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The more important question of disclosure has to do with the so-called "held-to-maturity" book, which I want to start affectionally referring to as the "held-to

The more important question of disclosure has to do with the so-called "held-to-maturity" book, which I want to start affectionally referring to as the "held-to-mortality" book, or the "head-in-the-sand" book. These are all fancy ways of talking about accounting tricks that banks are allowed to employ in order to hide economic losses from their financial statements. Banks would argue that their accounting tricks are blessed by the priesthood of professionals accountants, so it's perfectly legal. Which it is. It is not obvious that real-time mark-to-market accounting would have made things any better, but pretending that massive economic losses were not real was not a sustainable trajectory as soon the accounting fiction (no losses) collided economic reality (the need to sell holdings, in order allow depositors to withdraw their cash demand deposits). Given the panicy herd psychology of humans, it has long been argued (at least since as long as the collapse of Lehman Brothers) that "head-in-the-sand" accounting is preferable to mark-to-market in order to ensure the stability of the financial system. In laymen terms, sometimes it's better for the public not to know how bad things have gotten behind the scenes. That is a kind of common sense practice for governance, and it isn't going to go away. Ironically, the answer to the SVB collapse is that you should have less informed, less rich and less well connected depositors (i.e. tame and docile customers) if you want to reduce the risk of a run on your bank, which is obvious in retrospect.

sbierwagen 4y ago
Back in 2008, in contrast to mark-to-market, it was called "mark-to-make believe".
- mattclarkdotnet 4y ago
  I have the little celebration trinket on my desk for when PWC completed the sale of Lehmans’ assets. They got 130 cents on the dollar for them in the end. Liquidity matters.
  - ketzo 4y ago
    Man, I wish I could staple this comment to the top of every discussion of SVB.
  - Scoundreller 4y ago
    How’s that work? Did the stockholders get back the excess returns?
    - thechao 4y ago
      Probably not? The stockholders lost the rights to that value when they failed to maintain oversight of management.
      - Scoundreller 4y ago
        So who did the excess returns go to? Did Lehman get a big fine or something? Usually in a bankruptcy, if all creditors are paid off, the equity shareholders get the remainder. Usually they get wiped out, but sometimes they do get money back. A bankruptcy crystallizes the debts, but the assets can continue to increase in value. I think GP may have been focussing on one part of pwc’d recoveries but overall, Lehman lost money. Dunno.
  - ralph84 4y ago
    More like, being able to choose when you get liquidated matters. If an individual investor’s leveraged bet goes against them, they don’t get to say “just let me hold for a while so I can sell when the price is higher.”
    - sbierwagen 4y ago
      Unless your name is Xiang Guangda.
lysozyme 4y ago
>sometimes it's better for the public not to know how bad things have gotten behind the scenes Better for whom? It seems to me that institutions that serve the public should do so with transparency. The idea that “the experts” know better than “the public” is a dangerous and elitist one. The suggestion that “the experts” be allowed to hide their math while they fumble at the economy trying to make a buck is absurd
- cmeacham98 4y ago
  What does "institutions that serve the public" mean? It sounds like you're trying to say 'government-run' (like as in 'public sector'), but SVB was a private company. If we're including private companies, how far does that go? Should I be allowed to look at the financials of local restaurants?
  - function_seven 4y ago
    No, but you can see their Health Department inspection reports. That's a good analogy.
  - quesera 4y ago
    > SVB was a private company. I think you mean something different, but SVB went public in 1987. Transparency in publicly-traded companies is obviously important. SVB was subject to all of the usual reporting and disclosure rules.
- btilly 4y ago
  The problem is that expectations shape reality. So if experts are a bit worried, and say so, this may cause a public panic. The panic turned a potential problem that may have never manifested into an immediate disaster. Given this fact, should experts say things that may cause this panic?
  - geysersam 4y ago
    Maybe the oversized reaction is a consequence of historical lack of transparency? If so, it's unlikely that more obfuscation is the solution.
btilly 4y ago
This is tied to why the internationally accepted standards view some kinds of assets as riskier than others, and some kinds of deposits as also riskier than others. In particular corporate deposits are considered riskier because they are more likely to disappear in a run on the bank. Those standards only apply to our largest banks. But had they been applied, this disaster would not have happened. See https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3dc3 https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3... for more.
jjeaff 4y ago
SVB's problem wasn't that they had too many well informed customers. It had too many lemmings and a few lemming leaders all in the same industry who pathologically can't keep a thought to themselves without sharing it to their many millions of social media followers.
- zarzavat 4y ago
  If your cruise ship is sinking and there aren’t enough life rafts, the problem isn’t that your passengers are climbing in the life rafts and sailing away. The problem is that the ship is sinking! SVB might have lasted longer if their depositors had not been running for the exits. But why assume that lasting longer is a good thing? They might have got themselves into even more difficulty. In that case the VCs did SVB a favor.
  - abirch 4y ago
    The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. The market is expecting rates to drop hence the inverted yield curve.
    - gruez 4y ago
      >The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. In other words, those "safe investments" weren't so safe?
      - abirch 4y ago
        No banking investment is safe if there is a run on the bank. It's not like this result was inevitable. If the bonds didn't need to be sold, they would have paid out.
        gruez 4y ago
benjaminwootton 4y ago
There is of course a difference between holding assets with a subjective (potentially bubble) valuation and holding a long dated treasury. With the treasury, there is a very liquid and transparent market and you will almost certainly get all of the money back on a specific date. You just have to wait long enough.
- highwaylights 4y ago
  Yes, but it seems irresponsible that a bank would follow a plan like that knowing they don’t have control over when depositors ask for their money back.
  - landemva 4y ago
    Right. The depositors want paid in dollars not (underwater) fractionalized long duration bonds. Bank regulators allow mark-to-maturity accounting, and we just saw government and federal reserve backstop all deposits to cover up their regulatory blindness.
salawat 4y ago
>is that you should have less informed, less rich and less well connected depositors (i.e. tame and docile customers) if you want to reduce the risk of a run on your bank, which is obvious in retrospect. While a cynical and pragmatic take, I must remind you of the tradition of the United States as eloquently spoken by the American Bar Association, and traceable back as far as our first Presidents. >Democracy requires not just obeying the law, though; it requires that people actively participate in the political process. This means voting, of course, but it is usually thought that not just any effort at voting will suffice—the citizen must stay informed of political affairs and make a rational choice among the options presented to her in the voting booth. Is there a duty to vote, then? The root of all evil is info asymmetry; and it is a repeatedly self-evidently revealed truth that "Sunlight is the best disinfectant in matters of civic (or fiscal) corruption". https://www.americanbar.org/groups/crsj/publications/human_rights_magazine_home/we-the-people/civic-duties-civil-virtues/ https://www.americanbar.org/groups/crsj/publications/human_r... I know it's kind of a low blow to point this out, but if your point is even remotely representative of the "finance/banking" class, there are some serious problems that need to get resolved pronto; in no way, shape, or form should it even be considered a desirable end that "darn it, why can't we just keep these damn customers in the dark". You're there to facilitate. You're there to manage risk. You're there to accurately convey the gist and nuance of financial matters in a manner that can be processed by the layman, or failing that, help elevate the layman until you can. You are not there to, nor should you ever feel good about perception managing.
actually_a_dog 4y ago
> These are all fancy ways of talking about accounting tricks that banks are allowed to employ in order to hide economic losses from their financial statements. Banks would argue that their accounting tricks are blessed by the priesthood of professionals accountants, so it's perfectly legal. Which it is. It is not obvious that real-time mark-to-market accounting would have made things any better, but pretending that massive economic losses were not real was not a sustainable trajectory as soon the accounting fiction (no losses) collided economic reality (the need to sell holdings, in order allow depositors to withdraw their cash demand deposits). Oh, man, this made me recall the "borrow, then die" strategy mega rich people use to avoid capital gains taxes: * Step 1 is to have a large investment portfolio. * Step 2 is to get a loan from a bank against that portfolio with a sweetheart interest rate, very long term, and interest only payments with a final balloon payment. * Step 3 is to let the dividends and appreciation on the portfolio pay back the loan. * Step 4 is to die, leaving the entire portfolio to your heirs. This gives them the ability to take advantage of the step up basis, so they pay no capital gains should they sell, which also gives them the ability to immediately sell a portion of the assets to pay off the loans. They can then go on to implement this same strategy themselves. There's not a direct mapping between this and the "held-to-mortality" book, but the spirit is certainly very similar. While it's losses being hidden by banks using the "held-to-mortality" book strategy, it's gains being hidden by people using "borrow, then die." In both cases, it's essentially done by delaying realizing those losses/gains until as late as possible.

sbierwagen 4y ago

Back in 2008, in contrast to mark-to-market, it was called "mark-to-make believe".

mattclarkdotnet 4y ago
I have the little celebration trinket on my desk for when PWC completed the sale of Lehmans’ assets. They got 130 cents on the dollar for them in the end. Liquidity matters.
- ketzo 4y ago
  Man, I wish I could staple this comment to the top of every discussion of SVB.
- Scoundreller 4y ago
  How’s that work? Did the stockholders get back the excess returns?
  - thechao 4y ago
    Probably not? The stockholders lost the rights to that value when they failed to maintain oversight of management.
    - Scoundreller 4y ago
      So who did the excess returns go to? Did Lehman get a big fine or something? Usually in a bankruptcy, if all creditors are paid off, the equity shareholders get the remainder. Usually they get wiped out, but sometimes they do get money back. A bankruptcy crystallizes the debts, but the assets can continue to increase in value. I think GP may have been focussing on one part of pwc’d recoveries but overall, Lehman lost money. Dunno.
- ralph84 4y ago
  More like, being able to choose when you get liquidated matters. If an individual investor’s leveraged bet goes against them, they don’t get to say “just let me hold for a while so I can sell when the price is higher.”
  - sbierwagen 4y ago
    Unless your name is Xiang Guangda.

lysozyme 4y ago

>sometimes it's better for the public not to know how bad things have gotten behind the scenes Better for whom? It seems to me that institutions that serve the public should do so with transparency. The idea that “the experts” know better than “the public” is a dangerous and elitist one. The suggestion that “the experts” be allowed to hide their math while they fumble at the economy trying to make a buck is absurd

cmeacham98 4y ago
What does "institutions that serve the public" mean? It sounds like you're trying to say 'government-run' (like as in 'public sector'), but SVB was a private company. If we're including private companies, how far does that go? Should I be allowed to look at the financials of local restaurants?
- function_seven 4y ago
  No, but you can see their Health Department inspection reports. That's a good analogy.
- quesera 4y ago
  > SVB was a private company. I think you mean something different, but SVB went public in 1987. Transparency in publicly-traded companies is obviously important. SVB was subject to all of the usual reporting and disclosure rules.
btilly 4y ago
The problem is that expectations shape reality. So if experts are a bit worried, and say so, this may cause a public panic. The panic turned a potential problem that may have never manifested into an immediate disaster. Given this fact, should experts say things that may cause this panic?
- geysersam 4y ago
  Maybe the oversized reaction is a consequence of historical lack of transparency? If so, it's unlikely that more obfuscation is the solution.

btilly 4y ago

This is tied to why the internationally accepted standards view some kinds of assets as riskier than others, and some kinds of deposits as also riskier than others. In particular corporate deposits are considered riskier because they are more likely to disappear in a run on the bank. Those standards only apply to our largest banks. But had they been applied, this disaster would not have happened. See https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3dc3 https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3... for more.

jjeaff 4y ago

SVB's problem wasn't that they had too many well informed customers. It had too many lemmings and a few lemming leaders all in the same industry who pathologically can't keep a thought to themselves without sharing it to their many millions of social media followers.

zarzavat 4y ago
If your cruise ship is sinking and there aren’t enough life rafts, the problem isn’t that your passengers are climbing in the life rafts and sailing away. The problem is that the ship is sinking! SVB might have lasted longer if their depositors had not been running for the exits. But why assume that lasting longer is a good thing? They might have got themselves into even more difficulty. In that case the VCs did SVB a favor.
- abirch 4y ago
  The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. The market is expecting rates to drop hence the inverted yield curve.
  - gruez 4y ago
    >The reason why their safe investments were losing value is that the Fed had raised rates. Their assets weren't bad, they had lost value because the Fed has raised rates. In other words, those "safe investments" weren't so safe?
    - abirch 4y ago
      No banking investment is safe if there is a run on the bank. It's not like this result was inevitable. If the bonds didn't need to be sold, they would have paid out.
      - gruez 4y ago

benjaminwootton 4y ago

There is of course a difference between holding assets with a subjective (potentially bubble) valuation and holding a long dated treasury. With the treasury, there is a very liquid and transparent market and you will almost certainly get all of the money back on a specific date. You just have to wait long enough.

highwaylights 4y ago
Yes, but it seems irresponsible that a bank would follow a plan like that knowing they don’t have control over when depositors ask for their money back.
- landemva 4y ago
  Right. The depositors want paid in dollars not (underwater) fractionalized long duration bonds. Bank regulators allow mark-to-maturity accounting, and we just saw government and federal reserve backstop all deposits to cover up their regulatory blindness.

salawat 4y ago

>is that you should have less informed, less rich and less well connected depositors (i.e. tame and docile customers) if you want to reduce the risk of a run on your bank, which is obvious in retrospect. While a cynical and pragmatic take, I must remind you of the tradition of the United States as eloquently spoken by the American Bar Association, and traceable back as far as our first Presidents. >Democracy requires not just obeying the law, though; it requires that people actively participate in the political process. This means voting, of course, but it is usually thought that not just any effort at voting will suffice—the citizen must stay informed of political affairs and make a rational choice among the options presented to her in the voting booth. Is there a duty to vote, then? The root of all evil is info asymmetry; and it is a repeatedly self-evidently revealed truth that "Sunlight is the best disinfectant in matters of civic (or fiscal) corruption". https://www.americanbar.org/groups/crsj/publications/human_rights_magazine_home/we-the-people/civic-duties-civil-virtues/ https://www.americanbar.org/groups/crsj/publications/human_r... I know it's kind of a low blow to point this out, but if your point is even remotely representative of the "finance/banking" class, there are some serious problems that need to get resolved pronto; in no way, shape, or form should it even be considered a desirable end that "darn it, why can't we just keep these damn customers in the dark". You're there to facilitate. You're there to manage risk. You're there to accurately convey the gist and nuance of financial matters in a manner that can be processed by the layman, or failing that, help elevate the layman until you can. You are not there to, nor should you ever feel good about perception managing.

actually_a_dog 4y ago

> These are all fancy ways of talking about accounting tricks that banks are allowed to employ in order to hide economic losses from their financial statements. Banks would argue that their accounting tricks are blessed by the priesthood of professionals accountants, so it's perfectly legal. Which it is. It is not obvious that real-time mark-to-market accounting would have made things any better, but pretending that massive economic losses were not real was not a sustainable trajectory as soon the accounting fiction (no losses) collided economic reality (the need to sell holdings, in order allow depositors to withdraw their cash demand deposits). Oh, man, this made me recall the "borrow, then die" strategy mega rich people use to avoid capital gains taxes: * Step 1 is to have a large investment portfolio. * Step 2 is to get a loan from a bank against that portfolio with a sweetheart interest rate, very long term, and interest only payments with a final balloon payment. * Step 3 is to let the dividends and appreciation on the portfolio pay back the loan. * Step 4 is to die, leaving the entire portfolio to your heirs. This gives them the ability to take advantage of the step up basis, so they pay no capital gains should they sell, which also gives them the ability to immediately sell a portion of the assets to pay off the loans. They can then go on to implement this same strategy themselves. There's not a direct mapping between this and the "held-to-mortality" book, but the spirit is certainly very similar. While it's losses being hidden by banks using the "held-to-mortality" book strategy, it's gains being hidden by people using "borrow, then die." In both cases, it's essentially done by delaying realizing those losses/gains until as late as possible.