4 ms·

most of the last 10 years had near 0% interest rate

lazide 4y ago
It’s really mind boggling that SVB put so much money into bonds with long maturations at essentially zero or negative interest rates. I wonder how many others did similar?
- nemo44x 4y ago
  It's not like they wanted to. Loads of money was coming in from funded companies but the demand for loans was low. So they had to put the money somewhere and banks (not just SVB) began putting record amounts into treasuries. At least they got something from them so they could pay interest on things and keep the lights on. The government printed a ton of money and demand for loans crashed after the pandemic started. People even paid loans down. Many companies weren't borrowing much because of supply chain issues - why borrow if you can't use it? I'm not blaming the government - unemployment went through the roof for awhile and they had to protect people. But this is a side effect that no one really saw. That the treasuries would lose a lot of value because of super rapid interest rate increases while companies start eating away at their runway because no new investment is coming. It all makes sense today but literally no one saw this coming a couple weeks ago.
  - HDThoreaun 4y ago
    No, they did not have to put the money somewhere. They could've kept the cash as cash if they wanted to. Holding cash is free for a bank, it's not like their costs increased since they weren't paying any interest on deposits. They could've bought derivatives to hedge against the likely scenario that interest rates increase. They could've bought 1 year bonds instead of 10. They really fucked up here. > But this is a side effect that no one really saw. Literally everyone except SVB saw that long term bonds would decrease in value post pandemic when interest rates increase. Interest rate increases lowering the value of bonds is quite literally the most basic rule of bonds.
    - nemo44x 4y ago
      I don't think you're right. Here is an article from 2021 describing this. [1] Everyone has been doing it. SVB is unique in that its customers relied on financing to continue and because it hasn't they have been drawing their runway down. Other banks don't face this dilemma necessarily. Or they do and are coming up next. I don't know if you noticed, but a lot of banks stocks are down massively this week. [1] https://www.nytimes.com/2021/08/25/business/banks-government-bonds.html https://www.nytimes.com/2021/08/25/business/banks-government...
      - lazide 4y ago
        Folks knew it was going to happen - but banks are highly regulated and don't have a lot of choice in what they can invest in, it has to be 'safe'. Which means specific types of bonds. It's why the fed is currently bailing out the industry by being willing to take them all at par value, not market value, in exchange for cash.
    - hnfong 4y ago
      Smaller banks are usually pressured into offering higher interest rates to compete with larger banks. Holding cash gives you exactly 0%, and short term maturity bonds pre-2022 basically gave you roughly 0%. So, as a small bank how do you entice your customers to keep money in your bank? If the large banks are offering say 0.5%, you're probably pressured into offering ~1%. And how do you afford to do that? By buying longer term bonds. OK, now comes 2022, inflation is high and you think the Fed will increase rates. Now your bonds have already dropped in price due to the anticipated rate hikes. The billion dollar question now is whether you believe the Fed's "it's fine, don't worry we can get inflation under control", and keep your bonds, or whether you believe aggressive rate hikes are coming? It's easy to ridicule in hindsight, but as the saying goes hindsight is 20-20.
  - gitfan86 4y ago
    A lot of us took out 3% mortgages and avoided working at startups offering 400k to build some vaguely defined "democratization of finance" product. No one said SVB is going to be insolvent on 3/10, but lots of people thought SV and investors were making bad decisions in general over the past several years. SVB is a victim of its own culture. You would never be hired as an exec at SVB is you said "Lets keep all these deposits in 1-month Tbills and cash since most of these startups are garbage and are going to need to take withdrawals within a couple years."
  - kgwgk 4y ago
    > It all makes sense today but literally no one saw this coming a couple weeks ago. The risk has been discussed for almost a year at least: https://www.fitchratings.com/research/banks/us-banks-face-higher-unrealized-securities-losses-amid-rising-rates-11-04-2022 https://www.fitchratings.com/research/banks/us-banks-face-hi...
  - chollida1 4y ago
    > It all makes sense today but literally no one saw this coming a couple weeks ag The short interest in SVB would indicate that alot of people saw this failure moths ago. That and SI have been two of the most crowded trades by hedge funds since December. Borrow has been 50%+ for the banks. That would indicate that alot of people saw this coming 4 months go.

It’s really mind boggling that SVB put so much money into bonds with long maturations at essentially zero or negative interest rates. I wonder how many others did similar?

nemo44x 4y ago
It's not like they wanted to. Loads of money was coming in from funded companies but the demand for loans was low. So they had to put the money somewhere and banks (not just SVB) began putting record amounts into treasuries. At least they got something from them so they could pay interest on things and keep the lights on. The government printed a ton of money and demand for loans crashed after the pandemic started. People even paid loans down. Many companies weren't borrowing much because of supply chain issues - why borrow if you can't use it? I'm not blaming the government - unemployment went through the roof for awhile and they had to protect people. But this is a side effect that no one really saw. That the treasuries would lose a lot of value because of super rapid interest rate increases while companies start eating away at their runway because no new investment is coming. It all makes sense today but literally no one saw this coming a couple weeks ago.
- HDThoreaun 4y ago
  No, they did not have to put the money somewhere. They could've kept the cash as cash if they wanted to. Holding cash is free for a bank, it's not like their costs increased since they weren't paying any interest on deposits. They could've bought derivatives to hedge against the likely scenario that interest rates increase. They could've bought 1 year bonds instead of 10. They really fucked up here. > But this is a side effect that no one really saw. Literally everyone except SVB saw that long term bonds would decrease in value post pandemic when interest rates increase. Interest rate increases lowering the value of bonds is quite literally the most basic rule of bonds.
  - nemo44x 4y ago
    I don't think you're right. Here is an article from 2021 describing this. [1] Everyone has been doing it. SVB is unique in that its customers relied on financing to continue and because it hasn't they have been drawing their runway down. Other banks don't face this dilemma necessarily. Or they do and are coming up next. I don't know if you noticed, but a lot of banks stocks are down massively this week. [1] https://www.nytimes.com/2021/08/25/business/banks-government-bonds.html https://www.nytimes.com/2021/08/25/business/banks-government...
    - lazide 4y ago
      Folks knew it was going to happen - but banks are highly regulated and don't have a lot of choice in what they can invest in, it has to be 'safe'. Which means specific types of bonds. It's why the fed is currently bailing out the industry by being willing to take them all at par value, not market value, in exchange for cash.
  - hnfong 4y ago
    Smaller banks are usually pressured into offering higher interest rates to compete with larger banks. Holding cash gives you exactly 0%, and short term maturity bonds pre-2022 basically gave you roughly 0%. So, as a small bank how do you entice your customers to keep money in your bank? If the large banks are offering say 0.5%, you're probably pressured into offering ~1%. And how do you afford to do that? By buying longer term bonds. OK, now comes 2022, inflation is high and you think the Fed will increase rates. Now your bonds have already dropped in price due to the anticipated rate hikes. The billion dollar question now is whether you believe the Fed's "it's fine, don't worry we can get inflation under control", and keep your bonds, or whether you believe aggressive rate hikes are coming? It's easy to ridicule in hindsight, but as the saying goes hindsight is 20-20.
- gitfan86 4y ago
  A lot of us took out 3% mortgages and avoided working at startups offering 400k to build some vaguely defined "democratization of finance" product. No one said SVB is going to be insolvent on 3/10, but lots of people thought SV and investors were making bad decisions in general over the past several years. SVB is a victim of its own culture. You would never be hired as an exec at SVB is you said "Lets keep all these deposits in 1-month Tbills and cash since most of these startups are garbage and are going to need to take withdrawals within a couple years."
- kgwgk 4y ago
  > It all makes sense today but literally no one saw this coming a couple weeks ago. The risk has been discussed for almost a year at least: https://www.fitchratings.com/research/banks/us-banks-face-higher-unrealized-securities-losses-amid-rising-rates-11-04-2022 https://www.fitchratings.com/research/banks/us-banks-face-hi...
- chollida1 4y ago
  > It all makes sense today but literally no one saw this coming a couple weeks ag The short interest in SVB would indicate that alot of people saw this failure moths ago. That and SI have been two of the most crowded trades by hedge funds since December. Borrow has been 50%+ for the banks. That would indicate that alot of people saw this coming 4 months go.