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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 co

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
  Right, risk management is often about taking a huge loss, so that it doesn’t become an existential one. Clearly risk management was poor here. I only took exception to the idea that they “tried to unwind the position,” which is clearly untrue. There would be willing buyers at the right price.

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
Right, risk management is often about taking a huge loss, so that it doesn’t become an existential one. Clearly risk management was poor here. I only took exception to the idea that they “tried to unwind the position,” which is clearly untrue. There would be willing buyers at the right price.