4 ms·

I found https://www.livemint.com/news/world/explainer-silicon-valley-bank-crisis-what-led-to-stock-crash-what-lies-ahead-11678419807090.html https://www.livemin

by chx 4y ago

I found https://www.livemint.com/news/world/explainer-silicon-valley-bank-crisis-what-led-to-stock-crash-what-lies-ahead-11678419807090.html https://www.livemint.com/news/world/explainer-silicon-valley... much easier to understand. It would seem the crux of the matter is: > the bank purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Almost 97% of these MBS were 10+ years in duration, with a weighted average yield of 1.56%. > with the rise in Fed rates, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield. Precisely, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value. The second paragraph explains what the original article summarized as "The trouble is that when rates started to go up, mortgage assets got hit hard".

apnew 4y ago
2.a They sold some of the assets bought at step #1 at a loss (dont know why). 2.b Flubbed the PR game while trying to raise to cover the loss 2.c Bank run!
- actionablefiber 4y ago
  > They sold some of the assets bought at step #1 at a loss (dont know why) I imagine they ran out of their more liquid instruments.
  - apnew 4y ago
    Ah! That would make sense why they would sell 10T at loss instead of riding out
- eek2121 4y ago
  If 20 people give you $1,000 each totaling $20,000 and you just know you can make $50,000 by holding it for X amount of years thanks to the economic gods, what happens if your $20,000 suddenly is only worth $5,000 thanks to you having to sell said asset much sooner than you would like? Now you know why.
nemothekid 4y ago
1. Bank buys lots of mortgages (well, assets backed by mortgages) at 0 interest rates. Let's say those mortgages are $100 each. 2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105. 3. Tech sector experiences a crunch. All the sudden more and more companies are taking money out of their bank account. 4. In order to process withdrawals, SVB is now forced to sell the mortgages it bought for $100 for $75. If this continues SVB won't be able to find enough money to pay depositors.
- topicseed 4y ago
  thank you, this was helpful
- randlet 4y ago
  Great summary, thanks (assuming it's accurate!).
- toast0 4y ago
  > 2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105. It's not that new mortgages are shiny and old mortgages aren't; it's that $100 in 5 years (or whatever) is now worth less. It's easier with zero coupon bonds, because there's only the maturity, so a $100 zero coupon bond that matures on date X is worth $Y, regardless of when it was issued; and $100 mortgage that completes on date X needs to have each payment adjusted for current value. Clearly, a smaller series of payments is worth less than a larger series of payments, even though the principal amount is the same.
  - lamontcg 4y ago
    Yeah really its based on long-term t-bills and the risk premium. Because safe interest rates went up, people can get a better deal on long term debt unless they get a discount on the bonds from SVB so that in the end the SVB bonds work out to a the current interest rates, if held to maturity. This is how bond prices move opposite to the external interest rate environment. There is also a risk premium since t-bills are considered perfectly safe, while these mortgage backed securities are likely now carrying a risk premium so buyers want an even higher effective interest rate out of them. It isn't really new-vs-old, it is just the interest rate environment. If there was zero new issuance of debt people would still be trading the old debt at the same interest rates and the value of the bonds held by SVB still would have been underwater. Of course if there wasn't enough debt to satisfy the appetite for buying debt then the prices would rise and get bid up, but we'd see this as a lowering of interest rates in these markets (which isn't happening).
hylaride 4y ago
https://twitter.com/fabiusmercurius/status/1634227996172365826?s=46&t=kmouJSqr-Xk1EkUYlfsCfw https://twitter.com/fabiusmercurius/status/16342279961723658... (The whole thread dives in more). Essentially, when interest rates go up, current bonds temporarily fall in value as people can buy higher yielding ones. For a variety of reasons, SVB needed to sell the bonds at a loss now to cover deposit withdrawals, etc.
svbthrowaway 4y ago
If one were, in theory, to have the working capital for one’s employer tied up in this bank, how bad is it? Going to miss payroll bad?
- fairity 4y ago
  The facts are: - All funds in SVB are frozen - FDIC has implied that insured funds (up to $250K per account) will be released within 7 days. - It's entirely unclear how long it will take to recoup uninsured funds (above $250K per account). - It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%) If given the above fact pattern, your company can't make payroll, then it will have to raise emergency cash to do so. Whether or not that's feasible isn't an answer anyone here can provide.
  - jdhn 4y ago
    >It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%) Where is this 80% number coming from?
    - fairity 4y ago
      The FDIC's statement shared that: As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits The question is what haircut the FDIC will take on the $209b when they forcefully liquidate all securities. If the above data is still accurate, the FDIC can make depositors whole as long as they don't take more than a 16% haircut when liquidating. SVB recently liquidated their AFS bond portfolio at ~90c on the dollar. And, this traunch of securities is very sensitive to interest rate changes. Their HTM bond portfolio consists mostly of securities that could be sold today for ~80c on the dollar. Given the above, it seems likely depositors will be made close to whole. Then again, who knows what's hidden from public eye. https://www.fdic.gov/news/press-releases/2023/pr23016.html https://www.fdic.gov/news/press-releases/2023/pr23016.html
lapcat 4y ago
> I found https://www.livemint.com/news/world/explainer-silicon-valley-bank-crisis-what-led-to-stock-crash-what-lies-ahead-11678419807090.html https://www.livemint.com/news/world/explainer-silicon-valley... much easier to understand. It appears that text from this story may have been stolen from https://twitter.com/jamiequint/status/1633956163565002752 https://twitter.com/jamiequint/status/1633956163565002752 https://news.ycombinator.com/item?id=35099982 https://news.ycombinator.com/item?id=35099982
lamontcg 4y ago
What isn't being discussed is that SVB was probably seeing an initial drawdown in deposits because VC funding has locked up and startups are just burning through cash and can't raise money. SVB was likely a bet across the entire startup economy that funding wouldn't dry up. This probably foreshadows waves of startups failing as they run out of runway.

by chx 4y ago

apnew 4y ago

2.a They sold some of the assets bought at step #1 at a loss (dont know why). 2.b Flubbed the PR game while trying to raise to cover the loss 2.c Bank run!

actionablefiber 4y ago
> They sold some of the assets bought at step #1 at a loss (dont know why) I imagine they ran out of their more liquid instruments.
- apnew 4y ago
  Ah! That would make sense why they would sell 10T at loss instead of riding out
eek2121 4y ago
If 20 people give you $1,000 each totaling $20,000 and you just know you can make $50,000 by holding it for X amount of years thanks to the economic gods, what happens if your $20,000 suddenly is only worth $5,000 thanks to you having to sell said asset much sooner than you would like? Now you know why.

nemothekid 4y ago

1. Bank buys lots of mortgages (well, assets backed by mortgages) at 0 interest rates. Let's say those mortgages are $100 each. 2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105. 3. Tech sector experiences a crunch. All the sudden more and more companies are taking money out of their bank account. 4. In order to process withdrawals, SVB is now forced to sell the mortgages it bought for $100 for $75. If this continues SVB won't be able to find enough money to pay depositors.

topicseed 4y ago
thank you, this was helpful
randlet 4y ago
Great summary, thanks (assuming it's accurate!).
toast0 4y ago
> 2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105. It's not that new mortgages are shiny and old mortgages aren't; it's that $100 in 5 years (or whatever) is now worth less. It's easier with zero coupon bonds, because there's only the maturity, so a $100 zero coupon bond that matures on date X is worth $Y, regardless of when it was issued; and $100 mortgage that completes on date X needs to have each payment adjusted for current value. Clearly, a smaller series of payments is worth less than a larger series of payments, even though the principal amount is the same.
- lamontcg 4y ago
  Yeah really its based on long-term t-bills and the risk premium. Because safe interest rates went up, people can get a better deal on long term debt unless they get a discount on the bonds from SVB so that in the end the SVB bonds work out to a the current interest rates, if held to maturity. This is how bond prices move opposite to the external interest rate environment. There is also a risk premium since t-bills are considered perfectly safe, while these mortgage backed securities are likely now carrying a risk premium so buyers want an even higher effective interest rate out of them. It isn't really new-vs-old, it is just the interest rate environment. If there was zero new issuance of debt people would still be trading the old debt at the same interest rates and the value of the bonds held by SVB still would have been underwater. Of course if there wasn't enough debt to satisfy the appetite for buying debt then the prices would rise and get bid up, but we'd see this as a lowering of interest rates in these markets (which isn't happening).

hylaride 4y ago

https://twitter.com/fabiusmercurius/status/1634227996172365826?s=46&t=kmouJSqr-Xk1EkUYlfsCfw https://twitter.com/fabiusmercurius/status/16342279961723658... (The whole thread dives in more). Essentially, when interest rates go up, current bonds temporarily fall in value as people can buy higher yielding ones. For a variety of reasons, SVB needed to sell the bonds at a loss now to cover deposit withdrawals, etc.

svbthrowaway 4y ago

If one were, in theory, to have the working capital for one’s employer tied up in this bank, how bad is it? Going to miss payroll bad?

fairity 4y ago
The facts are: - All funds in SVB are frozen - FDIC has implied that insured funds (up to $250K per account) will be released within 7 days. - It's entirely unclear how long it will take to recoup uninsured funds (above $250K per account). - It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%) If given the above fact pattern, your company can't make payroll, then it will have to raise emergency cash to do so. Whether or not that's feasible isn't an answer anyone here can provide.
- jdhn 4y ago
  >It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%) Where is this 80% number coming from?
  - fairity 4y ago
    The FDIC's statement shared that: As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits The question is what haircut the FDIC will take on the $209b when they forcefully liquidate all securities. If the above data is still accurate, the FDIC can make depositors whole as long as they don't take more than a 16% haircut when liquidating. SVB recently liquidated their AFS bond portfolio at ~90c on the dollar. And, this traunch of securities is very sensitive to interest rate changes. Their HTM bond portfolio consists mostly of securities that could be sold today for ~80c on the dollar. Given the above, it seems likely depositors will be made close to whole. Then again, who knows what's hidden from public eye. https://www.fdic.gov/news/press-releases/2023/pr23016.html https://www.fdic.gov/news/press-releases/2023/pr23016.html

lapcat 4y ago

> I found https://www.livemint.com/news/world/explainer-silicon-valley-bank-crisis-what-led-to-stock-crash-what-lies-ahead-11678419807090.html https://www.livemint.com/news/world/explainer-silicon-valley... much easier to understand. It appears that text from this story may have been stolen from https://twitter.com/jamiequint/status/1633956163565002752 https://twitter.com/jamiequint/status/1633956163565002752 https://news.ycombinator.com/item?id=35099982 https://news.ycombinator.com/item?id=35099982

lamontcg 4y ago

What isn't being discussed is that SVB was probably seeing an initial drawdown in deposits because VC funding has locked up and startups are just burning through cash and can't raise money. SVB was likely a bet across the entire startup economy that funding wouldn't dry up. This probably foreshadows waves of startups failing as they run out of runway.