7 ms·
It's a solvency issue, not a liquidity issue, and HTM accounting does not reflect economic reality. Let's say that I have $1000 cash, but owe $1200 due tomorrow
by tripletao 4y ago
It's a solvency issue, not a liquidity issue, and HTM accounting does not reflect economic reality. Let's say that I have $1000 cash, but owe $1200 due tomorrow. I assume you'll agree I'm insolvent.
I can take my cash and purchase a 10-year zero-coupon Treasury paying ~4%; so my $1000 now buys me a payment of 1000*(1.04)^10 = $1480 in ten years. Would you say that I'm solvent now?
NPV is what matters for solvency; a cash flow later is worth less than the same cash flow now. Interest rates were ~zero for long enough that everyone seems to have forgotten this, but I guess Peter Thiel didn't.
- comte7092 4y agoHTM is considered entirely valid accounting by regulators. Opinions may differ, but nothing about it is “made up” or arbitrary. It’s a generally accepted practice and reflective of very clearly defined income.
- tripletao 4y agoI do agree that so far, the SVB's HTM accounting seems to have been entirely compliant. Indeed, I think those rules are the root cause of the failure--if the SVB had been forced to mark to market, then they'd have recognized the loss earlier, causing them to raise equity (or wind down less abruptly) before the hole got so deep. Regulators can draft whatever they want, but if their rules depart too much from economic reality then bad stuff tends to happen. I think that's what happened here.