4 ms·

> why should taxpayers cover their losses It doesn’t follow that there will be any losses to cover. The government can take ownership of the assets of the bank

> why should taxpayers cover their losses It doesn’t follow that there will be any losses to cover. The government can take ownership of the assets of the bank and won’t be stuck having to sell them at a loss.

ivalm 4y ago
If you mark to market the assets are less than liabilities. It’s unlikely government will keep to maturity a bunch of 30 year mortgages. At the same time, we should just make FDIC limit infinite and make depositors whole.
- comte7092 4y ago
  The fed already has billions of dollars worth of mortgage backed securities on its balance sheet right now.
  - ivalm 4y ago
    I mean sure, but when it transacts it will be marked to market, it won't be just valued at the original hold to maturity so fed will take a loss. Also, fed is trying to shrink its balance sheet, presumably.
    - comte7092 4y ago
      I don’t believe the fed typically marks its assets to market, though I’d be open to a correction on that point. Typically they just roll off the balance sheet by letting assets mature and not re purchasing. They are indeed trying to shrink their balance sheet, but at the volumes they are working at, the entirety of SVBs assets amount to a few months of the fed’s current volumes.
tripletao 4y ago
It doesn't matter whether the bonds are sold now or held to maturity; the loss is exactly the same either way. For a simple example, let's say interest rates are independent of time to maturity and initially 2%, and we purchase a bond that pays $1000 in ten years. That will cost us 1000/(1.02^10) = $820. After two years, that bond now has FMV of 1000/(1.02^8) = $853. But then interest rates increase to 4%, so its FMV drops to 1000/(1.04^8) = $731. If we sold today at the FMV then we'd realize an $89 loss from our purchase price. That's neither better nor worse than holding to maturity, though--that's what makes it the FMV. In the case where we sell, we'd get $731 now, but we could reinvest it at 4%. After the remaining eight years, that would give us 731*(1.04^8) = $1000, exactly the same as if we'd held. HTM accounting treats the two cases as different, but that's an arbitrary regulatory decision, untethered from any economic reality. It has no meaning outside that narrow compliance purpose. The SVB's decision to treat that accounting fiction as if it were economically meaningful appears to be a major part of how they blew themselves up.

ivalm 4y ago

If you mark to market the assets are less than liabilities. It’s unlikely government will keep to maturity a bunch of 30 year mortgages. At the same time, we should just make FDIC limit infinite and make depositors whole.

comte7092 4y ago
The fed already has billions of dollars worth of mortgage backed securities on its balance sheet right now.
- ivalm 4y ago
  I mean sure, but when it transacts it will be marked to market, it won't be just valued at the original hold to maturity so fed will take a loss. Also, fed is trying to shrink its balance sheet, presumably.
  - comte7092 4y ago
    I don’t believe the fed typically marks its assets to market, though I’d be open to a correction on that point. Typically they just roll off the balance sheet by letting assets mature and not re purchasing. They are indeed trying to shrink their balance sheet, but at the volumes they are working at, the entirety of SVBs assets amount to a few months of the fed’s current volumes.

tripletao 4y ago

It doesn't matter whether the bonds are sold now or held to maturity; the loss is exactly the same either way. For a simple example, let's say interest rates are independent of time to maturity and initially 2%, and we purchase a bond that pays $1000 in ten years. That will cost us 1000/(1.02^10) = $820. After two years, that bond now has FMV of 1000/(1.02^8) = $853. But then interest rates increase to 4%, so its FMV drops to 1000/(1.04^8) = $731. If we sold today at the FMV then we'd realize an $89 loss from our purchase price. That's neither better nor worse than holding to maturity, though--that's what makes it the FMV. In the case where we sell, we'd get $731 now, but we could reinvest it at 4%. After the remaining eight years, that would give us 731*(1.04^8) = $1000, exactly the same as if we'd held. HTM accounting treats the two cases as different, but that's an arbitrary regulatory decision, untethered from any economic reality. It has no meaning outside that narrow compliance purpose. The SVB's decision to treat that accounting fiction as if it were economically meaningful appears to be a major part of how they blew themselves up.