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It's odd that SVB's choice to forego short-dated securities keeps getting reframed as "they were a victim of a bank run" or "they were the victims of Fed raisin

It's odd that SVB's choice to forego short-dated securities keeps getting reframed as "they were a victim of a bank run" or "they were the victims of Fed raising rates too fast". Any normal, non-degnerate bond manager would would keep a significant amount of 1-3 year treasuries in their mix of bonds. Feel free to call your 401k provider to verify this. Thiel may be guilty of various things, but SVB's failure was due to overleveraged yield chasing.

mcguire 4y ago
It doesn't seem likely that SVB would have had to close their doors to depositors without the run on deposits from people like Thiel.
- mrguyorama 4y ago
  Or they could have properly diversified like a functional financial institution they would have had diversified enough investments that they could fix a liquidity problem with minimal balance sheet losses or their depositors would be different enough people to not run on the bank from one rich guy on twitter pitching a fit. SVB bet it all on red and the ball landed on black. Everything after that point is not useful information.
dragontamer 4y ago
Note that Silicon Valley Bank had no Chief Risk Officer from April 2022 through January 2023.
- Aperocky 4y ago
  Could've probably sold their low interest HTM for a far smaller hit but wound up holding the bag while feds absolutely spiked the rate. The previous CRO probably saw the writing on the wall, I wonder if she* got shut down and decided to quit and watch the fireworks from outside.
  - oaktowner 4y ago
    *she According to the linked article: "Ms. Izurieta departed the Company on October 1, 2022. The Company initiated discussions with Ms. Izurieta about a transition from the Chief Risk Officer position in early 2022. Accordingly, the Company and Ms. Izurieta entered into a separation (without cause) agreement pursuant to which she ceased serving in her role as Chief Risk Officer as of April 29, 2022 and moved into a non-executive role focused on certain transition-related duties until October 1, 2022."
    - gregw2 4y ago
      She and the CEO sold a ton of stock in Dec 2021 and the bank risk committee met 18 times in 2022 so the writing was probably on the wall in Dec 2021
swatcoder 4y ago
Yeah, but 10 year bills are way cheaper and you can apparently use their HTM value to shape your balance sheet. $80 spent for $100 on the paper (or whatever). I’d suspect they were already marginal and this was their only way to keep the books sound until they could solve their deeper problems.
- oarabbus_ 4y ago
  10 year bills are way cheaper because of the interest rate risk. You have to hold an unrealized/paper loss if rates move against you, but eventually you will realize the face value after 10 years. This is why bond investors who aren't yield chasing would never overleverage into these. At the _very_ least the fed announced interest rate rises in March of 2022 (with updates in June, Sept, Nov/Dec) and SVB could've worked out some kind of short-term credit deal with a JP Morgan type last year. Instead they did nothing but sat on assets which they knew would drop over 20% market value in a year while not ensuring short-term liquidity.
- ctchocula 4y ago
  You're confusing cause and effect here. In 2021, even crap 1% 10-year treasury notes cost $100 to purchase, not $80. It's only after interest rates went up in 2022 due to faster than expected Fed rate hikes that 1% treasury notes were no longer as valuable. An intuitive way to think about this is a seller of 1% treasury notes can only ask for $80 when 3% treasury note new issues are available for $100, to compensate the buyer of the 1% treasury note for the lower, less attractive interest rate. The interesting quirk is that it's only the mark-to-market price that is underwater i.e. worth $80. If SVB had the privilege to hold these assets to maturity (i.e. waiting 10 years), they could get their principal $100 back + $10 in interest. If they did do what you said i.e. "spend $80 to buy $100's worth of treasury notes", then they wouldn't be in the conundrum they're in today. Because their cost basis in that case would be $80 and they could simply sell that treasury note for $80 and they wouldn't have a capital loss at all (in fact, they would be up since they earned coupon payments). It's only because: 1. 2021: they purchased low interest treasury notes before interest rates jumped 2. 2022: interest rates jumped faster than expected This caused SVB incurring capital losses, which meant their assets to be worth less than their deposits. If you are curious and want to visualize some of the changes on a graph, you can check out VFITX [1], which is a mutual fund that holds a mix of treasury bills, bonds and notes for an average of around 7-year duration. -2021 Jan 1: $11.63/share -2022 Jan 1: $11.12/share = 4.4% cap loss (before factoring in coupon payments) -2023 Jan 1: $10.15/share = 12.7% cap loss (before factoring in coupon payments) [1] https://www.marketwatch.com/investing/fund/vfitx https://www.marketwatch.com/investing/fund/vfitx
Zetice 4y ago
This is the part no one is explaining to me; what's the advantage of doing this over doing the right thing? So far it really looks like gross negligence rather than avarice.
- oarabbus_ 4y ago
  >what's the advantage of doing this over doing the right thing? So far it really looks like gross negligence rather than avarice. Yield chasing is equally gross negligence and avarice. I'm not sure what you mean by "what's the advantage". What's the advantage of going 100% into Tesla stock call options, rather than an SP500 index fund? There is no advantage when Tesla is returning 4x the S&P. There's a rather large disadvantage when it drops 30% in a quarter.
  - Zetice 4y ago
    But that's not what SVB did at all; based on what I've read, their investments were not "yield chasing" but literally the only thing they could think of to do with the massive amount of money getting dumped in their lap. SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do.
    - oarabbus_ 4y ago
      Sorry, but you're completely misunderstanding what you're reading, or reading false information if that's your interpretation. Bond portfolios typically hold a mix of maturities from 1, 2, 3, to 10-year+ maturities. The short term ones offer liquidity and protect against interest rate risk. Because if the interest rate increases and new bonds are issued at a higher rate, your maturing bonds become cash to purchase the new, higher-yield notes. Literally - call your 401k provider and ask to speak with an investment advisor if you don't believe me. Holding only 10-30 year HTMs is absolutely yield chasing. SVB skipped having the short-term maturities, because they do not offer much yield. It is basically the literal definition of yield chasing. >SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do. All cash would've been foolish, but considering the primary purpose of a bank is to provide liquidity for clients, it's a bit of a reach to call it equally irresponsible as assuming your banking clients would be fine waiting 6-10 years for your investments to mature.
deleted 4y ago
[deleted]
3np 4y ago
Yeah, that's akin to saying FTX were a victim of CZ dumping FTT.
campbel 4y ago
Multiple things can be true here. Thiel didn't start the issue, but he did act in a way that would make things worse for the group, but best for him. Perhaps he felt that if he didn't do it, others would anyways? Probably needless to say, this is perfectly on brand for how he'd act.
- mrguyorama 4y ago
  Blaming Thiel for the bank run on SVB is the same stupidity as blaming Soros for the collapse of the pound two decades ago. If someone calls out that the emperor has no clothes and that is the reality, they have done nothing wrong.
- oarabbus_ 4y ago
  These banks made poor investment decisions and were reckles with customer funds, and are to blame for their own failure. It might be on-brand for him, and surely he acted in his own interest and didn't give a shit about anyone else. But did Thiel also organize runs on Silvergate Bank and Signature Bank NY? Why did those fail along with SVB in a span of days? His involvement seems to be getting exaggerated here.
nullc 4y ago
> Any normal, non-degnerate bond manager would would keep a significant amount of 1-3 year treasuries in their mix of bonds. How significant? Is 1/3rd not enough?
- oarabbus_ 4y ago
  Source on 1/3rd? Does that include the ~$80B of 15-30 year MBS they acquired at the same time? clearly it was not enough considering interest rates were zero at the time and the yield curve was inverted.

mcguire 4y ago

It doesn't seem likely that SVB would have had to close their doors to depositors without the run on deposits from people like Thiel.

mrguyorama 4y ago
Or they could have properly diversified like a functional financial institution they would have had diversified enough investments that they could fix a liquidity problem with minimal balance sheet losses or their depositors would be different enough people to not run on the bank from one rich guy on twitter pitching a fit. SVB bet it all on red and the ball landed on black. Everything after that point is not useful information.

dragontamer 4y ago

Note that Silicon Valley Bank had no Chief Risk Officer from April 2022 through January 2023.

Aperocky 4y ago
Could've probably sold their low interest HTM for a far smaller hit but wound up holding the bag while feds absolutely spiked the rate. The previous CRO probably saw the writing on the wall, I wonder if she* got shut down and decided to quit and watch the fireworks from outside.
- oaktowner 4y ago
  *she According to the linked article: "Ms. Izurieta departed the Company on October 1, 2022. The Company initiated discussions with Ms. Izurieta about a transition from the Chief Risk Officer position in early 2022. Accordingly, the Company and Ms. Izurieta entered into a separation (without cause) agreement pursuant to which she ceased serving in her role as Chief Risk Officer as of April 29, 2022 and moved into a non-executive role focused on certain transition-related duties until October 1, 2022."
  - gregw2 4y ago
    She and the CEO sold a ton of stock in Dec 2021 and the bank risk committee met 18 times in 2022 so the writing was probably on the wall in Dec 2021

swatcoder 4y ago

Yeah, but 10 year bills are way cheaper and you can apparently use their HTM value to shape your balance sheet. $80 spent for $100 on the paper (or whatever). I’d suspect they were already marginal and this was their only way to keep the books sound until they could solve their deeper problems.

oarabbus_ 4y ago
10 year bills are way cheaper because of the interest rate risk. You have to hold an unrealized/paper loss if rates move against you, but eventually you will realize the face value after 10 years. This is why bond investors who aren't yield chasing would never overleverage into these. At the _very_ least the fed announced interest rate rises in March of 2022 (with updates in June, Sept, Nov/Dec) and SVB could've worked out some kind of short-term credit deal with a JP Morgan type last year. Instead they did nothing but sat on assets which they knew would drop over 20% market value in a year while not ensuring short-term liquidity.
ctchocula 4y ago
You're confusing cause and effect here. In 2021, even crap 1% 10-year treasury notes cost $100 to purchase, not $80. It's only after interest rates went up in 2022 due to faster than expected Fed rate hikes that 1% treasury notes were no longer as valuable. An intuitive way to think about this is a seller of 1% treasury notes can only ask for $80 when 3% treasury note new issues are available for $100, to compensate the buyer of the 1% treasury note for the lower, less attractive interest rate. The interesting quirk is that it's only the mark-to-market price that is underwater i.e. worth $80. If SVB had the privilege to hold these assets to maturity (i.e. waiting 10 years), they could get their principal $100 back + $10 in interest. If they did do what you said i.e. "spend $80 to buy $100's worth of treasury notes", then they wouldn't be in the conundrum they're in today. Because their cost basis in that case would be $80 and they could simply sell that treasury note for $80 and they wouldn't have a capital loss at all (in fact, they would be up since they earned coupon payments). It's only because: 1. 2021: they purchased low interest treasury notes before interest rates jumped 2. 2022: interest rates jumped faster than expected This caused SVB incurring capital losses, which meant their assets to be worth less than their deposits. If you are curious and want to visualize some of the changes on a graph, you can check out VFITX [1], which is a mutual fund that holds a mix of treasury bills, bonds and notes for an average of around 7-year duration. -2021 Jan 1: $11.63/share -2022 Jan 1: $11.12/share = 4.4% cap loss (before factoring in coupon payments) -2023 Jan 1: $10.15/share = 12.7% cap loss (before factoring in coupon payments) [1] https://www.marketwatch.com/investing/fund/vfitx https://www.marketwatch.com/investing/fund/vfitx

Zetice 4y ago

This is the part no one is explaining to me; what's the advantage of doing this over doing the right thing? So far it really looks like gross negligence rather than avarice.

oarabbus_ 4y ago
>what's the advantage of doing this over doing the right thing? So far it really looks like gross negligence rather than avarice. Yield chasing is equally gross negligence and avarice. I'm not sure what you mean by "what's the advantage". What's the advantage of going 100% into Tesla stock call options, rather than an SP500 index fund? There is no advantage when Tesla is returning 4x the S&P. There's a rather large disadvantage when it drops 30% in a quarter.
- Zetice 4y ago
  But that's not what SVB did at all; based on what I've read, their investments were not "yield chasing" but literally the only thing they could think of to do with the massive amount of money getting dumped in their lap. SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do.
  - oarabbus_ 4y ago
    Sorry, but you're completely misunderstanding what you're reading, or reading false information if that's your interpretation. Bond portfolios typically hold a mix of maturities from 1, 2, 3, to 10-year+ maturities. The short term ones offer liquidity and protect against interest rate risk. Because if the interest rate increases and new bonds are issued at a higher rate, your maturing bonds become cash to purchase the new, higher-yield notes. Literally - call your 401k provider and ask to speak with an investment advisor if you don't believe me. Holding only 10-30 year HTMs is absolutely yield chasing. SVB skipped having the short-term maturities, because they do not offer much yield. It is basically the literal definition of yield chasing. >SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do. All cash would've been foolish, but considering the primary purpose of a bank is to provide liquidity for clients, it's a bit of a reach to call it equally irresponsible as assuming your banking clients would be fine waiting 6-10 years for your investments to mature.

deleted 4y ago

[deleted]

3np 4y ago

Yeah, that's akin to saying FTX were a victim of CZ dumping FTT.

campbel 4y ago

Multiple things can be true here. Thiel didn't start the issue, but he did act in a way that would make things worse for the group, but best for him. Perhaps he felt that if he didn't do it, others would anyways? Probably needless to say, this is perfectly on brand for how he'd act.

mrguyorama 4y ago
Blaming Thiel for the bank run on SVB is the same stupidity as blaming Soros for the collapse of the pound two decades ago. If someone calls out that the emperor has no clothes and that is the reality, they have done nothing wrong.
oarabbus_ 4y ago
These banks made poor investment decisions and were reckles with customer funds, and are to blame for their own failure. It might be on-brand for him, and surely he acted in his own interest and didn't give a shit about anyone else. But did Thiel also organize runs on Silvergate Bank and Signature Bank NY? Why did those fail along with SVB in a span of days? His involvement seems to be getting exaggerated here.

nullc 4y ago

> Any normal, non-degnerate bond manager would would keep a significant amount of 1-3 year treasuries in their mix of bonds. How significant? Is 1/3rd not enough?

oarabbus_ 4y ago
Source on 1/3rd? Does that include the ~$80B of 15-30 year MBS they acquired at the same time? clearly it was not enough considering interest rates were zero at the time and the yield curve was inverted.