People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be.
Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there. Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves.
It is remarkable how badly SVB managed to fuck this whole situation up. But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.
I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect this means that you will not see the interest rate on savings accounts go up as much as it might have otherwise.
I'm not saying this outcome is terrible, perhaps it was the best solution for the system as a whole. But using an insurance fund to cover a kind of loss, the insurance was not sized to address is not a choice that has no impact.
If I were in charge of everything (perish the thought!) I would probably have insisted that the uninsured portion of the deposits take some haircut. If depositors had gotten back 90% or 98% of their deposits instead of 100%, it might have increased the chance in the future that institutions with 100 million+ bank accounts would pay more attention to the risk profile of the banks they choose to invest with. Banks are rewarded mostly in proportion to the risks that they take; having a force other than government regulation that pushes in the opposite direction can be very useful.
Have the FDIC rates actually changed or is this a hypothetical. It's relevant because the FDIC limit has not actually increased--it's still de jure $250K. The fact that the FDIC said they would cover 100% of deposits at SBV could be related to the fact they weren't actually insolvent and could have covered the run if given enough time to liquidate assets.
Relatedly, the FDIC is built as an insurance pool and has always stated coverage as a minimum with no explicit maximum coverage. It's entirely possible to see the FDIC's over-coverage here as an explicit "this pool has seen lower portfolio risk than expected" which may only indicate that past rates were higher than necessary versus real world risk profiles and that serves no expectation of future rate changes just a sign of a very healthy risk pool. (It's just as possible to argue that if the insurance pool was able to 100% cover the deposits in this event that actuaries should reevaluate the risks for the entire pool and decrease rates moving forward to stronger align with the expected minimum coverage and present risk assesment knowledge of the likelihood of events of this scale.)
>Have the FDIC rates actually changed or is this a hypothetical.
It's hypothetical. The FDIC is likely to recover a vast majority of the uninsured deposits through asset sales, people just want to be outraged.
At smaller banks, 60-75% of uninsured deposits are usually recovered by FDIC and those banks went out of business for bad balance sheets, not bank runs due to duration mismatch.
We've gotten so used to assuming every statement is spin on 'you're getting screwed' that people assume it's always the case.
I keep reading comments like this, but I've seen no well sourced material saying that the FDIC is raising rates.
Do you have some reliable source about it?
(NOT a "look at it logically" or "here's how my health insurance works, why would the FDIC be different", or "do your own research" or anything else that's some random internet comment - I'm looking for real meat about this claim).
No one has published what kind of discount the gov't applied to the assets it is leveraging to make uninsured SVB depositors whole. For all we know the government correctly forecast the likely future losses, allocated some extra assets from the SVB carcass, and functionally prepaid those maybe rate increases.
The problem, as it were, isn't some lurking or hidden loss, it's arguably that these answers aren't currently available and we don't have the slightest idea in the public what will happen if profits result from the bailout venture. This shouldn't be a "heads-I-win-tails-you-lose" redux.
FDIC took over because SVB failed to make a margin call Thursday 9 March. Not having the money today while operating as a going concern, and having the money never after a liquidation, are different things.
No, that is not known at this time. It will take a few years to fully wind down the assets so as of right now no one knows if recovery will be <100%, 100% of deposits, or >100% of deposits (in which case general creditors may get some money).
The only thing we can be certain of is shareholders are wiped out and general creditors will take a significant haircut.
I is pretty clear they are underwater from their SEC filings. You know what exactly what their assets are and what their the fair market value of their securities. They reported the fair market value of their underwater loans.
I guess the FED could have bullied some banks into buying the securities at a higher rate, but the books themselves are transparent.
The market fluctuates. If those assets are held to maturity most will payoff without losses... even some of the subprime mortgage dreck from 2007 ended up recovering, SVB's assets are far less impaired.
If you can recover full capital from a selloff, SVB wouldn't be insolvent in the first place. The reality is that you can't, which is why we are here. The haircut is probably, also, deeper than 1-10% because otherwise SVB would have borrowed this money against its own "capital". Clearly, that was not possible too. The haircut seems to be quite big but there is no information whatsoever about how big the losses are.
Nope. The haircut was only severe because of the immediacy of the bank run. With more buffer (presumably the new holders of SVB's assets have more cash!) and no bank run fears, those assets will eventually mature to their full value. The "haircut" only applies if you're forced to take the marked-to-market value today.
You're conflating two reasons why an asset might be worth less now, but more later:
1. Illiquidity. For example, there might be few people anywhere in the world with the expertise to accurately value some weird loan to a startup. If those prospective buyers are busy or undercapitalized, then the market may become inefficient, with best bids well below FMV. If we wait for those expert buyers to research the startup's credit risk, to raise more money themselves, etc., then the bids will eventually come back up to FMV. This is the classic "It's a Wonderful Life" style bank run, and was an important dynamic in 2008.
2. Time value of money. Assuming positive interest rates, a dollar later is worth less than a dollar now. The NPV of a given cash flow will remain constant, which means that its current value will increase steadily with time. When interest rates increase, the NPV of a future cash flow decreases, and the FMV of the corresponding asset decreases. This isn't a market inefficiency. If you assume that money is lent at interest and no riskless arbitrage opportunities exist, then it's just how money works.
The SVB's problem was #2. There's a liquid and orderly market for their assets, trading at prices close to those predicted by a simple NPV calculation; that price is just lower than the SVB wished. Hold-to-maturity accounting allowed them to ignore that, but that didn't change the economic reality.
> if the FDIC's current funds can't cover the bill
The FDIC's current funds were $128.2 billion on December 31 2022
SVD had ~$200 billion of deposits December 31 2022 - but obviously had significant withdrawals prior to being taken over. Likely < 100 billion remained.
> I've seen no well sourced material saying that the FDIC is raising rates
Beyond the special assessment, they almost certainly need to raise a new assessment to cover $250k+ deposits. Full insurance can't be on a discretionary basis.
Minus the assets they recovered from SVB which will probably cover most of it given they were just illiquid, not fraudulent. All those bonds didn’t just disappear.
They don’t have enough treasuries to cover deposits even if they could liquidate them for par value. They’re also holding a bunch of startup loans which I doubt are going to fetch the valuation they assigned to them on their balance sheet, otherwise they would’ve been acquired whole by one of the big banks. Nobody put in a bid for the whole book of business, there must be a good reason for that. Not wanting to assume the credit risk of SVBs loan portfolio is a reasonable guess.
The value of those bonds is less than what it says on the balance sheet. They were not able to sell them at price X meaning they are no longer worth that much. The rate on those bonds is less than inflation, meaning keeping them to maturity won't recover original value.
You know what else is below inflation? The rates SVB has to pay its depositors. As long as the rate is > 0, which is the rate SVB will pay its depositors, there’s no reason the Feds should take any hits.
As long as the rates on the bond are > than the rates SVB is paying its depositors it will be fine.
What’s the delta though? Nobody seems to be able to quantify how much this is, but still are able to muster outrage over some unknown amount of harm done to them as bank users.
For the Treasuries, this is known but not public. For the MBS, a theoretical value is known but not public. (The federal government has to sell these securities. It doesn't make sense to announce the holdings so they can be front run.)
> break it all down by asset type, MBS, treasuries, foreign debt, ect. They break it down by the duration, eg <1yr, 5-10, 10+ yrs
Yes, categorically. No, not specifically. 5 and 10 years produce different answers, particularly with current convexity. (It is fine if you're trying to get broad-grained answers.)
Potential buyers over the weekend got a list of CUSIPs. The public does not get that until ex post facto.
The public does know the current value of all securities, and of several different buckets. Yes, these market values will change at different rates for individual assets, and we dont have a list of every stock, bond, and loan.
We still have a very good understanding of the "delta" and the magnitude of the loss, if not with crystal clarity.
Nearly all of the unrealized loss was in securities more than >10 years.
They had 15.1 billion in unrealized HTM losses. 14.7 billion of this had a maturity >30
9 billion is agency MBS
2 billion in agency collateralized mortgage obligations
2.3 billion in commercial mortgage backed securities, and
1.2 in municipal bonds and notes.
They actually have relatively few treasuries, and none in their HTM portfolio. Unrealized losses on treasuries are ~1 billion, And mostly treasuries from treasuries less than 12 months ( contrary to what most people report).
I really recommend actually looking at their filing. It is extremely detailed.
Like I said above, you won't have a crystal clear number but you have some brackets on the fair market value. The assets under management belong to the account holders so you can zero them out. You can zero out the shareholder value which is zero. This mainly leaves there other cash assets and physical assets.
I'm not willing to do it to win a hn debate, but there's enough public information to estimate the size of their hole within a billion or two.
Claims that they were evasive or hiding things in their financial reportings are off base. Claims that it would be impossible to get an idea of their Financial losses are also off base.
> they were evasive or hiding things in their financial reportings are off base
Nobody (in this thread) claimed this? And I disagree with the “within a billion or two,” though do think within a few tens of billions is accurate. The problem isn’t the specificity of the filing per se but the delay; that isn’t the balance sheet anymore.
>And I disagree with the “within a billion or two,” though do think within a few tens of billions is accurate.
It is clear from the statement that we are almost entirely talking about 30 year MBS purchased in 2021.
3% 30yr MBS were about $105 throughout 2021. These were about $89.2 at the end of 2022 (10-k filing), and about $89.4 today.
You might say, "but they may have put it 30yr MBS!". The thing is, you can validate this by the ammount they lost from 2021 to 2022. It also doesnt make much of a difference if they bought slightly different rate MBS at 2.5% or 3.5%, as they track pretty closely. Lastly, MBS value havent changed much since the time of the 10-k filing.
To get "a few tens of billions" difference, they would have had to tripple their losses on MBS in a time when MBS value has been stable.
Janet has just declared that. The Banana court will determine whether you are worthy of full insurance or not. As a bank. I wouldn't be surprised if we have more of these in the future, that the insured parties will be favored too. "Oh, we are only covering X and Y, because they are systemically important to the rest of the economy".
> we have chosen to put the burden for paying for those losses on all of the other banks
But isn't it likely to cause more bank runs if depositors lost money? So in a real sense, many other banks were saved from going under, by assuring depositors that their money is safe, whichever bank they're at.
My understanding is that other banks have massive unrealized losses as well, due to the steep interest rate increases. So they're all kind of vulnerable.
I'd say it's more likely that there will be at least slower rolling runs on smaller banks by large depositors. Keep in mind that the unlimited coverage only applies to the depositors of the two banks that were taken over, not all depositors everywhere. Keeping large balances in a bank that may not be deemed a systemic risk is still rolling the dice if said bank fails. (i.e. unless a bunch of other banks fail around the same time getting national attention, you'd probably be out of luck)
Here is my question about that: whatever the increased costs to insure other banks by making uninsured depositors whole, aren't they ultimately based on the resolution costs for SVB itself? That is to say: in the limit, if it costs almost nothing to wrap up SVB, because their assets are fine (just inconveniently structured), what drives insurance costs up at other banks?
I'd also add that covering uninsured depositors isn't new behavior for FDIC, at least as I understand it. The mechanics of how it was done here are different than in previous instances.
Covering uninsured deposits is common as they retain their senior debt status. Guaranteeing them on the other hand is very new.
And if we are going to expect them to be guaranteed in the future insurance rates must go up, not just to cover more things but to cover the riskier behavior it creates.
If we aren’t going to cover them 100% in the future then apparently it’s true that there are not just different classes of banker but different classes of depositors.
Or just different circumstances? IndyMac famously paid uninsured depositors back 85 cents on the dollar, right? But IndyMac was also plowing depositor dollars into a portfolio of Alt-A MBS's.
A regulatory regime that makes depositors whole when a bank fails due to not managing their interest rate risk appropriately but not when they mismanage their credit risk feels even stranger than just admitting that the fdic cares more about some depositors than others.
The regulatory regime is one that makes depositors whole when doing otherwise seems likely to cause a major crisis in the banking system. Which we've had for a long time. It merely seems inconsistent because evidence of "likely to cause a major crisis" differs by current possible crisis.
As https://www.bitsaboutmoney.com/archive/banking-in-very-uncer... explains in painful detail, the reasons why they likely concluded that there is systemic risk. But long story short, rising interest rates caused the banking sector to have $620 billion in unrealized losses. Unsurprising since the interest rate rise was *INTENDED* to make people lose money, making money more valuable relative to goods and services, which reduces inflations.
But $620 billion is substantially more than the $130 billion in the FDIC insurance fund. It is substantially less than the $2 trillion in equity in the banking sector, but both losses and equity are unevenly spread. Therefore there are banks under water, and others that are fine. But nobody is sure which are which. And given cash outflows from worried people, we were about to find out the hard way. And once there is a bank panic, even fine banks become not fine.
Like Wile E. Coyote, running off this cliff works fine until you look down. But we've looked down. And now the whole sector needs saving. Thus these actions.
They will go back to normal behavior once the crisis is over.
First Republic now has a sweep account that spreads up to $100m across 400 banks in increments of up to $FDIC_INSURANCE_LIMIT.
What's the difference between the FDIC insuring all deposits at US banks directly and US banks doing it themselves by forming a complete graph? (Other than there being a clear upper limit in the latter case, which is currently greater than $1b per account.)
Insurance only pays out to $FDIC_INSURANCE_LIMIT if a bank fails. I can't say what the scenario looks like where 400 banks fail simultaneously, but I can image it would not be good. I'm not sure the current FDIC payout models account for that, either.
I agree about 400 banks failing would likely be due to some greater catastrophe.
But financially I think it's the same. If 400 customers each use 1 bank each, then a single bank failure means the FDIC needs to make whole one customer.
But if every customer put 1/400th of their wealth into each of the 400 banks, then FDIC has to cover all customers for 1/400th each.
> But if every customer put 1/400th of their wealth into each of the 400 banks, then FDIC has to cover all customers for 1/400th each.
Seems like having everyone use at least 400 different banks achieves one of the core goals of the FDIC guarantee - making small/midsize banks viable and preventing everyone from piling into the big four megabanks.
I'm not sure I'm following. If the FDIC only needs to insure 1/400 of all deposits, then they only need to have on balance 1/400 of the total funds. So the cost to all accounts is in effect 1/400, no?
If customers are only utilizing a single bank, and the FDIC will insure all deposits regardless of amount, they would need 400 times as much than would be necessary if the balances were swept.
The FDIC insures the entirety of the deposits either way.
> Insurance only pays out . . . if a bank fails
That's a good point. So one difference is that while the money is equally insured in both cases, the payout dynamics would change. Very roughly, the amount of a payout might be expected to go down in the cross-bank case (smaller account values, but then also more accounts per bank, so it isn't quite so simple), and the likelihood of a payout might be expected to go up (higher chance of failure with more and smaller banks). But this all depends on how interlocked the banks become; in the extreme they could end up functionally a single bank.
The first thing that came to mind for me is somewhat related: Spreading deposits across banks is relatively better for small banks and worse for big ones, since the small banks gain deposits and the big banks lose them. So you can definitely argue there's some advantage to keeping a lower insurance limit, although it gets murkier when we bring behavioral considerations and "too big to fail" into the picture.
>The FDIC insures the entirety of the deposits either way.
This is new with SVB. I get the whole "250K minimum" argumemt, but this is the first where we are seeing major 10M++ depositors getting 100% guarantees.
I don't see issue with spreading money across smaller banks - other than perhaps they may not be able to assess risk as well as larger banks. But again, SVB.
I think one thing to keep in mind is that most bank depositors hold far, far less than the 250K guaranteed by FDIC. By a large margin. Id be surprised if the average was above 10K. There are $17T in deposits across the country [1]. The FDIC at the beginning of the year had $128B in balance as insurance to depositors [2].
If you look through the thread I replied to and the broader conversation, some people objected to backstopping deposits without limit and think rates have to go up if this is the new status quo.
The question is in what way(s) does it matter whether deposits are insured without limit in a single account, which is new, or with limits when spread across an arbitrary number of accounts, which isn't? If one costs 1x, why should the other cost > 1x?
It's a serious question. FDIC assessment rates aren't as simple as tax brackets and for example it's possible that the act of spreading deposits across more accounts in more banks would increase the fees paid into the existing system anyway.
>The question is in what way(s) does it matter whether deposits are insured without limit in a single account, which is new, or with limits when spread across an arbitrary number of accounts, which isn't?
It matters because only 1 (SVB) bank failed. If those depositors had their money swept across multiple banks this point would be moot.
Edit: If deposits are spread about multiple banks, the FDIC does not need to carry as large of a balance to cover the loses of any single bank, which results in less indirect fees to depositors of different banks.
I don’t follow the math. A bank failure is a bank failure. There’s no difference to the FDIC between 100 depositors with $250k swept across 100 banks and 1 depositor with $25m.
I think this move probably saved the FDIC money. If you had a massive bank run(1), it's probably cheaper to pay back 250k+ depositors of one bank than for the FDIC to pay out < 250 on 40. Not to mention unloading enormous amounts of MBS's could trigger further insolvencies.
1. which seemed pretty likely, I know people who over the weekend were planning to pull all of their money out of a regional bank and put it in one of the 4 super banks Monday morning)
> because their assets are fine (just inconveniently structured)
If assets are so inconveniently structured that the bank fails, then the assets are not fine. A bond that pays 0.01% that never matures has an infinite value over infinite time. So while the FDIC/gov can solve the liquidity issue by replacing a $100 face value bond with $100 cash but that's still a net transfer of actual value from the FDIC i.e other banks.
As far as I know, regulatory requirements require/encourage holding good bonds but if the FDIC is going to start treating gov/muni bonds of any maturity length as good as cash, then there's less reason to hedge against interest rate risk.
What's the rationale behind not breaking up the accounts of large depositors into FDIC-insurable accounts? Apparently this is called a 'cash sweep'. Typical ad blurb:
> "Insured cash sweep is a safe and convenient service that provides FDIC insurance on large balances while giving you access to your money, as well as the ability to earn interest. Choose between demand accounts, which offer unlimited withdrawals, and money market accounts that permit up to six withdrawals per month."
I've heard some claims that SVB was offering incentives to depositors who kept their funds in one lump account, is this true and if so what's the benefit to SVB from doing that?
It’s called brokered deposits, there is not reason to not do it if it’s just sitting in bank acccount, but if the $ size gets large (>$25m it can be cumbersome), and if there is a lot of operational activity it doesn’t make much sense.
What’s unforgivable is why these large depositors that didn’t tend this cash for short term operational needs didn’t have the funds in govt securities in an insured brokerage account at a trust company…
Where many venture backed companies got hung up though is that the terms of venture debt provided by SVB required the borrowers to keep use SVB as their bank…
1) Is this outcome better than (expected) panic on the banks and bank runs? There still seem to be runs going on e.g. First Republic. Are the markets “calm” now?
2) Because insurance fund is not designed for the task it is currently experiencing, how the gap will be plugged?
3) Could this cause depositors move money from smaller banks to larger ones, and then larger banks just lend this money back to small banks w/some nice profit?
> you will not see the interest rate on savings accounts go up as much as it might have otherwise.
Bullshit. Interest rates for savings accounts are and have been an absolute joke. Are they going to become a more hilarious joke? Probably but seriously, who cares?
> I'm not saying this outcome is terrible, perhaps it was the best solution for the system as a whole.
Yes, it is the best solution, otherwise you'd have written a completely different statement if the bank run went viral and you would have been really harmed.
That's like asking how you were specifically harmed as a result of there being one more CO2-spewing pickup truck in the world. Bad things amortized over millions of people are still bad, even if the harm to any individual is too small to verbalize.
>interest rate on savings accounts go up as much as it might...
No sensical person is concerned with the interest rate on savings, it is nearly zero and effectively negative.
I dont believe anyone should have a single account with 100 million dollars nor should banks allow that, but they do. Perhaps part of the problem is that the $250k coverage is a value that should adjust annually and coverage should be relative to each account as opposed to each account holder
> No sensical person is concerned with the interest rate on savings, it is nearly zero and effectively negative
This might have been true for the past ten years or more, it's not true now. You can easily find savings accounts now which offer over 3%, and it's going up as the fed continues to raise rates.
This still might not be the best investment when you consider the high inflation, but it's great for emergency fund type accounts that need low risk, high liquidity.
As somebody employed by a company which kept all their assets in SVB, I strongly support the FDIC bailout. Even a couple percent haircut would've resulted in many many second order economic implications. I think even for member banks, strong economic activity not realized through a systemic contagion is much better than slightly lower premiums.
If we're not going to let economic signals tell companies to check who they're banking with before putting all their assets in one place, how can that happen? Regulations saying every small business needs to have a risk officer, and more regulations specifying how that officer has to make decisions?
Isn't the point of banking regulations that we are relying on the government to do that checking?
Relying on customers to check their bank, besides being fairly impractical for all but the largest and most sophisticated customers, is just going to trigger bank runs as soon as customers get any whiff of a problem.
I don't see the problem with unlimited FDIC provided the regulations are congruent with that. If you want to go the private route for better interest rates and take on the regulatory burden yourself, you can always go with an uninsured bank. If you just want a simple place to stash a few hundred million, why make you jump through hoops?
What I don't understand is why start-ups were apparently keeping millions of dollars of capital in a bank account rather than government bonds or other instruments, given that the FDIC limit was well known.
>If we're not going to let economic signals tell companies to check who they're banking with before putting all their assets in one place, how can that happen
The assumption that an operating company should understand fixed income pricing dynamics, have a POV on future FED interest rate moves, and dive into each potential banking partners' asset duration is an interesting one, especially when most of SVB's deposits were made during a period of perpetually falling interest rates, where duration mismatch helped banks.
Maybe not each company, but the VCs who encouraged their portfolio companies to put everything in SVB should have some inkling of the risks involved in doing that.
The main source of upset I've seen (disregarding the silly "woke bank" hot air) is less about banking industry regulations per se and more about viewing government priorities writ large through a blurry sense of class warfare. For example, there's a particular feeling of a double standard between SVB depositors and people with student loan debt. When the government decided to bend the rules for the former, it was done swiftly with a minimum of serious political conflict. When the government decided to bend the rules for the latter, the swift action was to arrange for the program to be challenged at the Supreme Court.
There are all kinds of legal and practical reasons that this isn't really a fair comparison, but again, it's not really about the specific policies, it's about a sense of where the government's priorities are and its flexibility seeming to only bend in one direction.
Not 0: you and your investors make 3 billion this year
0: you and your investors lose your 20 billion you have invested, and the government bails out your depositors who kept 200 billion with you
This stylized bet is a good deal for the investors and management and bad for the government. Sometimes investors lose everything but it's still a very good bet in expectation. This stylized example is a case of "privatized gains, socialized losses".
Then the question is: was SVB reckless? They could have been less reckless by covering their interest rate exposure, but the fed has an equity to deposits ratio requirement, and getting any equity to invest requires a return. IMO they should have either diversified their business or stopped opening new accounts for tech companies because when depositors are uninsured and concentrated in the same industry, that is risky.
First SVB was bailed out by FDIC funds which all banks pay into.
Second, to say 'privatized gains, socialized losses', you are assuming that banking is like gambling, with no value being created through the banking process.
Even if banks were being very very safe, they would still make money by lending out deposits. (Whether that is good or bad for society, is another question, which I would argue the answer to would be bad).
These are great points and show that the system worked as designed. There will always be bank failures. We want depositors to have confidence that their deposits are safe, not altruistically, but to prevent bank runs since those serve no one and re totally avoidable. Management and Shareholders were wiped out.
Honestly, it looks like in a year or two, the Government will make money off of this because as soon as interest rates come down the securities will go back to book value.
The real winner here is Goldman, since they bought the bond portfolio from SVB that triggered all of this at a discount and can hold to maturity and interest rates may need to come down or a broader asset exchange program implemented to stop any contagion, so those bonds will return to book value sooner than expected.
That is what insurance was supposed to be for and it was up to 250000. Anything above that was supposed to be returned from sold assets. When assets are not enough, those money would be lost.
There are literal products to insure money in excess of 250000. But people who are getting bailout now were not using those products. They were not paying for insurance in excess of that.
The system did not worked purely as designed. The system socialized loses of well connected rich people.
> Honestly, it looks like in a year or two, the Government will make money off of this because as soon as interest rates come down the securities will go back to book value.
Government will get back the number of dollars equal to the par value of those bonds. Inflation between now and then, however, will mean that in real terms there will have been losses.
> First SVB was bailed out by FDIC funds which all banks pay into.
And from where this money is coming from you think? From you and me and everyone else because costs of doing business are transferred to clients, so to the whole society because almost everyone have a bank account.
>> They could have been less reckless by covering their interest rate exposure, but the fed has an equity to deposits ratio requirement, and getting any equity to invest requires a return.
Great point. To rephrase a bit, they lost money...and then kept doubling down by not cutting their losses (?hoping things would turn?) They finally tried to do something about it, but it was too late to matter.
What bet should management have made instead of buying US treasuries and Grade A MBS? Should they have held all deposits in cash? How should they have funded operations because eventually, holding $180 billion in cash with no interest and thus no profit while running a large operation will start to eat into shareholder equity and eventually depositor capital. I think a thought experiment about what should have been done is important if we are going to assign blame for anyone. When I do that, its not clear that SVB management made some profound mistake as there were structural challenges they faced that were unique to them (large capital inflows that were a majority of deposits during a very low rate interest rate environment, client mix that kept balances that were much higher than FDIC limits, client mix that was highly concentrated in one industry with much greater sensitivity to interest rates than most companies since fundraising is now clearly seen as tightly coupled to rates) and forces outside of their control in that the Fed raised rates very quickly without providing any mechanism for member banks to exchange long term low rate securities.
So Management has to invest in something and it has to have some interest. I would love to hear an investment thesis that would have been able to deploy over $100 billion in new capital during the low interest rate 2018-2021 time period that wouldnt have been ill prepared when rates drastically increased in 2022-2023.
Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).
When interest rates began rising about 13 months ago, SVB should have taken a small haircut on the long term bonds and moved to shorter terms and T-bills. They held their losers until last week when they finally sold for a larger loss.
> the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves
It seemed self-evident to me, based on the explicitly stated limit on FDIC insurance, that if you had an amount of money over that limit, you really need to have a plan to deal with that risk, and people who failed to do so should suffer the consequences of their poor decisions. As things stand, the people who did spend the time and/or money to provision for that risk have suffered for it.
I think what many people are having a hard time with (myself as well, sort of...) is how the rules were changed out from under everyone in yet another example of how the rules don't apply to the politically connected.
As I understand it, the ordinary way FDIC resolves a situation like this is that they simply have the failing bank acquired by a peer bank (a bank of generally the same size and structure), which then takes over the depositor obligations. So it's not as if the ordinary course is that uninsured deposits get zeroed out; it's just that the mechanism FDIC is using is novel and abrupt.
>> they simply have the failing bank acquired by a peer bank
"Simply".
WaMu - acquired, depositors got 100 cents on the dollar
IndyMac - 50 cents on the dollar
Silver State - 11 cents on the dollar
Depositors have not always been made whole in the past. Calvinball has certainly been played in the past, for IndyMac the FDIC limit was retroactively raised from 100K to 250K.
That's what people are pissed about. The Calvinball rules.
And we know how that works out, if you're in the in group, you get paid, and if you're not in the in group, you get fucked.
As Black Flag once sang, "We're tired of being screwed. Revenge!"
I don't know either. I've been wondering if it's largely because SVB is a weird bank. They were huge --- larger than American Express --- but with an unusually small and extraordinarily correlated based of depositors. I think it's hard to understate just how strange SVB's customer base was; the closest analogy I can come up with is the Last of Us zombies, all perfectly connected with fungus hyphae.
The situation unfolded over a weekend, after SVB shut down Friday afternoon. The FDIC attempted to find a buyer on Saturday, and got at least one interested party, but couldn't close a deal. The Administration was getting anxious over the possible fallout: tech companies not meeting payroll, possible banking contagion, who knows what else? Then Powell/Fed proposed some novel mechanisms for temporary rescue. [1]
They worked together to put out a joint press release, and Biden gave a down-to-earth, rough-and-tumble speech about protecting depositors and kicking the failed executives and bad-luck shareholders to the curb, because this is "how capitalism works". It was an unusually blunt attempt to preemptively push back at the perception that this guarantee of FDIC-uninsured deposits will be branded a 'bailout'. (I predict that this attempt will fail and this will widely be perceived as a 'bailout' in casual and political discourse, which is the exact forum at which they've aimed this message.)
After 2008, the public gained awareness of the consolidation -- both forced and emergent -- that occurs in response to these sorts of crises. Public opinion views these outcomes unfavorably, because they seem unfair and irreversible, albeit no palatable alternatives have emerged that are acceptable to both to the public and government and industry incumbents.
Buyers of banks in the last round got screwed. Dimon has been vocal about this. They inherit a string of liabilities that take a decade (or more) to resolve. Add to that, the number of private equity buyers for a $200bn bank is limited.
>> SVB would have held them to maturity had the bank run not happened, and now somebody else will instead.
If that were the case, they wouldn't have had to raise emergency funding last week. The assets were indeed impaired. Hiding the true values via AFS accounting treatment doesn't magically make the dire circumstances sustainable.
The assets are impaired at today's interest rates. The yield curve is very inverted (is that gramatically correct??) this signals interest rates will be quite a lot lower in a few years. At that time the assets will not be impaired - they may even be at above-par value.
It doesn't matter that prices might recover in the future. I'd argue they might not -- and if anyone believed otherwise they would buy up the assets at inflated prices (why arent they?!) SVN rolled the dice, made bets, the value is way down and...they didnt have enough money to allow customers to withdraw money. That is a fail. They needed to raise a lot of cash, they didnt/couldnt raise enough. That is a fail.
Further, they underwrote tons of LoCs for startups which are underwater due to down-rounds. That isnt a temporary impairment, that is a permanent impairment.
Their customers are burning funds (as most VC-funded companies do) and VC funding is down, so declining balances via continued withdrawal is the natural state they need to support (even in the absence of a bank run.)
These assets will all be redeemable for par value when they mature. The only impairment they have is that they pay less interest in the interim than other available bonds, because their rates were locked in before the interest rate spike.
>> These assets will all be redeemable for par value when they mature.
This is absolutely false -- there is no guarantee of this. Agency securities pay more than treasuries because there is a risk of default (never in aggregate, but pass-thru component cashflows i.e. individual homes.) Further, there is a risk that upon default, the home isn't of sufficient value to account for the lost principal. If anyone has doubts of the potential for default of agency securities, the mortgages underneath these bonds are all publicly displayed monthly: https://singlefamily.fanniemae.com/applications-technology/f... and you can see defaults also.
>> The only impairment they have is that they pay less interest in the interim than other available bonds, because their rates were locked in before the interest rate spike.
This is a third of the story.
Second third of the story: they may less interest than advertised due to defaults/delinquencies
Third third of the story -- and most important: their value has gone down, so in the immediate term, the bank depositor cannot withdraw money (because the bond cant be sold at book value.) It is absolutely not OK to tell bank depositors to wait 10yrs while a bond bays them back little by little. Bank depositors should be able to withdraw money at any point they want.
Losses are reported, definitely not clearly. Losses are hidden under "Other Comprehensive Income." If you want to be transparent about it, then it should show up in the Profit and Loss. You'd choose MTM accounting treatment. Not choosing MTM accounting treatment is literally hiding the losses into a vague bucket of income.
This is a lie. Look at the 10K yourself. It shows the fair market value of AFS securities. Sure, it shows the purchase price for hold too maturity securities, but right God damn next to it it shows the fair market value and losses too. Silicon Valley Bank reported 15 billion in unrealized losses on there hold to maturity portfolio. They also clearly documented the different durations of those securities, and their annual interest yield.
The idea that this was somehow hidden needs to die. People knew they were vulnerable to a run not due to some shady rumor Network, but because they reported exactly what they were doing plain as day.
They were making low but positive interest profit on those assets. They simply locked up too much money in a long-term investment to withstand a coordinated Bank Run. This was a real mistake, but it is not at all about secret accounting.
Anyone who can do simple arithmetic could determine that they were at risk in a bank run from their published documents. Most of the world simply did not care because they did not think the Run would happen
The problem here is that extremely liquid assets like treasury bonds are not being marked to market resulting in completely invisible insolvency. Banks don't have a right to have you keep your deposits when their assets do not cover those deposits, and, by extension, shouldn't have a right to lie about the market value (aka value) of those assets in order to con you into doing so. Executives were still paying out their bonuses during the period of insolvency...
The weird thing is they were only insolvent under artificial pressure. A lot of banks would have similar trouble there's just not as concentrated of a depositor spread where a scant handful of people can create a run on the bank by themselves.
A distinction between held to maturity assets and market priced assets makes sense though, there should be some consideration in the calculation about term though for sure. The question of that though seems very complex to answer.
The "insolvency" here was detailed in the SEC statements, which is, as I understand it, how the run happened --- there was chatter about it last year.
Further: the "market value" thing here is complicated. The reason there is separate available-for-sale and held-to-maturity accounting for bank assets is that, in the ordinary course, the assets are held --- the only reason you sell them is because of extrinsic distress. There isn't anything wrong with the agency MBS portfolio SVB had; they're worth less because if you have to sell them in Q1'2023, they compete with even more attractive bonds and are discounted accordingly. But if you just hold them, they pay back dollar for dollar, and that's what the bank normally does anyways.
I really don't see the market value thing as all that complicated. A banks liabilities are (roughly) instantaneous. They must honor withdrawals when they are requested, so their assets must be measured accordingly. There is no other reasonable definition of instanteous value except for market value. This is an extraordinary advantage of having large markets for things.
Granted, it's sometimes hard to establish market value. In the case of assets with genuinely low liquidity, the market value is somewhere above the bid and probably below the ask. Accounting in this case comes with error bars, but it's not really justifiable to approximate the value of an asset outside of this range.
Here's an example. Suppose a hypothetical bank receives 100 dollars in deposits at an interest rate of effectively 0. They use 85 dollars to buy a bond that matures in 1 year that pays 90 dollars, and keep 10 dollars in cash as reserve requirement. They pay themselves the extra 5 dollars as bonuses. They have met their fractional reserve requirements, and according to your scheme, their holdings should be valued at 100 dollars. Are they solvent?
I guess the core of my argument is that SVB's viability and the damage caused by their implosion are separable concerns, and FDIC has rather neatly separated them. Nobody has to take a bath on SVB's bond portfolio; deposits are guaranteed, so they can just be held to maturity; there's no pressure to sell. Meanwhile: SVB's equity is zeroed out, so they've paid the ultimate price for their incompetence.
I think you're assuming here that the HTM accounting means the bonds don't actually lose value if they're held to maturity? That's not the case; it's just arbitrary accounting treatment, and the regulatory decision to permit such accounting is a big part of why the SVB blew up. Accounting rules are supposed to reflect economic reality to some extent, but they obviously don't do so exactly. For example, under FIFO inventory accounting, two identical boxes in the warehouse might be on the books at different values; but I assume you'd agree they're still actually worth the same amount, since they're identical.
All bonds get held to maturity by someone (unless they default, but that's not the problem here). The FMV of the bond is determined by the value of the bond's remaining 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's holding the bond.
Say you buy a theoretical 10 year zero-coupon bond with a 5% yield and a face value of $1,000. You should pay about $614 for it. You intend to hold it to maturity.
Interest rates take a random walk from now until maturity.
Under fair-value accounting, the balance sheet value starts at fair-value (obviously), then gyrates, but tends towards face value, and reaches it at maturity, due to time decay of bond premium. As you said yourself, every bond eventually matures in the absence of credit risks and fair-value can't indefinitely diverge from face value.
Under amortized cost basis accounting, the balance sheet value starts at fair-value but then increases every year until maturity, at which point it is also face value.
Surely you acknowledge that these are the same? They both describe the exact same cash flows.
Assuming I buy the bond today, the two accounting treatments agree (correctly) that in 2033, the bond is worth $1000 2033-dollars. The problem is that when interest rates increase, a 2033-dollar becomes worth relatively less than a 2023-dollar. So that agreement in future says nothing about the economic value of the bond today.
That's the loss that took down the SVB, and it's a real economic loss. If the SVB's depositors behaved like the simplest textbook model, then as soon as short-term Treasury rates increased, they'd insist on correspondingly increased interest on their deposits. The cost of that extra interest would be the SVB's loss--the cash flows in from the bonds stay the same, but the cash flows out to the depositors would need to increase.
In reality, I understand that depositors are generally "stickier" than that, leaving their funds at their existing banks even when bank interest rates increase slower than Treasury rates. That gave the SVB some hope that they could earn their way out of the hole, passing the loss slowly to their depositors over time by paying below-market interest rates. That's the behavior that HTM accounting roughly models. The SVB's depositors had no economically rational incentive to accept that though, and they didn't.
>The cost of that extra interest would be the SVB's loss--the cash flows in from the bonds stay the same, but the cash flows out to the depositors would need to increase.
... but SVB expected to have positive net-interest-income with increasing rates. Look here:
A 100bp increase in interest rates would've increased net-interest-income by 1.8%; a 200bp increase by 3.5%. This is typical for banks, because lending rates go up more than deposit rates as the base rate increases, increasing interest margin.
So the idea that this is about NPV of future cash flows is not right.
Why should economically rational depositors leave more money than they need for short-term working capital at the SVB at ~0% when a Treasury bill pays ~5% and carries less risk? Back when rates for everything were ~0%, a startup might lazily just put everything in the bank; but when interest rates increased, the reward for moving and the risk of staying both increased. I agree (and already noted above) that depositors are often irrationally sticky in practice; but nothing obligates them to be, and these ones weren't.
Of course most of the money left in a self-sustaining bank run, not directly for the reason above. There's a quite rational reason for someone to start that run, though. That reason wouldn't exist if the bank were well-capitalized on a MTM or NPV basis.
The SVB's expectation in that 10-K is a model of depositor behavior, predicting that depositors will leave their funds at a MTM-insolvent bank earning below-market interest for long enough for the SVB to earn its way out of the hole. That prediction obviously didn't come true. So doesn't that just mean their model was wrong, and shouldn't be relied upon elsewhere either?
You don't address the fact that they paid out bonuses for doing a horrible job just prior to the seizure, nor the very real danger of further concentration of the banking sector (We are down to the big 3 now?).
The issue isn't that too big to fail happened, because its immaterial after the fact. Its that little punishment was actually done for bad management, and not only that, the situation is left worse because we have a banking concentration problem.
If you look at the number of banks chartered after 2008, its dropped to negligible amounts going into the business, and regulation has only been increasing. You have to lie to get a charter because no reasonable person would accept the personal liability without something in it for them. The requirements are that onerous.
Everything is now so big it will certainly fail, and that's what people are angry about. There is plenty of evidence over the past 100 years (and longer if you go further), that as sector concentration goes up, so does corruption, frauds, and other crimes that are largely based around deception at our loss. It becomes easier to increase the scope, and get away with it when setting up dominoes to fall (so you can profit on event's you manufacturered).
The fed aren't doing there jobs, and worse, it looks like they could never meet their original charter to begin with. They aren't government, they are private bankers.
So they try to justify bailouts as a way of saving the system, and really its just acting as a wealth transfer to the elite rich whose pockets they are lining via a money printer at the expense of the public taxed by inflation.
> Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead.
Part of the problem is that the system that enabled them to end up in this situation is the erosion of Dodd-Frank. The systemic risk to depositors isn't going away. If pissant SVB (relative to it's contemporaries) can lobby congress effectively imagine what other banks are up to. Speculation? Sure you can say I'm speculating. But the apple doesn't fall far from the tree.
> Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves.
The issue of course is that the total balances required the FDIC to dip into special capital reserves in order to make the bold faced lie the taxpayer won't front this.
Anyone who knows the surface level details of a bank know that these FDIC "loans" are effectively collateralized by the taxpayer. Banks pay an assessment. With what money? The depositor's money. A perfect example of a hidden tax.
> But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.
Credit Suisse is in big trouble and getting a bailout. Several other banks have collapsed in the wake of SVB. The only people not worried have their heads buried so deep in the sand only their feet are showing. Calling Chicken Little because you believe it was only SVB and not a massive market level problem suddenly beginning to show it's head is not a very effective argument.
I'd ask you to consider the economy that allowed these levels of capital to even exist. Years of ZIRP and near-ZIRP allowing effectively free money. As it stands, the mainstream media currently blames the fed for this and implores it to once again lower rates. The problem of course is that there has been no sign of stoppage in market speculation and we are only now starting to see VCs really tighten their belts. History doesn't repeat itself but it often rhymes and terrible, borderline predatory, VC funding practices begin to approximate NINJA loans in the limit. There's no reason to believe it's just SVB and there are plenty of reasons to believe we have very serious economic concerns ahead of us. Only difference this time is the criminals responsible will be wearing Patagonia.
This wouldn't have been solved by any thing in Dodd-Frank. SVB invested in highly liquid securities that are considered the safest asset class, interest rate risk wasn't expected to materialize as quickly as it did as the Fed would have been expected to raise rates more gradually over a longer time horizon or provide an asset exchange mechanism for member banks. SVB is not an example of a bank that had engaged in Investment Banking activity with depositor capital or had unacceptable capital reserve ratios.
That being said, I could be wrong and not aware of the specific Dodd-Frank policy that, if followed, would have made SVB safer.
The fed doesn't need to lower rates necessarily, it could simply allow all member banks to exchange low interest rate long term bonds for new higher yield bonds and pay the Fed for the spread with a loan. That would reduce the liquidity risk if the member bank needs to sell some or all of its bond portfolio on short notice to fund depositor withdrawals, it would allow the Fed to hold the low rate securities to maturity while being fairly compensated by member banks.
Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).
> The fed ... could simply allow all member banks to exchange low interest rate long term bonds for new higher yield bonds and pay the Fed for the spread with a loan.
Maybe we should admit Congress will never repay the national debt and simply have the Fed purchase new federal debt issuance. The current complicated charade just pays banker bonuses.
SVB was holding 91 billion dollars of underwater securities (with a fair market value of 76) . The FED is currently holding 2.7 trillion with a t dollars of underwater securities
> Part of the problem is that the system that enabled them to end up in this situation is the erosion of Dodd-Frank.
My understanding is that SVB would have met the Tier 1 capital requirements even without the 2018 revisions to Dodd-Frank, for the reason digitaltrees said: The bonds it purchased are considered highly liquid and safe.
> The only people not worried have their heads buried so deep in the sand only their feet are showing.
If you haven’t lived through a couple of these things then it’s perfectly understandable.
Back in ‘98 there was a huge monetary problem going on in SE Asia but pets.com could take a loss on every sale and make it up in volume. Everything was fine until it suddenly wasn’t.
In ‘08 cracks were starting to become obvious but housing prices never go down, keep selling $500k houses to someone making minimum wage. Everything was fine until it suddenly wasn’t.
Today you have massive layoffs in the tech sector but the CEOs are just trying to appease activists investors, nothing to worry about because tech companies never fail. That Dot Com Bust? Well, that was Web 1.0 and we have it all figured out this time, nothing to worry about. Everything is fine…
Well, people are specially angry about Depositors were made whole almost immediately among other things.
And depositors to their dismay are learning they are about as much loved as Wall street bankers, corporate execs and billionaires. More than any particular moral deficiency I think people are finding a general lack of self-awareness common among SV startup founders infuriating.
> I think people are finding a general lack of self-awareness common among SV startup founders infuriating.
Exactly this. I even read a comment from such a founder saying essentially: "Why are people so angry, don't they know I oppose brogrammer culture?" As if brogrammer culture were the meat of of the reason why people are sick of the hypocrisy of the capital class, or even American startup culture specifically. Totally out of touch, completely clueless. Utterly tone deaf.
Particularly, the decision to change the rules in the middle of the game and make depositors over the FDIC limit completely whole again is clearly an unfair favor to the rich. Normal people don't get to have the rules changed mid-game in their favor. If all the depositors were merely semi-wealthy commoners with only $300k in their accounts, they would have only gotten $250k back. Nobody would expect the rules to be changed in that scenario. But if you're much richer than that, then the rules are apparently just guidelines. It isn't fair and that's why people are mad. Anybody confused by people being mad is completely out of touch, and voicing that confusion is only going to make people even madder.
Quibble. The point is that the rules would not be changed for such a person. Neither you nor I would expect the rules to change mid-game for a common sort of person.
The only party that made out like bandits is the SVB management that piled on the risk in the first place -- but investors are ultimately responsible for letting them do that and investors have been punished.
I'm unclear how SVB management "made out like bandits". I assume they had a couple good years of nice salaries and bonuses, but now their equity is zero'd and they're out of a job. I presume they would have preferred to continue managing the bank as a going concern.
They chose to invest in those 10 year securities, proverbial pennies in front of the steamroller. I'm sure this was framed as a smart move at the time and they gave themselves big bonuses while investors were out to lunch. Ultimate responsibility does lie with investors, but management definitely hustled them and got away with it.
I guess my point is that they still got hit by the steamroller: they lost their jobs and future earnings, they lost any equity (which certainly was part of aforementioned bonus), etc.
Earning a nice bonus last year is a reasonable consolation prize, but I'd wager most execs would rather have had a lower bonus and the ability to continue to manage an operational bank through 2023.
They cashed in millions in stock just before they announced they needed to raise $2B in capital to offset losses on their bond sales, which led to a crash, on top of their bonuses. If that's getting hit with a steamroller, sign me up.
So far as I have seen, every equity sale was part of standard, pre-cleared and disclosed plans. And all those executives had significantly more equity they probably would have loved to sell but couldn't.
> every equity sale was part of standard, pre-cleared and disclosed plans
Not really. They were sold 1 month after the 10-Qs were filed, which is shorter than the holding period most reputable banks require for their executives, and the 1O-Qs had only that one sale in them.
My point in all this is that the FDIC's actions to guarantee the deposits did not benefit bank management.
They may have "made out like bandits" in taking advantage of equity holders, and perhaps without duty of care to depositors... but all that is true regardless of the subsequent actions. They did not "make out like bandits" because of the Government's actions. And I think that's important, given the criticism levied against the "bailout".
Interestingly, that second part appears to be true only for the CEO, who's lost ~$30m. Other executives (at least the ones on NASDAQ's insider transactions list) were holding only a few thousand shares at most.
No, the investors got hit by the steamroller. Management, who knew exactly what they were doing, did not lose their earnings. Future earnings? Some of these were Lehman execs -- their ability to land a position in SVB is proof that they probably did not sacrifice future earnings.
> Earning a nice bonus last year
Why do you think this was limited to last year? I suspect they made risky moves again and again and again and got paid out again and again and again.
This is so out of touch with the reality of people. No one is knowingly taking risk that will bankrupt their company for a few million dollars in bonus when they can instead have a 10 or 20 year career where even 25% of that bonus with accrue to much more value. Further, their bonus were stock, and every single executive at SVB lost most of their equity which was paid over years and locked up as options.
Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).
Ah, likely. Though it doesn't seem like there's any evidence yet on insider trading or execs fully cashing out. They got lucky liquidating some single-digit % of their holdings, but still likely lost most. A 95% loss is better than a 100% loss, but still not "making out like a bandit".
They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since that was one of the lowest risk assets they could invest in and still get enough spread vs their deposits to remain a viable business. It’s strange days when that is considered piling on risk.
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.
It's been reported [1] (no paywall [2]) that executives were aware of the risk and continued to purchase higher yielding assets in spite of internal protests.
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 went back and edited a few of my posts specifically mentioning your post and the article you cited to clarify the record of discussion.
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.
Yes, same here, thanks. It’s crazy they were so forewarned and yet did nothing, even having lived through the GFC and knowing how quickly things can go sideways. Just 15yrs and they already forgot, /smh.
2008 is an extremely low bar. They still piled on risk.
> 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.
It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.
They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?
No, and that's the point. I understand that banks mark long-term bonds as hold-to-maturity (and only then can list them at par on their balance sheet). But they actually have to hold them. Otherwise, they have to mark them to market, and any sales of HTM bonds flip the entire tranche over to MTM.
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.
E.g., a simple balance sheet:
Assets Qty. Par Market Total
-----
Mark To Market Bonds 10k $1k $0.8k $8Mn
Hold To Maturity Bonds 1M $1k $0.8k $1Bn
Total $1.08Bn
But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price.
But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this:
Assets Qty. Par Market Total
-----
Mark To Market Bonds 990k $1k $0.8k $792Mn
Total $792Mn
$16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.
To allow the bond sale before they had a cash infusion basically flushed the business. I wonder if board of directors had an understanding of how it would detonate the balance sheet. After that, the regulators took the obvious necessary action.
Sure, though in all fairness, I understand it's standard GAAP accounting for all banks, and your balance sheet has to have a footnote explaining the market value as well. I.e., this particular play or accounting standard is extremely common.
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.
The rumor I read is that SVB booked those treasuries in some weird way that prevented them from being sold but also prevented them from having to pay taxes on the treasures.
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.
> A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there.
This kind of assumes that the risk matrix of an executive is singularly indexed on the long term viability of their institution. But the short term gain of bad behavior is still in full effect. Bonuses for the years up to this crisis have already been paid and were probably inflated based on the banks over performance due to its riskier posture.
And the consequences have been softened. There's a very good chance that the people responsible here have had their guilt assuaged by the reduction in impact. They are probably less likely to become the kinds of pariah that they probably should because while we should always consider decisions in the context they are made, humans seem to always adjust their assessments to final consequences.
I'm in agreement that the decisions here on the part of the government are probably the wisest in this context. But this crisis does hint that perhaps we need to reconsider the structure of this system a bit.
Alternately, it assumes that the risk matrix of an executive also includes:
1. Their reputation. How much less likely is it that a board of directors would think twice before hiring them to be a steward of shareholders' assets?
2. Their egos. How much less likely is it that people will be willing to invest time delivering projects whose value can be wiped out by poor risk management in the same way that SVBs has?
1. Their reputation. How much less likely is it that a board of directors would think twice before hiring them to be a steward of shareholders' assets?
One member of the SVB c-suite was the CFO fr Lehman in the run up to that catastrophe. So, BOD don’t appear to care. They keep on hiring each other, making massive mistakes, but walking away with $$$$ in bonus money.
I probably shouldn't have used the word singularly. I think reputation and shame matter to these people to some extent. But as I indicated in my comment, I think this outcome dampens the consequences for those incentives as well.
The unintended consequences here are having a guarantee on uninsured deposits.
Most people are unaware they are loaning money to a bank when they open a bank account.
You've effectively said that bank deposits are now risk-free, meaning that the government is back-stopping 9.2 Trillion of deposits (40% of all deposits).
Can banks still provide a yield for these guaranteed deposits? Are they still able to loan out these deposits? What are the new capital requirements for these deposits, are depositors allow to take their money out when a bank run is happening?
Yeah, I agree. I think this a situation where the individual decisions mostly make sense. But when you add them up, you get a system that creates some questionable implications.
I think the outrage would be for/at all the -other- bankers who made the same poor decisions but now still get to keep their bonuses and jobs due to the new Fed Backstop lending. SVB lost their pound of flesh but the rest (or most) are getting a free pass. We still have to see how the first republic bank run plays out... but according to some other comments which I can't find right now, there are more than just these two banks which have heavily exposed themselves to rate risk.
Yes, every cent. If they don't it is effectively a ponzy scheme where the last bag holding investors are the ones getting zeroed out. All the previous holders made money on them.
But the bailout that people are complaining about is for all the other banks that aren't SVB. There are many insolvent banks out there that would otherwise have had to raise capital at punishment prices this year. Those banks are unambiguously better off with the Fed taking their underwater collateral at par, and this is a clear subsidy to (non-SVB) bank shareholders.
Short answer is we nationalized commercial banking, over a weekend and without a vote. I agree it was the best thing to do. But there will be consequences, politically and financially.
The surprising part is, if we were willing to do this, why not just revise the Fed's discount window rules? They discount from market value. Why not change that to face value for Treasuries?
It's hitting the cultural memories of both 2008 (where banks themselves were bailed out) and multiple cryptocurrency exchanges (where "failed" means all deposits vanish).
Then add in some vocal VCs' hypocritical stance on bailouts coupled with Surveillance Valley's overarching hypocritical stance on freedom, and here we are.
It seems that in this day and age of instant communication and social media mobs, even three days is too long for the precise fate of deposits to remain unknown. IMO the right way to proceed is to calmly raise bank capital requirements, create a few new tiers of FDIC coverage (eg coverage on accounts between $250k and $10M is funded from assessment on accounts between $250k and $10M), and institute criminal penalties for executives of banks that go bust beyond their capital buffer (otherwise nothing reigns in TBTF accounts that have too much variance to be absorbed by higher FDIC tiers).
"People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about."
Does that have anything to do with this article at all? First few lines of this article: Banking is a confidence trick. Financial history is littered with runs, for the straightforward reason that no bank can survive if enough depositors want to be repaid at the same time. The trick, therefore, is to ensure that customers never have cause to whisk away their cash.
This article is about the possibility of the total loss of confidence in the banking industry leading to a run on a system that can't handle it. I understand the context you meant when you said things like "the system works, why is everyone upset", but I find those a pretty poor choice of words regardless with this much fear circulating.
This is not true. SVB had 91 billion in hold-to-maturity securities. These were auctioned off to other Banks. The FED did not take them.
If the Fed did take them, it would be a drop in the ocean. The FED is already holding 2.7 trillion dollars of underwater mortgage-backed securities they bought.
They have six trillion dollars of other securities they are holding.
Nobody can do a bank run on the Fed and they control the interest rate, so despite their colossal unrealized losses, they can wait it out.
Months of work undone by loaning to banks which made risky investments betting against high interest rates.
Any uptick on this graph is equal to printing money which causes inflation. They can wait it out while we collectively pay the cost of this increased money supply.
Maybe somebody here can explain something I just doin't seem to be able to understand. Why is it so hard for banks to do a stress test?
They have all the data. If I was CEO of a bank I'd want to be able to get up in the morning and have some idea how much risk and what types of risk my bank was assuming. Especially in a dynamic environment of Fed interest rate changes. I would think they would be doing it all the time. Isn't that what computers do? Simulate scenarios like - What does our bank look like if the Fed raises rates to %2 etc. It makes me feel like they truly just don't want to know so they can do whatever they want.
> Why is it so hard for banks to do a stress test?
They're super involved, requiring a full-time department to prepare for and run. That's a multi-million dollar recurring expense a bank with tens of millions of dollars of profit may not be able to afford.
It isn't hard. They want a try at getting a little more profit in exchange for risk. Stress tests prevent them from taking those risks, therefore they lobby against them and don't do them unless compelled.
It’s not that they had no assets it’s that they couldn’t liquidate them to pay out their depositors.
Sure, if everyone had just waited for the 10 year bonds to mature to access their funds their bank was in perfect shape.
—edit—
Assuming they could come up with enough money to pay the over market interest rates on deposits while also seeing their money flows reversing because of VC capital drying up.
The system is designed to be a private scheme supported by a government which supports that scheme. That's the issue. Profits are privatized and losses are socialized. If deposit insurance becomes limitless as Yellen announced, then the issue is our kids will pay for this.
Re effective system: Maybe dinosaurs had to swallow rocks to digest their food, but we don't have to maintain this practice just so dinosaurs can keep existing. The system needs to be deprecated in favor of better tech that takes it out of the hands of dinosaurs. Legacy banking and gov/political class need to be replaced by a better solution.
It's really pretty easy to understand. Imagine if some tech company went from fine to bankrupt overnight in a surprise to everyone. All the shareholders zeroed, not just management but public shareholders, employees, etc. Would you seriously be surprised that all those people who lost their shares would be upset?
Hell, even with just layoffs the outrage on this site has been deafening. I can see shareholders and employees of SVB rightly being pissed off. It's not your place to tell them they should not be.
> I can see shareholders and employees of SVB rightly being pissed off. It's not your place to tell them they should not be.
I mean... yes it is. I'm against zeroing depositors of failed banks, because (for better or worse) we've decided that banks should work like restaraunts and you shouldn't have to do a complicated risk assessment about how safe one is before deciding to do business there. But shareholders are a different story. If you invest in a company and they do dumb things and lose your money, that's at least somewhat on you - you're supposed to know what the company is doing before you invest, and potentially push for management changes if they're doing stupid things. Insulating shareholders from the bad decisions of their companies is an utterly unacceptable degree of moral hazard.
Where did I say they should be insulated? I said they are pissed off since you seem confused as to why. Imagine telling a laid off employee: you work for a tech company you're supposed to know what the company is doing before you join. If you get laid off that's how it's supposed to work! I don't understand why you are so upset?
Does that resonate with you? Or do you still have no sympathy for all those people?
They handled SVB itself, fine. It's a bank that didn't manage interest rate risk sufficiently so its equity holders got zero'd out but depositors are made whole. That's fine. Wish they would handle the next SVB the same way, and the one after that, since there are many other banks that mismanaged risk.
But they're not.
The next banks all get to keep their equity because the fed is putting out a lifeline (the new BTFP facility) so that they won't be zero'd out the way SVB was.
There isn't clear messaging on where the money is coming from to cover depositors. Thats whats leading to no one even factually knowing whats happening.
In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid? SVB couldn't do that because there was a run that was forcing them to sell early, in unfavorable conditions.
> In SVB's case, can't you cover depositors simply by holding their assets to maturity and waiting for them to be repaid?
If you're willing to lock the depositors up for 10 years and pay them back when those assets mature, sure. But that probably wouldn't be seen as an acceptable way of making those depositors whole.
Someone's got $100 of deposits with you today; you're holding a 10-year bond that will pay $102 over the 10 years but currently trades at $87. Yes you "can" "pay" "them" "back" eventually, but what if they want to pull their deposit today, perhaps to buy a bond like the one you were holding? If you do the accounting based on today, they're entitled to $100 and you only have $87; if you do the accounting based on 10 years' time, they're entitled to $115 and you only have $102; either way there's a shortfall.
This doesn't make sense though. Sure they would have to take a haircut on those securities thanks to the fed jacking up the interest rate so much, but if you offer the right price they should still sell.
Investing involves risk. Sometimes that means losing money, even if you are the bank.
No, they don't, right? They simply hold them to maturity.
The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount.
But the bank doesn't normally sell the bond to begin with. That's why people say banks "borrow short and lend long". What the bank is supposed to do is hold the bond until it matures and is paid back in full. The only reason SVB can't do that is that all its depositors simultaneously demanded their money bank, so it couldn't wait the bonds out. But other institutions can do that waiting.
The bond is impaired in that sense. The concept of present value isn't made up just for fun, it's because the value of money depends upon the time at which it is available. $10 in 10 years is obviously worth less than $10 right now, which is not only captured by present value calculations but it's also plainly and intuitively visible if you make the chain of associations of high interest rates -> higher price levels -> lower monetary value. So yes, if your bond sells for $87, you can be reasonably sure that $87 is the value of all of its payments back to you. It doesn't matter that the nominal payouts sum to $100, because they are denominated in future dollars which are worth less than present dollars! You need to cover the shortfall when you move those payments from the future to now!
The bond is impaired (fair value less than amortized cost basis) but from the accountancy perspective, the question is whether it's Other Than Temporarily Impaired (OTTI).
As long as the holder does not intend to sell the bond, believes that is more likely than not going to be a position where it isn't forced to sell (to generate working capital etc), and there is no likelihood of a credit loss, then the bond is not OTTI.
The subjective assessment of whether you're "more likely than not" going to be forced to sell the bond is the pivot on which this whole thing tilts. It's probably a good question whether a simple balance of probabilities is really where that standard ought to be.
But it's not like there is no market for bonds. You can calculate what they will be worth at maturity and sell them to people looking for shorter term bonds. Yes they're getting a bad deal thanks to the Fed, but that's life.
It will be a loss for the bank, but that seems better than total collapse. Banks are ultimately companies that take calculated risk to make money, if you can't afford to take an occasional loss then you shouldn't be in a risk based business.
Right: SVB was incompetent. Their stock got zeroed out. Meanwhile, institutions that have adequate cushion can step in and hold SVBs assets to maturity.
The thread here asks: "who's paying to cover SVB's uninsured depositors?". Isn't that the answer?
The SVB was mark-to-market insolvent, not just undercapitalized. There's no indication that those marks were unrealistic; the market was orderly, and they were consistent with a naive NPV calculation, with a loss due to the increase in that discount rate. So it wasn't obvious that sufficient money to repay the depositors would exist even after zeroing the shareholders and creditors; if it were, then the SVB would probably have found a buyer.
Maybe enough depositors will leave money in the SVB at below-market interest rates that it will earn its way out of the hole. The FDIC has given depositors a special incentive to, since by guaranteeing all funds they've made the SVB the safest bank in the USA. If the depositors don't, then the FDIC will take the loss, and socialize it over all participating banks.
Per my other comment, the HTM accounting is a distraction. That accounting was compliant, but accounting doesn't define reality. The holders of long-term bonds take a real economic loss when interest rates increase, regardless of whether they sell. This may seem unintuitive since the cash flows don't change, but it couldn't be otherwise--if the bond is worth par, then why aren't any buyers willing to pay that?
Uninsured accounts are effectively insured and the difference is paid by other banks and their customers. Also, if system actually worked, the bank whose crash means systemic risk would be subject to more serious regulations.
This is what I'm mad about. FDIC insures to $250k in normal cases. It should not have been used to insure depositors for their full deposit amounts here.
Why does that make you mad? If my money is at risk, I expect to be compensated with an interest rate. If I'm not earning interest, my money should have zero risk. We should remove the FDIC $250k limit and if bank's business models don't work with that, we should nationalize the banks. It's in society's best interest to not have our money wiped out overnight for things beyond our control.
No, your money should not have zero risk. There is always risk in the system. The FDIC was created as an insurance for this specific risk hence the name (Federal DEPOSIT INSURANCE Corporation). This was mainly to help the common person when bank failures were more prevalent...not the wealthy who were the predominant beneficiaries of this bailout.
You should learn that you the moment you put a deposit in the bank, the funds become the property of the depository bank. As a depositor, you are a creditor of the bank.
People are mad because the rules were changed in the middle of the game to serve the interests of a select few (mainly VCs and the startup crowd).
Those supporting this bailout seem to have some of the least knowledge on how banks work.
If there's risk, I should be compensated for it with interest on the account.
I'm fine with banks being not for profit institutions run by the government. Allowing people to safely store their money is baseline civilization. If banks are private, the government is going to have to back them up because you can't have the operational accounts of nearly every business in the country getting wiped out randomly.
It makes very little sense to treat depositors as risk takers. These aren't people investing in stocks or bonds. These accounts are places to park your cash. It would be very bad to discourage deposits.
Putting a ceiling on FDIC insurance is effectively an outdated idea that doesn't work.
Take the example of a company that keeps payroll in a cash account. Let's say that company has 100 employees. Should the FDIC treat the account as belonging to 1 person or 100? If you say 1, I say you are irrational.
They are choosing to place money in the bank. This is a risk in and of itself.
Companies with treasury departments already know this. They can put money in money market funds, CDARs, cash sweeps, or any other vehicle to protect their cash. There are multiple ways to hold cash with very low duration risk that does not involve putting it in a bank.
FDIC is not an outdated idea. It is just the reality of the current financial system because it would require an excess of $20 trillion dollars to insure every deposit in the banks.
Although I knew about the FDIC coverage limit, it seems many did not. I've never had enough cash to test this, but I suppose I assumed if you put $251K in a bank account the web page turns red or something, or a dude calls you up to warn you that the last $1K is at risk. I'm guessing now that doesn't happen.
This, exactly this. If my bank had collapsed and I had more than $250k in the bank we know the FDIC's answer would be "there is a limit of $250,000 for deposit insurance".
Whether it's planned to work that way isn't so relevant as it is what is probably going to happen from time-to-time due to the fundamental nature of banks - at least, this is what Diamond and Dybvig believed when they published their model[1] back in 1983, concluding that deposit insurance is the better way to prevent bank runs than closing banks.
Presumably they were onto something, as they jointly received the Nobel prize for economics last year for this contribution.
Every few months the mainstream media jumps on some new thing about how big tech is finally collapsing because of X or we should be mad at big tech for doing Y and it's usually blown way out of proportion. Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage.
What I am confused about is - if everything went "according to plan", then what did happen? Is it really all peter thiel's fault? Surely someone as smart as him saw something that made him do what he did, given that it was a pretty massive thing to do.
Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage
Of course they don't! Look at some charts of newspaper advertising revenue over the past few decades. There's one word that best describes it: apocalyptic.
Where did all that advertising revenue go? Google and Facebook!
Meanwhile, all the benevolent VC techbros had to do was collectively agree to just not withdraw all of their deposits from SVB en masse, and they couldn't even muster that. How deep is the rot in SV?
That would be irrational. It’s a Prisoner’s Dilemma and no matter what any individual would prefer to do the only rational move is to assume others will betray you. I don’t think it’s fair to ask SV to behave irrationally.
> Two members of a criminal gang, A and B, are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communication with their partner.
Second, the traditional framing of the Prisoner's Dilemma disregards the aftermath, and the lasting reputational and trust consequences of betrayal, which would be substantial for any VC that failed to cooperate, or outright backstabbed the others.
All banks are suffering, buy some are suffering more than others. It's also unclear how the Fed's actions are going to impact the situation going forward. Here are my unanswered questions:
1. What's going to happen to risk management at banks now that the government has shown themselves willing to backstop all deposits. Is there really any reason to spend money hedging risk?
2. What's going to happen to the bond market? Bonds are generally understood to change in price in a way that keeps yield equal to currently available fixed-income securities. However, with the Fed's new BTFP, the value of bonds is always par, apparently.
3. What are the banks going to do with their new liquidity? The Fed is essentially giving banks a fully collateralized $1 in exchange for $0.80. That's a lot of free money.
If BTFP can only be used by banks with hold to market bonds purchased before March 12th, then wouldn't the impact on bond prices be negligible? I suppose we could hypothesize what the bond market would like in the absence of BTFP and the much higher likely hood of contagion. Feels like yields would drop on the expectation that the Fed would be forced to lower rates due the crashing economy. So I guess one could argue that BTFP might cause yields to go down a little bit, but probably a lot less than they would have otherwise.
As to question 3, BTFP feels like a small dash of QE after pushing QT a little too hard and too fast. Banks will probably just put that extra cash into short term treasuries to shore up their balance sheet to protect against declining deposits. So I guess we should expect that extra cash to push short term yields down. Short term yields have already dropped a bit though, so maybe that is already priced in.
The bond market is massive. A large majority of bonds were purchased before March 12th.
As for the QE/QT performed by the Fed. The Fed's balance sheet has already increased by 300 billion, which undoes like half a year of QT. JPMC estimates a total of 2T in liquidity. Not only will that undo all QT, it will bring the Fed balance sheet to new all time highs.
It's just petty corruption. The FED has raised rates (many people will lose from that). Some people don't want to lose from that. The FED decided to not raise rates (ie: holding your low-rate bond to maturity is basically that) for some people. This "some people" are denominated "systemically important"; in other countries they are called "friends of friends", or "oligarchs".
This is the closest the West can be to the East. We finally had the "rapprochement"!
But even then: Some professor was on Bloomberg today wondering about the hedge strategy. The hedge providers may be at risk if all of the sudden there are a huge amount of sales there. But this only happens during heavy withdrawals...
Silicon Valley Bank was giving executives easy 50 y mortgages for mansions and commercial real estate. This is the garbage now in SVB's balance sheet. It's not just 10y treasuries. Read the actual reports.
In turn, VCs/founders/executives promoted SVB. And now they don't want to be their own counterparties on a bet gone wrong.
I'm seeing a lot of comments along the lines of "What should SVB have done? They bought the best bonds they could have for the time, and then the Fed screwed them over."
Maybe I'm just naive when it comes to how these systems work, but couldn't SVB have just... done nothing? Nobody was compelling them to purchase any bonds at the time. Sure they have pressure from stockholders to make money, but if the deck was so stacked against them as everyone seems to think it was, it seems like a financially-literate management (which I would expect out of a bank) would have had the idea to merely wait a bit to see what the Fed was going to do.
(Everyone and their mother was predicting a crash from 2020 to 2022, so it seems reasonable that a bank of all institutions could have made the call to be patient and see which way the wind blows...)
Again, maybe this is me just being naive, but "They should have just been patient" seems like a mantra applicable to a lot of companies lately. Car companies cancelling all their chip orders at the start of the pandemic, only to scramble and re-place them as demand surged; tech companies hiring like crazy in the face of a supposed talent crunch, only to have massive layoffs a year later. It seems like companies keep making "impulsive" decisions to try and capitalize on short-term trends without any eye for the long term strategic view.
Yes, "being patient" might mean they don't make as much money as they could have if they jumped at the first sign of a change, but... Do they have to? SVB could have continued making money hand over fist in the long run, but now they no longer exist. Google and Microsoft and all these corps could have saved a lot of corporate face and internal morale, had they just waited out the supposed hiring crisis that never quite seemed to materialize: now they have a pile of irritated employees and everyone I know at a major brand seems to be holding their breath for the next round of layoffs.
There's a trend of hyper-efficiency in the name of maximum profit that I feel like I've been seeing kind of everywhere, and that seems fine until the moment the music stops. Maybe I'm just the kind of person who naturally hedges their bets, but I'm constantly blown away by how rickety entire companies appear to be sometimes. What am I missing? Are there just insufficient incentives to be conservative with resources and decision making?
As the saying goes, 'Make hay while the sun shines'. If you don't take advantage of a good opportunity while it's there, it'll eventually go away and you won't have benefitted from it, while others have.
Not saying that to justify SVB or anything, as they're in the business of securing people's money long-term, and they made bad decisions that they had plenty of time to course correct for (rates have been continuously rising for well over a year, with a clear goal of lowering inflation to around 2%, and you can see how slowly that was lowering and predict roughly how high that would get).
Car companies also had a big faceplant moment with cancelling chip orders, but we were in the midst of a novel global pandemic that no one really knew how people were going to react to, or how big or how long it would last. Health officials were predicting around 100k total deaths in the US, and we blew way past that.
But for tech hiring I can clearly see why they were like 'let's take all this zero interest cash, get a bunch of people, use them to get a competitive advantage, and then when everything starts to unwind we'll just lay people off'. It's a shitty thing to do to people, but I get the reasoning.
I know they all claim they didn't see this coming and 'take full responsibility' or whatever in their layoff announcement/apology letters, but behind closed doors I bet they knew exactly what they were doing, at least the vast majority of them.
I've had quite a few opportunities in my life that I didn't really leap on 100% like I should have, and as a result those opportunities slipped by, and I didn't end up making that hay at all as a result, the opportunities passed and I'll have to find some other way to make that hay.
It wasn't a good opportunity though. Their mortgage-backed securities were making 1.56%. All that risk for 1.56%? I understand that it was hard to find good investments at the time, but that doesn't mean you have to run out and buy bad ones.
Doing nothing wasn't the best strategy. They could and should have bought short duration bonds instead of long duration bonds and mortgage-backed securities. That would have been fine.
If you ask me, the real problem is the fact that 30 year fixed rate mortgages with super low rates were being handed out like candy. Who in their right mind would seriously hand out a 30 year loan with a fixed 2.6% interest rate? It didn't cross their mind that just maybe sometime in the next 30 years interest rates would go higher?
It was completely obvious to me that whoever owned those loans was going to be sorry sooner or later. Turns out it was sooner. And in the meantime we got ridiculous house price inflation to boot. Why did those loans exist? Not because they make sense, but because of government policies intended to promote homeownership and pump up property values.
The Greg Becker of the article (SVB CEO & president) was in SF Fed board of directors until Friday [1] and successfully lobbied for lax rules for banks like SVB. The current risk officer worked at NY Fed [2] and at Fitch Ratings (!) and Deutsche Bank [7]. Previous risk officer was director of Freddie Mac [3]. Yellen was the 11th President of the SF Fed [5] and the current president is her protégé [6].
They knew exactly what they were doing. The Fed looked the other way. They sold a lot of stock in the past month [8]. They are very well connected into the Fed and Treasury. I doubt anybody will get any kind of serious legal troubles.
The rot is at the core, the Federal Reserve. My parents saved money in a savings account for their eventual retirement. It was a prudent and accepted way to do things. Over time, with Reagan and deregulation of everything that followed, their savings rate effectively dropped from 5-8% to zero. That income was expected to fund part of their retirement, and it was stolen from them in order to prop up wall-street.
Those zero and near-zero rates distorted fiscal reality in the US and elsewhere they've effectively broken the system. At some point, we'll be bailing out whole countries to keep kicking the can down the road, and that's when things will be too big to save and we get to The Great Simplification.
I only hope we've got alternatives to fossil fuels figured out at scale and somewhat in place, otherwise civilization could collapse in World Depression II.
I was pleased to read Nathan Tankus' take[1] on all this, although I wish I understood it better, which was that a lot of policy ideas that have been somewhat fringe are becoming mainstream in the last week:
> The prospect of unlimited deposit insurance, whether de facto or de jure, is leading to a large-scale reconsideration of views among even “moderate” banking scholars.
I imagine that's usually how real policy progress happens: interesting ideas are always getting thought up and proliferated, but it takes a big upheaval to move them over to being really possible.
It depends on your view of "progress." Early in the pandemic, people thought you really could print money indefinitely and MMT was right. Now people see that classical notions of inflation are still valid.
Yeah. There were still plenty of people who predicted how foolish the early pandemic money printer was. I’d bet those same people view this new regulation with equal displeasure. I’m certainly in that camp.
Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year, or the 2018 increase in interest the size of bank required to have a resolution plan thereby exempting SVB or Peter Thiel’s call to withdraw $ I would have labeled the raising of the size required for a resolution plan as greed by SVB but the fed had no problems resolving SVB so it clearly wasn’t too big to fail. If the fed continues to raise I’d guess we will see more bank failures
> Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year
I'm not an expert in this area, but in what way is this true? Interest rates are still quite low by historical standards. The 80s saw massive increases to a much higher level (approaching 20%) in a shorter amount of time. There were large jumps in the late 60s and early 70s as well.
lol, the media frenzy is hilarious to watch. This was a badly run bank facing some headwinds. I forget how much people like writing about things in a flurry instead of taking a step back and providing real analytics oversight.
By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. The problem wasn't that they too exciting bets; its that they played the standard playbook incompetently.
>> By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe.
Clearly not safe. IMHO anyone buying 10 year treasuries in the last several years is an idiot. Those rates were guaranteed to rise, as they could not fall below zero.
Next up: anyone who bought a house in the last few years is gonna get hurt. We knew rates would be rising, and hence prices falling. So far it's mostly sales volume dropping near zero, but soon...
And then when people are broke, many will raid their retirement investments. The stock market has benefitted for decades from people blindly (via 401k funds) dumping money into the market. More buyers than sellers equals rising prices. Guess what a jump in sellers causes...
And then after the market drops, people with money elsewhere will want to buy, resulting in one more shift of money from here to there.
> Next up: anyone who bought a house in the last few years is gonna get hurt. We knew rates would be rising, and hence prices falling. So far it's mostly sales volume dropping near zero, but soon...
People who bought a house as an investment might be in trouble, but people who bought a home to live in are making out like bandits with their 30 year fixed mortgages.
Agreed in general but I don’t think there is anything structurally preventing <0% yields on treasuries. The ECB has already set a central bank rate as low as -0.50% before.
It would of course be deeply unintuive to a regular person and likely very unpopular if rates went negative enough to require it to be reflected in consumer banking (eg negative rates on a checking/savings account). But I don’t think it’s impossible and we may see it in our lifetimes.
That is just a nitpick though because I think the US public as-is would throw a fit if it happened, making it unlikely. Fully agreed that purchasing a 10y bond at 1% was boneheaded given plenty of people predicted interest rates to need to increase to fight inflation (come on, just because the fed said it was transitory for a while, doesn’t give professionals an excuse to blindly take that at face value). The effective yields could have been so much higher just keeping the cash uninvested or in short term treasuries, then purchasing 10y bonds after the rate hikes started or stabilized.
Yeah that is much more obvious in hindsight but it’s not like it was a fringe position even in 2021
Safe, as in they're going to be paid back dollar for dollar. People are talking about SVB's assets as if they were toxic, rather than just not as attractive as other available bonds.
They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence.
The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.
Yes, by all accounts, SVB was managed incompetently. But look at the thread we're on, which starts with the idea that Glass-Steagal might have prevented this, as if SVB had gone long on upper tranche subprime loans.
I agree with you about G-S, all it did was separate the Investment banking from regular banking. That doesn't make it boring at all!
But I just can't wrap my head around the decision making process at SVB. I wouldn't expect to be paid high 6 figures to run risk at a $200B bank and I knew not to be in long bonds. hn_throwaway_99's comment about the legality of hedging their HTM book makes me wonder if they just reclassified it to reduce their costs in 2022. (Only credit and servicing risks can be hedged)
And that gets to the real issue. Current regulations actually encourage rate risk at banks <$250B, because you can either pay for insurance or just mark it HTM. The majors don't have this choice and have to eat the extra cost.
It is not that way in EU banking due to the Basel framework and IRRB. At least they have reporting standards and don't allow more than 15% to be at risk in the Supervisory Outlier Test (SOT).
Also, if we expect government regulators to protect bank executives from their own incompetence and make sure no banks ever go under, this brings up the question of why we need bank executives at all. Just let the government run the banks or, since there would no longer be competition between banks, roll all deposits and assets into one big government-run bank. An alternate, roughly equivalent scheme is to shut down all private banks and give everyone a Fed account.
Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning.
Edit: I went looking and PWC has a nice overview...
6.4.3.4 Hedging held-to-maturity debt securities
ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge.
...
The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities.
They could have hedged and marked to market though. In that case, the accounting would have said they were fine, and they would actually have been fine.
In reality, they didn't hedge, and they used the HTM accounting treatment. So the accounting still said they were fine, since that permitted them to ignore the loss when interest rates increased; but accounting doesn't change reality, so they actually weren't fine and they blew up.
i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal
Risk management is much more than that. If that's easy then everyone can be a good fund manager: just take people's money and buy bonds. This doesn't work in real life.
Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?
SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?
It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments.
I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.
And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine.
With that said, it's good they got punished for poor decisions given their depositor profile.
That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though?
If it was a short period of time (a week?) this was going on, then sure. The emperor darting to the bathroom without his clothes on is unlikely to be a scandal after all.
But even if fed rates dropped tomorrow those bonds will not recover to par, because inflation on their principal amounts has already happened, and their interest rates are too low to ever recover back how much they have lost value barring truly exceptional deflation.
So unless they somehow come up with even more cash on hand to be able to avoid ever realizing those losses (good luck when everyone starts drawing down savings and boomers start retiring more and more), they’re boned inevitably.
Deflation wise, the fed will fight THAT even harder than the current inflation fight they are doing, and that’s relatively easy to combat - print more money. It’s why they’ve been printing money since ‘08.
Since the expectation is that inflation will continue for some time of course makes the math and present value even worse, but there is no plausible situation right now where the expected future dollar value of those bonds will be high enough to recoup a large percentage of their purchase value in today’s or a future dates currency.
> That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though?
This is banking in general though. Any bank will struggle if a significant portion of deposits suddenly outflow. SVB was unique in that it had relatively large balances concentrated in relatively few depositors. This made it especially susceptible to a bank run. Of course they knew this and should have handled their risk appropriately.
Also, according to reports, they were very close to getting bridge financing. The run caused the financing to fall through, and we all saw what happened.
There is the run from ‘can’t liquidate fast enough’, and there is the run from ‘can liquidate fast enough, but don’t have enough value if they do’.
The first one any bank is susceptible to, the second one is a bad bank issue - and it means that any sustained rate of deposit outflow is going to eventually implode it, as they’ll run out of value at some point regardless of how slow the draw down is.
That’s because that second scenario is essentially forced ‘mark to market’, which unlike ‘stress tests’ and regulator driven accounting standards, can’t be gamed. That’s the real issue here.
SVB was in the last category, but everyone is pretending it was in the first category because this problem is systemic due to fed reductions in interest rates for so long. We’re trying really hard to not look behind the curtain because it’s too scary.
The really interesting thing is easy fed cash has caused this issue globally. Global interest rates have been suppressed everywhere the USD touches, even China. Now that they’re ending, the bill coming due is a global one.
That’s why the fed is willing to take all these bonds at par for cash - they recognize they created this mess and don’t want it to spread, as it will implode the system and break the orderly turnaround they are trying to accomplish.
Pain spread over years in ways the system can absorb without causing an out of control spiral is the goal. Retirees eating dogfood (or starving), and mobs of angry unemployed 20 something men burning cities are the thing they are trying to avoid.
I assume most banks should be going after shorter term bonds to adjust with those changes. Wasn't the problem with SVB that they had too much money in long term bonds and MBS? So they were locked into really low rates (based on today's srandards), which is fine if they held to maturity, but they couldn't hold due to the withdrawals and then nobody wants to buy those low rate securities for them to exit without losing too much.
The problem is that no one has been allowed to price in (real) inflation risks into bonds for a very long time as the fed has artificially suppressed rates through QE.
Bonds have only ever been considered ‘safe’ from a repayment perspective (it’s the only thing they really get graded on risk wise), and even then junk bonds are a real thing. The value of the bond shrinking due to inflation is always a unquantifiable future risk that typically gets priced in price/interest wise by the buyer/underwriter - but with the fed suppressing rates? All bets are off.
Those who got those 2% mortgages though have a lot to be thankful for. As long as the zombie hordes don’t get them in the coming debt apocalypse anyway (/s).
My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway.
The bond market already is built to handle this, and we should stop treating demand deposits as this Schrödinger collateral. If you want to insure lending, insure the lending directly, not with consumer and business cash. I know there are no simple solutions to complex problems, but this all seems very unnecessary when you pull the system apart conceptually.
Most people do not receive interest in their deposit accounts (or its minimal) because banks keep the spread between paying depositors nothing and the interest the Fed pays on reserves held at the central bank. A Narrow Bank (which the Fed won't approve [1]) would cover their costs with that same spread. Failing that, one can invest in short dated government securities (US treasuries) directly. "All Roads Lead To Treasuries" if you will. If someone is going to gamble your money, might as well be the US government (treasuries are considered "risk free") vs your rando bank executive leadership team (the CEO of SVB collected ~$9.9 million in 2022 total comp for overseeing and approving suboptimal duration risk mgmt decisions).
If banking is to be boring and minimally profitable, that leads us to the idea that it should be a utility, not a risk taking venture, no? And if the Fed interest is covering the costs of banking, aren't we already all paying that cost as taxes?
IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments.
Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself.
The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.
I think there is some nuance around CBDC vs simple "accounts" but I agree with your thesis, as do others, on issuing deposit accounts directly from the Fed.
By all accounts, most of their demand deposits were invested in US treasuries. Those treasuries are just worth less now because of interest rate hikes and so even if they didn't have to do a fire sale on billions in treasuries, it still wouldn't be enough to cover deposits.
Large venture capitalist depositors demanding to pull out billions of dollars because of relatively minor liquidity risk definitely contributed to the bank run though.
Current global dollar-based financial system can only be sustained by an ever-increasing leverage, that allows rolling over the ever-increasing pile of dollar-denominated debt.
Since 1971 everything (all relevant policies) were geared towards increasing the amount of debt in the system. It's no surprise that student debt, mortgage debt, credit card, auto loans and whatever else were ballooning.
Regular banks not making risky bets would go against it, so it will not be done.
Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there. Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves.
It is remarkable how badly SVB managed to fuck this whole situation up. But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.