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This, these bonds/mbs are liquid instruments, they just lost value at market prices. When I make a deposit in a bank I am not purchasing a CD - I expect full li

This, these bonds/mbs are liquid instruments, they just lost value at market prices. When I make a deposit in a bank I am not purchasing a CD - I expect full liquidity. If the bank invested my deposit in something that lost money but should be worth my deposit amount in X years that is purely the bank’s fault, not my fault.

alfalfasprout 4y ago
Here's the more mindblowing thing... not only are those MBS and treasuries completely liquid... they're correlated to interest rates! The fed has been forecasting interest rate hikes every single quarter. Every. Single. Quarter. They had plenty of time to roll over these investments at a slight loss. Heck, even reducing their exposure 50% would have been enough to not end up in this mess. Instead, they waited until it was way too late (by most accounts, the fed is going to do another 50bps hike next) and all it took was some fear for the house of cards to come crumbling down. This does feel like a regulatory failure though. Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this.
- Randalthorro 4y ago
  Reserve requirements should be based on current market price or at least last quarter or last year, not purchase price. They would have had to recapitalize way earlier if that was the case.
  - deleted 4y ago
    [deleted]
  - fooker 4y ago
    > Reserve requirements should be based on current market price or at least last quarter or last year, not purchase price. This is the kind of thing you could get a Nobel prize for, if it was backed with data and people agreed with the conclusion.
    - albert_e 4y ago
      Isn't the requirement already accounting for change in market value of "assets" in the quarterly balance sheet?
      - alfalfasprout 4y ago
        Apparently the MBS can be valued at their maturity price for the purposes of reserve requirements.
        kurthr 4y ago
        I completely agree, but not discounting the duration risk (which the big guys do and buy insurance for) and/or adjusting for expected inflation (kind of is the yield curve), and allowing banks (other than the Reserve Bank) to mark them to maturity assuming no inflation is pretty bogus. Of course Bank of England had to bail out their pension funds for very similar reasons so it's not like this is something they're unaware of. My guess is that come Monday they backstop all of this and only the shareholders of SVB get wiped out, sort of like the reverse of Bear Sterns (bailed out early) vs Lehman (allowed to fail). It's not "fair", it's just risk.
- q1w2 4y ago
  Exactly - they failed due to one of the most widely predicted trends. Literally everyone knew interest rates would go up. They absolutely deserved to fail. The government allowing them to fail is actually a sign of the system working.
  - alfalfasprout 4y ago
    Not even predicted trends... even when the fed said specifically they would raise rates they still didn't start selling their securities. Every. Single. Time. Nothing.
- nerdponx 4y ago
  > Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this. You would think that they should prevent such risks, right? If the bank loses their collective shirt on a bad bet, they will eventually fail to meet their reserve requirements, right? I don't see how you create a stronger incentive without specifically telling bankers how to do their jobs.
- mancerayder 4y ago
  > by most accounts, the fed is going to do another 50bps hike nex Is this one possibly one of the 'the Fed broke something' scenarios that might lead to quicker rate cuts ?
  - alfalfasprout 4y ago
    Not really. It's like a child repeatedly telling you they're going to pour some cranberry juice in a container. Then pouring some. Then telling you exactly how much more they're going to pour next time. Then they pour that. Then again. And being surprised when it overflows and stains your carpet. SVB had plenty of warning to sell securities. They didn't even have to do it overnight. They had plenty of time to slowly roll-over their bonds and sell MBS. This wasn't a surprise "gotcha" by the fed.
  - opportune 4y ago
    It depends on how much agency you ascribe to the SVB team, and things could very well have been more complicated than the commentariat gives them credit for, but this was all happening in slow motion over months/a year (with an extra year before then when the writing was more or less on the wall). SVB probably should have realized that continued interest rate cuts were gonna nuke their MBS, and sold them at a loss earlier, so they could recapitalize in safer instruments like short term treasuries. What I’m learning about reserve requirements is that this would have actually reduced their “assets in reserve” though because they were allowed to use the maturity price of the MBS for that accounting. So selling them at a loss and buying short term treasuries would have reduced the amount of assets in reserve by that calculation, even though it would have been the same amount of assets (at the time of the transaction) in mark-to-market value AND safer against further interest rate increases. I’m guessing this dilemma at some point got so bad that they literally could not recapitalize anymore without becoming insolvent, at which point their only option was to hold the MBS through further losses
- shjake 4y ago
  > 50bps It would be very damaging for their credibility if they hiked by 50bps after already doing 25. Of course it depends on what’s the CPI next week but if it’s good/as-expected 50bps would be very surprising
  - dubcanada 4y ago
    How? Powell has specifically said they are going to increase rates higher and faster that implies more than 25bps. Just because it was 25bps doesn't mean the next has to be 25bps, that's not how it works at all. There is nothing saying it has to go 75 -> 50 -> 25 and cannot go back up.
    - shjake 4y ago
      It’s usually how it works, I mean it would indicate that they are unable to plan ahead by more than one month which doesn’t look great at all… If they wanted 0.5 they could just hike it by 0.25 and add another 0.25 later. Exactly the same outcome, less turmoil in the financial markets. Powell’s rhetoric seems to have staid about the same for the last 6 months. Also the fact that their rapid rates hikes were the direct reason behind the second largest bank collapse in US history adds another dimension. Obviously I’m not saying it’s their fault. But well if bond prices go down even more than expected more banks might end up in the same situation.
worik 4y ago
> This, these bonds/mbs are liquid instruments It is all relative, not all relevant Anything is liquid if you will lower the price enough
- kgwgk 4y ago
  Liquidity is defined as being able to sell quickly at a fair price. Surely they did sell those treasuries without any hiccup. (I'm not 100% certain about the MBS they hold but the main problem is that the fair value is down and not the discount relative to that price that would be required to sell quickly.)
  - worik 4y ago
    Liquidity is being able to sell, it is relative to price There is no "fair price". Price is a scaler, it has no morals or ethics
    - kgwgk 4y ago
      Fair price in the sense of "you get the same price if you want to sell and if you want to buy". It's not true that "Anything is liquid if you will lower the price enough" if we understand liquidity in the usual sense. Bonds and stocks are liquid because the bid-ask spread is small. It doesn't matter if you bought the bond at $1000, if you can get $799 for it and it would cost you $801 to buy one you may be unhappy but your problems are unrelated to liquidity (of course that $800 market price has nothing to do with ethics or morale). A lingot of gold is more liquid than a gold tiara. A participation in a private company is not liquid. Being able to sell with a large enough discount doesn't make it a liquid asset.

alfalfasprout 4y ago

Here's the more mindblowing thing... not only are those MBS and treasuries completely liquid... they're correlated to interest rates! The fed has been forecasting interest rate hikes every single quarter. Every. Single. Quarter. They had plenty of time to roll over these investments at a slight loss. Heck, even reducing their exposure 50% would have been enough to not end up in this mess. Instead, they waited until it was way too late (by most accounts, the fed is going to do another 50bps hike next) and all it took was some fear for the house of cards to come crumbling down. This does feel like a regulatory failure though. Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this.

Randalthorro 4y ago
Reserve requirements should be based on current market price or at least last quarter or last year, not purchase price. They would have had to recapitalize way earlier if that was the case.
- deleted 4y ago
  [deleted]
- fooker 4y ago
  > Reserve requirements should be based on current market price or at least last quarter or last year, not purchase price. This is the kind of thing you could get a Nobel prize for, if it was backed with data and people agreed with the conclusion.
  - albert_e 4y ago
    Isn't the requirement already accounting for change in market value of "assets" in the quarterly balance sheet?
    - alfalfasprout 4y ago
      Apparently the MBS can be valued at their maturity price for the purposes of reserve requirements.
      - kurthr 4y ago
        I completely agree, but not discounting the duration risk (which the big guys do and buy insurance for) and/or adjusting for expected inflation (kind of is the yield curve), and allowing banks (other than the Reserve Bank) to mark them to maturity assuming no inflation is pretty bogus. Of course Bank of England had to bail out their pension funds for very similar reasons so it's not like this is something they're unaware of. My guess is that come Monday they backstop all of this and only the shareholders of SVB get wiped out, sort of like the reverse of Bear Sterns (bailed out early) vs Lehman (allowed to fail). It's not "fair", it's just risk.
q1w2 4y ago
Exactly - they failed due to one of the most widely predicted trends. Literally everyone knew interest rates would go up. They absolutely deserved to fail. The government allowing them to fail is actually a sign of the system working.
- alfalfasprout 4y ago
  Not even predicted trends... even when the fed said specifically they would raise rates they still didn't start selling their securities. Every. Single. Time. Nothing.
nerdponx 4y ago
> Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this. You would think that they should prevent such risks, right? If the bank loses their collective shirt on a bad bet, they will eventually fail to meet their reserve requirements, right? I don't see how you create a stronger incentive without specifically telling bankers how to do their jobs.
mancerayder 4y ago
> by most accounts, the fed is going to do another 50bps hike nex Is this one possibly one of the 'the Fed broke something' scenarios that might lead to quicker rate cuts ?
- alfalfasprout 4y ago
  Not really. It's like a child repeatedly telling you they're going to pour some cranberry juice in a container. Then pouring some. Then telling you exactly how much more they're going to pour next time. Then they pour that. Then again. And being surprised when it overflows and stains your carpet. SVB had plenty of warning to sell securities. They didn't even have to do it overnight. They had plenty of time to slowly roll-over their bonds and sell MBS. This wasn't a surprise "gotcha" by the fed.
- opportune 4y ago
  It depends on how much agency you ascribe to the SVB team, and things could very well have been more complicated than the commentariat gives them credit for, but this was all happening in slow motion over months/a year (with an extra year before then when the writing was more or less on the wall). SVB probably should have realized that continued interest rate cuts were gonna nuke their MBS, and sold them at a loss earlier, so they could recapitalize in safer instruments like short term treasuries. What I’m learning about reserve requirements is that this would have actually reduced their “assets in reserve” though because they were allowed to use the maturity price of the MBS for that accounting. So selling them at a loss and buying short term treasuries would have reduced the amount of assets in reserve by that calculation, even though it would have been the same amount of assets (at the time of the transaction) in mark-to-market value AND safer against further interest rate increases. I’m guessing this dilemma at some point got so bad that they literally could not recapitalize anymore without becoming insolvent, at which point their only option was to hold the MBS through further losses
shjake 4y ago
> 50bps It would be very damaging for their credibility if they hiked by 50bps after already doing 25. Of course it depends on what’s the CPI next week but if it’s good/as-expected 50bps would be very surprising
- dubcanada 4y ago
  How? Powell has specifically said they are going to increase rates higher and faster that implies more than 25bps. Just because it was 25bps doesn't mean the next has to be 25bps, that's not how it works at all. There is nothing saying it has to go 75 -> 50 -> 25 and cannot go back up.
  - shjake 4y ago
    It’s usually how it works, I mean it would indicate that they are unable to plan ahead by more than one month which doesn’t look great at all… If they wanted 0.5 they could just hike it by 0.25 and add another 0.25 later. Exactly the same outcome, less turmoil in the financial markets. Powell’s rhetoric seems to have staid about the same for the last 6 months. Also the fact that their rapid rates hikes were the direct reason behind the second largest bank collapse in US history adds another dimension. Obviously I’m not saying it’s their fault. But well if bond prices go down even more than expected more banks might end up in the same situation.

worik 4y ago

> This, these bonds/mbs are liquid instruments It is all relative, not all relevant Anything is liquid if you will lower the price enough

kgwgk 4y ago
Liquidity is defined as being able to sell quickly at a fair price. Surely they did sell those treasuries without any hiccup. (I'm not 100% certain about the MBS they hold but the main problem is that the fair value is down and not the discount relative to that price that would be required to sell quickly.)
- worik 4y ago
  Liquidity is being able to sell, it is relative to price There is no "fair price". Price is a scaler, it has no morals or ethics
  - kgwgk 4y ago
    Fair price in the sense of "you get the same price if you want to sell and if you want to buy". It's not true that "Anything is liquid if you will lower the price enough" if we understand liquidity in the usual sense. Bonds and stocks are liquid because the bid-ask spread is small. It doesn't matter if you bought the bond at $1000, if you can get $799 for it and it would cost you $801 to buy one you may be unhappy but your problems are unrelated to liquidity (of course that $800 market price has nothing to do with ethics or morale). A lingot of gold is more liquid than a gold tiara. A participation in a private company is not liquid. Being able to sell with a large enough discount doesn't make it a liquid asset.