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SVB clearly got greedy. They looked at their models and decided that they should use long-term vehicles with higher interest rather than short-term vehicles.
by pclmulqdq 4y ago
SVB clearly got greedy. They looked at their models and decided that they should use long-term vehicles with higher interest rather than short-term vehicles. The core problem they had was that interest rate risk prices have changed a lot over the last year and a half, largely due to the fed, and they severely underpriced that risk.
Long-term fixed-income investments lose a LOT of value when rates go up and gain a lot when rates go down, and the relationship is nonlinear and kind of hard to model since it's so dependent on people.
- mise_en_place 4y agoI wouldn’t say they were greedy exactly. They made the wrong assessment that QE would last forever. In which case a 10/30 year treasury yield @ 200 bps is still a good deal, at that time. If they were really greedy they would have gone all in on riskier assets. The irony is, eventually they will be vindicated, when the Fed is forced to start QE all over again.
- cjalmeida 4y ago>I wouldn’t say they were greedy exactly. They made the wrong assessment that QE would last forever. Ie. they got greedy.
- deleted 4y ago[deleted]