2 ms·

They didn’t buy risky MBS. They bought standard vanilla MBS and Treasury Bonds. The problem is the speed of interest rates rising which cause 2 unrelated circum

They didn’t buy risky MBS. They bought standard vanilla MBS and Treasury Bonds. The problem is the speed of interest rates rising which cause 2 unrelated circumstances to hit at the same time. 1. The net present value of the long term MBS/treasury’s went down. 2. Start ups had trouble raising capital so their normal business activities shifted from net inflows to SVB to net outflows. So instead of being able to hold to maturity, SVB had to sell assets they bought for $100 for $80. Perhaps they could have hedged against interest rates rising better than they did or had a more short term securities or capped account balances. But the fed could have been faster to act in raising rates to allow for more gradual in raising rates as that would have been less disruptive. Now the Fed should set up a program to take these long term assets off of member banks balance sheets. Do so at a discount, make the members pay for their bad investments but prevent failures.

panarky 4y ago
*> ... make the members pay for their bad investments ... SVB was a $209 billion dollar balance sheet with only $16 billion of shareholder equity. That means an 8% decline in the value of their assets makes them insolvent. That also means that 8% is the maximum shareholders will have to "pay" for the bank's bad investments. Doesn't seem like nearly enough skin in the game.
- digitaltrees 4y ago
  But that’s a very standard ratio in banking. And to be blunt treasuries don’t decrease that much. In fact that’s not really what happened here. Instead, SVB had significant deposit inflows over the last 10 years as their VC back clients raised massive rounds. Their deposit base went from something like $60b to $180b. Then all in unison, as interest rates increased, the same inflows reversed and nearly 100% of their depositors started withdrawing. so SVB had to come up with massive amounts of cash and had to sell things at a loss. That would have been fine if panic hadn’t set in and a Run initiated. To play devils advocate, what would you have done as the CEO of SVB? Imagine over the last 10 years your clients are successful in raising large rounds and deposit the money in your account, you are required to keep those deposits safe and have to buy something. Would buying US treasuries and investment grade MBS be an unacceptable risk? They could have and should have hedged interest rate risk more perhaps but this isnt some irrational exuberance at work. To your point about skin in the game, a shareholders skin in the game isn’t the percentage of equity in the firm, it’s what that equity represents in their portfolio. If a shareholders entire net worth is worth

panarky 4y ago

*> ... make the members pay for their bad investments ... SVB was a $209 billion dollar balance sheet with only $16 billion of shareholder equity. That means an 8% decline in the value of their assets makes them insolvent. That also means that 8% is the maximum shareholders will have to "pay" for the bank's bad investments. Doesn't seem like nearly enough skin in the game.

digitaltrees 4y ago
But that’s a very standard ratio in banking. And to be blunt treasuries don’t decrease that much. In fact that’s not really what happened here. Instead, SVB had significant deposit inflows over the last 10 years as their VC back clients raised massive rounds. Their deposit base went from something like $60b to $180b. Then all in unison, as interest rates increased, the same inflows reversed and nearly 100% of their depositors started withdrawing. so SVB had to come up with massive amounts of cash and had to sell things at a loss. That would have been fine if panic hadn’t set in and a Run initiated. To play devils advocate, what would you have done as the CEO of SVB? Imagine over the last 10 years your clients are successful in raising large rounds and deposit the money in your account, you are required to keep those deposits safe and have to buy something. Would buying US treasuries and investment grade MBS be an unacceptable risk? They could have and should have hedged interest rate risk more perhaps but this isnt some irrational exuberance at work. To your point about skin in the game, a shareholders skin in the game isn’t the percentage of equity in the firm, it’s what that equity represents in their portfolio. If a shareholders entire net worth is worth