4 ms·

Your understanding does not fit with the article or anything else I read, which indicates there is a hole in their assets.

eightysixfour 4y ago
They’re confusing cause and the current situation. The cause was not a joke in the balance sheet, it was a liquidity crisis, SVB created a hole by taking a haircut on the illiquid assets to try and keep the house of cards up. Few of the explainers are covering both parts of this.
- cperciva 4y ago
  The long-duration bonds in question were plenty liquid. The problem is that SVB couldn't sell them without realizing losses -- and because they were listed as "held to maturity" on SVB's balance sheet, SVB had been hiding those losses to give a false appearance of solvency.
  - eightysixfour 4y ago
    Liquidity at a substantial loss on a long term maturity that would otherwise pay out as predicted is practically illiquid for a bank. This was a liquidity crisis (bank run) which sparked a solvency issue, not a solvency issue.
    - caddemon 4y ago
      The bond isn't really paying out as predicted though. If they knew interest rates would go up so much they never would have bought those bonds to begin with. It's not the same as something that would pay out above (or at least ~ at) baseline if they could survive long enough. Imagine if they put 100% of their deposits in these bonds, they would not be able to raise the interest rates they pay out above like 1.5% for the next 10 years, because they're stuck with their own long term investment. When other banks start offering a better interest rate on savings, of course people will want to withdraw. So even if they are solvent by definition this is not the same thing as a liquidity crisis that results from an inability to sell a large amount of something in a short time, potentially something that is difficult to sell. It's not the amount or the weirdness of the asset here, it's the price they are locked into, the same way that anyone trying to sell any amount of this right now would be taking a loss if they bought in 2021. And it's not like the price is some irrational situation like GameStop, it's a natural consequence of the interest rates. I don't see how this wasn't a predictably risky trade regardless of the VC panic factor. They put 40% of their deposits into a long term bet that interest rates wouldn't go up.
    - cperciva 4y ago
      The bonds themselves were liquid. The bank didn't want to liquidate them, but that doesn't mean that they weren't liquid. This was a liquidity crisis (bank run) which sparked a solvency issue, not a solvency issue. No. SVB had liabilities significantly in excess of the value of their assets. They were, by definition, balance sheet insolvent. The "hold to maturity" accounting practice made it legal for them to pretend that the value of their long term bonds hadn't changed, but that's just an accounting figleaf; the actual value of those bonds had factually dropped.

eightysixfour 4y ago

They’re confusing cause and the current situation. The cause was not a joke in the balance sheet, it was a liquidity crisis, SVB created a hole by taking a haircut on the illiquid assets to try and keep the house of cards up. Few of the explainers are covering both parts of this.

cperciva 4y ago
The long-duration bonds in question were plenty liquid. The problem is that SVB couldn't sell them without realizing losses -- and because they were listed as "held to maturity" on SVB's balance sheet, SVB had been hiding those losses to give a false appearance of solvency.
- eightysixfour 4y ago
  Liquidity at a substantial loss on a long term maturity that would otherwise pay out as predicted is practically illiquid for a bank. This was a liquidity crisis (bank run) which sparked a solvency issue, not a solvency issue.
  - caddemon 4y ago
    The bond isn't really paying out as predicted though. If they knew interest rates would go up so much they never would have bought those bonds to begin with. It's not the same as something that would pay out above (or at least ~ at) baseline if they could survive long enough. Imagine if they put 100% of their deposits in these bonds, they would not be able to raise the interest rates they pay out above like 1.5% for the next 10 years, because they're stuck with their own long term investment. When other banks start offering a better interest rate on savings, of course people will want to withdraw. So even if they are solvent by definition this is not the same thing as a liquidity crisis that results from an inability to sell a large amount of something in a short time, potentially something that is difficult to sell. It's not the amount or the weirdness of the asset here, it's the price they are locked into, the same way that anyone trying to sell any amount of this right now would be taking a loss if they bought in 2021. And it's not like the price is some irrational situation like GameStop, it's a natural consequence of the interest rates. I don't see how this wasn't a predictably risky trade regardless of the VC panic factor. They put 40% of their deposits into a long term bet that interest rates wouldn't go up.
  - cperciva 4y ago
    The bonds themselves were liquid. The bank didn't want to liquidate them, but that doesn't mean that they weren't liquid. This was a liquidity crisis (bank run) which sparked a solvency issue, not a solvency issue. No. SVB had liabilities significantly in excess of the value of their assets. They were, by definition, balance sheet insolvent. The "hold to maturity" accounting practice made it legal for them to pretend that the value of their long term bonds hadn't changed, but that's just an accounting figleaf; the actual value of those bonds had factually dropped.