3 ms·

I'm not sure if it's tied to a specific repeal, but letting them keep the MBS at face value on their books is an obvious mistake in hindsight. Also in retrospe

by treis 4y ago

I'm not sure if it's tied to a specific repeal, but letting them keep the MBS at face value on their books is an obvious mistake in hindsight. Also in retrospect they were likely insolvent or at best barely capitalized at the end of last year. Probably should have been pushed into receivership or forced to recapitalize then.

smsm42 4y ago
As I understand, their problem wasn't capital as such, it was liquidity. I.e. they had the assets that were above their deposits, it's just that these assets were not liquid, so when the run happened, they predictably couldn't raise liquidity fast enough. If that's the case, adding more capital would help only if it'd be enough capital to cover all deposits participating in the run, but I'm not sure many banks have that amount of capital just laying around, if it's in billions. FDIC has billions though.
- shkkmo 4y ago
  This framing is a bit weird. The bond assets are not worth enough to cover SVB's deposit liabilities. Thus in a very real sense SVB was insolvent. The fact that these were marked as "hold to maturity" for accounting purposes, means this insolvency was concealed until SVB faced a a liquidity crunch. The issue was never that these bonds can't be sold (are illiquid), but that their real value was much lower than how they were valued under the applicable accounting rules.
  - smsm42 4y ago
    > The bond assets are not worth enough to cover SVB's deposit liabilities. I don't think this is actually true. Could you provide the source for that? I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth $1M, and I ask you to give me $1M tomorrow, you couldn't do it - but that doesn't mean your house is worth less. It means it's an illiquid asset that can't be easily converted to cash. Even if you agreed to sell it for $100, you probably couldn't pull it off in one day. Maybe you could take a loan against the house - but even that is hard to do by tomorrow. > but that their real value was much lower What's "real value"? Is it the value of the income stream when held to maturity? Then I never encountered any mention that these bonds were bad (in fact, some of them were Treasuries which are as good as any bond can be) - could you provide a source for this claim? If you mean "fire sale" value then yes, of course the "fire sale" value was low - but that's not because the bonds were bad, you can not value an asset by it's "fire sale" value.
    - shkkmo 4y ago
      > I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth $1M, and I ask you to give me $1M tomorrow, you couldn't do it - but that doesn't mean your house is worth less. The same bonds can be held in two different ways MTM (Mark to Market) and HTM (Hold to Maturity), the underlying bond is equally liquid (in that they would be sold to the same pool of buyers) but the way they are tracked in accounting differs. It's like if you bought a house for $1M but then the housing market crashed and prices dropped by 20%. Regardless of whether you value the house as still worth 1M or $800k on your balance sheet, that doesn't change the liquidity of the house. > What's "real value"? Is it the value of the income stream when held to maturity? The market price of the bond. > Then I never encountered any mention that these bonds were bad (in fact, some of them were Treasuries which are as good as any bond can be) - could you provide a source for this claim? If you mean "fire sale" value then yes, of course the "fire sale" value was low - but that's not because the bonds were bad, you can not value an asset by it's "fire sale" value. There are two types of risk for these bonds. One is the risk of the bond issue defaulting on the bond. You are correct that this risk is extremely low for Treasury bonds (thought not for the MBS bonds that SVB also owned a lot of). The other risk is due to interest rate changes. The reason the bonds are worth less on the market now is because interest rates have gone up. You can buy a 5 year bond with a higher interest rate than the 10 year bonds that SVB owns. Thus, if you are selling those bonds, you have to offer them at a discount so that buyers will see a comparable return to new bonds sold with higher interest rates. The lower price has nothing to do with the number of bonds SVB needed to sell vs the size of the market for those bonds, but rather that the market values those bonds as lower given the current interest rates, regardless of how many of those bonds SVB needed to sell.

by treis 4y ago

smsm42 4y ago

As I understand, their problem wasn't capital as such, it was liquidity. I.e. they had the assets that were above their deposits, it's just that these assets were not liquid, so when the run happened, they predictably couldn't raise liquidity fast enough. If that's the case, adding more capital would help only if it'd be enough capital to cover all deposits participating in the run, but I'm not sure many banks have that amount of capital just laying around, if it's in billions. FDIC has billions though.

shkkmo 4y ago
This framing is a bit weird. The bond assets are not worth enough to cover SVB's deposit liabilities. Thus in a very real sense SVB was insolvent. The fact that these were marked as "hold to maturity" for accounting purposes, means this insolvency was concealed until SVB faced a a liquidity crunch. The issue was never that these bonds can't be sold (are illiquid), but that their real value was much lower than how they were valued under the applicable accounting rules.
- smsm42 4y ago
  > The bond assets are not worth enough to cover SVB's deposit liabilities. I don't think this is actually true. Could you provide the source for that? I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth $1M, and I ask you to give me $1M tomorrow, you couldn't do it - but that doesn't mean your house is worth less. It means it's an illiquid asset that can't be easily converted to cash. Even if you agreed to sell it for $100, you probably couldn't pull it off in one day. Maybe you could take a loan against the house - but even that is hard to do by tomorrow. > but that their real value was much lower What's "real value"? Is it the value of the income stream when held to maturity? Then I never encountered any mention that these bonds were bad (in fact, some of them were Treasuries which are as good as any bond can be) - could you provide a source for this claim? If you mean "fire sale" value then yes, of course the "fire sale" value was low - but that's not because the bonds were bad, you can not value an asset by it's "fire sale" value.
  - shkkmo 4y ago
    > I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth $1M, and I ask you to give me $1M tomorrow, you couldn't do it - but that doesn't mean your house is worth less. The same bonds can be held in two different ways MTM (Mark to Market) and HTM (Hold to Maturity), the underlying bond is equally liquid (in that they would be sold to the same pool of buyers) but the way they are tracked in accounting differs. It's like if you bought a house for $1M but then the housing market crashed and prices dropped by 20%. Regardless of whether you value the house as still worth 1M or $800k on your balance sheet, that doesn't change the liquidity of the house. > What's "real value"? Is it the value of the income stream when held to maturity? The market price of the bond. > Then I never encountered any mention that these bonds were bad (in fact, some of them were Treasuries which are as good as any bond can be) - could you provide a source for this claim? If you mean "fire sale" value then yes, of course the "fire sale" value was low - but that's not because the bonds were bad, you can not value an asset by it's "fire sale" value. There are two types of risk for these bonds. One is the risk of the bond issue defaulting on the bond. You are correct that this risk is extremely low for Treasury bonds (thought not for the MBS bonds that SVB also owned a lot of). The other risk is due to interest rate changes. The reason the bonds are worth less on the market now is because interest rates have gone up. You can buy a 5 year bond with a higher interest rate than the 10 year bonds that SVB owns. Thus, if you are selling those bonds, you have to offer them at a discount so that buyers will see a comparable return to new bonds sold with higher interest rates. The lower price has nothing to do with the number of bonds SVB needed to sell vs the size of the market for those bonds, but rather that the market values those bonds as lower given the current interest rates, regardless of how many of those bonds SVB needed to sell.