6 ms·

Here is what I don't understand: How is this even possible? If SVB buys $100B worth of (10yr?) T-Bonds and MBS, this will immediately show up as an enormous int

Here is what I don't understand: How is this even possible? If SVB buys $100B worth of (10yr?) T-Bonds and MBS, this will immediately show up as an enormous interest rate risk position on their internal risk profile. The Bank's Risk Manager, CEO and Management Committee are supposed to look at these things every day and should have very specific guidelines on market risk exposure bounds. Regardless of what those guidelines were, presumably $100B worth of 10-yr unhedged fixed income instruments will be way out of those bounds. How was this missed? This is not some sophisticated high finance, this is basics. What on earth happened?

eclipticplane 4y ago
https://www.prnewswire.com/news-releases/svb-hires-kim-olson-as-chief-risk-officer-301711529.html https://www.prnewswire.com/news-releases/svb-hires-kim-olson... - Jan 2023 The previous CRO resigned in April 2022.
- g42gregory 4y ago
  Wow. I am guessing they discovered this mess in early 2022. The CRO bailed or was pushed out. They couldn't hire anyone qualified, once they've seen the balance sheet (or were refused to be shown the balance sheet, which would be a red flag). Tried to unwind the position throughout the 2022, but couldn't, with the rising interest rates.
  - pgwhalen 4y ago
    This is an interesting story but I'm not sure it adds up. What does it mean that they "tried to unwind the position"? It doesn't really make sense that you could fail to unwind a position in some of the most liquid markets in the world, over the course of a year. Maybe it wouldn't be at the desired price, but if they understood the risk as you imply, they'd just do the trade.
    - tomca32 4y ago
      What are you going to do with MBS that aggregated averaged a yield of 1.5% when anyone can get a risk free bond returning over 3% now? Who’s going to buy your mortgages?
      - zamfi 4y ago
        This didn't happen all of a sudden -- it took place over months! Sure, now it's a pickle, but it didn't turn into a pickle from one day to the next.
      - hnfong 4y ago
        You sell them at a discount of (duration * 3.x%-1.5%), so that the hold to maturity interest rate remains at the market rate of 3.x%
    - g42gregory 4y ago
      You would be able to unwind these positions gradually and the markets are relatively liquid for MBS and super liquid for T-Bonds. The problem is that you would be unwinding these positions after the interest rates have moved up, i.e. at a tremendous loss. Rates go up - bond prices go down and your assets are not worth as much. They did not want to do this right away and book a few billion in losses. It would be a hard decision for anyone to make. They bet that the rates will move lower soon but, instead, the rates went higher still. Now, if SVB could wait 10 years to maturity, everything would have been fine. But SVB is a bank and customers demanded money right now. They could not meet their obligations without immediate selling at a tremendous loss.
    - PeterisP 4y ago
      Unwinding the position in early 2022 would mean acknowledging and executing a huge loss back then. Not unwinding the position means taking a gamble that perhaps it all will work out or perhaps you'll go insolvent. Apparently they chose the latter, and perhaps that's related with the CRO quitting if they disagreed with that choice.
      - pgwhalen 4y ago
- IG_Semmelweiss 4y ago
  this is incredible. As chief risk officer, going into a public company that goes bad not even 2 months after being hired -for strictly risk mismanagement, not fraud- tells you all you need to know about the competency of the person being hired. EDIT: Sincerely curious about downvotes: You are interviewing for a CTO job. As part of the process, you get unrestricted access to prod codebase. The stack/ libraries are something you are very familiar. You find out the software will be a critical component to make payments to people worldwide. Its a high profile project. You are the public face of the software that must go live very soon, no one can tell for sure, but its imminent. Your (interview) prep finds a dumpster fire. There's no way this thing will even run. The entire thing is not salvageable. Do you take the job ?
  - deleted 4y ago
    [deleted]
  - causality0 4y ago
    The best parachute in the world won't help you if you open it when you're ten feet from smashing into the ground.
    - clownvorld 4y ago
      depends on the origin of said parachute
    - csteubs 4y ago
      This. Better to pull the parachute than wait for the federal retrorockets.
  - lp0_on_fire 4y ago
    Any organization of that size will have inertia and the damage was already done by the time they got there.
    - jaycroft 4y ago
      I think the parent is saying that the new CRO is bad not because they caused the dumpster fire - the new CRO is bad because after interviewing in January, they saw the dumpster fire and either thought it didn't matter, or that they could fix it. Not a case of "incompetent because they couldn't fix the problem", instead a case of "must be incompetent because they saw the books but took the job anyway".
- thewarpaint 4y ago
  Source: https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/amp/ https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...
unclesaamm 4y ago
Well, to answer one part of the question, the chief risk manager quit early last year and wasn't replaced until just over a month ago
- AnimalMuppet 4y ago
  Is it normal for a bank of that size to run without a chief risk manager for an entire year?
  - g42gregory 4y ago
    Generally not, but there will always be someone (next in line) who is responsible for the overall risk management. I think the problem was, once they discovered this mess, there wasn't a whole lot they could do, with rates going up. They could have booked several billion dollar loss early on, but instead, they decided to wait it out.
hoofhearted 4y ago
https://twitter.com/jonwu_/status/1634250754486857729?s=46&t=UrDwbp6h3pQPjZiHctb5JA https://twitter.com/jonwu_/status/1634250754486857729?s=46&t...
- g42gregory 4y ago
  Well, the bet against raising interest rate is not the problem. It's the size of that bet that is the problem.
  - hoofhearted 4y ago
    A lot of words in those tweets were reminiscent of 2008. To me, it sounds like SVB was possibly giving away sub prime adjustable rate loans to startups.
    - marcosdumay 4y ago
      Well, everything was fine as long as deposits were ballooning.
kerpotgh 4y ago
[dead]

eclipticplane 4y ago

https://www.prnewswire.com/news-releases/svb-hires-kim-olson-as-chief-risk-officer-301711529.html https://www.prnewswire.com/news-releases/svb-hires-kim-olson... - Jan 2023 The previous CRO resigned in April 2022.

g42gregory 4y ago
Wow. I am guessing they discovered this mess in early 2022. The CRO bailed or was pushed out. They couldn't hire anyone qualified, once they've seen the balance sheet (or were refused to be shown the balance sheet, which would be a red flag). Tried to unwind the position throughout the 2022, but couldn't, with the rising interest rates.
- pgwhalen 4y ago
  This is an interesting story but I'm not sure it adds up. What does it mean that they "tried to unwind the position"? It doesn't really make sense that you could fail to unwind a position in some of the most liquid markets in the world, over the course of a year. Maybe it wouldn't be at the desired price, but if they understood the risk as you imply, they'd just do the trade.
  - tomca32 4y ago
    What are you going to do with MBS that aggregated averaged a yield of 1.5% when anyone can get a risk free bond returning over 3% now? Who’s going to buy your mortgages?
    - zamfi 4y ago
      This didn't happen all of a sudden -- it took place over months! Sure, now it's a pickle, but it didn't turn into a pickle from one day to the next.
    - hnfong 4y ago
      You sell them at a discount of (duration * 3.x%-1.5%), so that the hold to maturity interest rate remains at the market rate of 3.x%
  - g42gregory 4y ago
    You would be able to unwind these positions gradually and the markets are relatively liquid for MBS and super liquid for T-Bonds. The problem is that you would be unwinding these positions after the interest rates have moved up, i.e. at a tremendous loss. Rates go up - bond prices go down and your assets are not worth as much. They did not want to do this right away and book a few billion in losses. It would be a hard decision for anyone to make. They bet that the rates will move lower soon but, instead, the rates went higher still. Now, if SVB could wait 10 years to maturity, everything would have been fine. But SVB is a bank and customers demanded money right now. They could not meet their obligations without immediate selling at a tremendous loss.
  - PeterisP 4y ago
    Unwinding the position in early 2022 would mean acknowledging and executing a huge loss back then. Not unwinding the position means taking a gamble that perhaps it all will work out or perhaps you'll go insolvent. Apparently they chose the latter, and perhaps that's related with the CRO quitting if they disagreed with that choice.
    - pgwhalen 4y ago
IG_Semmelweiss 4y ago
this is incredible. As chief risk officer, going into a public company that goes bad not even 2 months after being hired -for strictly risk mismanagement, not fraud- tells you all you need to know about the competency of the person being hired. EDIT: Sincerely curious about downvotes: You are interviewing for a CTO job. As part of the process, you get unrestricted access to prod codebase. The stack/ libraries are something you are very familiar. You find out the software will be a critical component to make payments to people worldwide. Its a high profile project. You are the public face of the software that must go live very soon, no one can tell for sure, but its imminent. Your (interview) prep finds a dumpster fire. There's no way this thing will even run. The entire thing is not salvageable. Do you take the job ?
- deleted 4y ago
  [deleted]
- causality0 4y ago
  The best parachute in the world won't help you if you open it when you're ten feet from smashing into the ground.
  - clownvorld 4y ago
    depends on the origin of said parachute
  - csteubs 4y ago
    This. Better to pull the parachute than wait for the federal retrorockets.
- lp0_on_fire 4y ago
  Any organization of that size will have inertia and the damage was already done by the time they got there.
  - jaycroft 4y ago
    I think the parent is saying that the new CRO is bad not because they caused the dumpster fire - the new CRO is bad because after interviewing in January, they saw the dumpster fire and either thought it didn't matter, or that they could fix it. Not a case of "incompetent because they couldn't fix the problem", instead a case of "must be incompetent because they saw the books but took the job anyway".
thewarpaint 4y ago
Source: https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/amp/ https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...

unclesaamm 4y ago

Well, to answer one part of the question, the chief risk manager quit early last year and wasn't replaced until just over a month ago

AnimalMuppet 4y ago
Is it normal for a bank of that size to run without a chief risk manager for an entire year?
- g42gregory 4y ago
  Generally not, but there will always be someone (next in line) who is responsible for the overall risk management. I think the problem was, once they discovered this mess, there wasn't a whole lot they could do, with rates going up. They could have booked several billion dollar loss early on, but instead, they decided to wait it out.

hoofhearted 4y ago

https://twitter.com/jonwu_/status/1634250754486857729?s=46&t=UrDwbp6h3pQPjZiHctb5JA https://twitter.com/jonwu_/status/1634250754486857729?s=46&t...

g42gregory 4y ago
Well, the bet against raising interest rate is not the problem. It's the size of that bet that is the problem.
- hoofhearted 4y ago
  A lot of words in those tweets were reminiscent of 2008. To me, it sounds like SVB was possibly giving away sub prime adjustable rate loans to startups.
  - marcosdumay 4y ago
    Well, everything was fine as long as deposits were ballooning.

kerpotgh 4y ago

[dead]