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>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 gro

>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.
  - Zetice 4y ago
    Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Those sound absurdly secure, and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.
    - oarabbus_ 4y ago
      >Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Exactly. the 1-year notes had zero interest rate risk, and almost no yield. The 10-year notes offered very high interest rate risk (remember: rates were almost zero) and barely-more-than-no-yield. Choosing 1.5% return at high interest rate risk vs. 0.5% return for low rate risk. Either way you are getting almost nothing, but one has the risk of putting you into a liquidity crisis. In a sense you're willing to risk it all to squeeze an extra 1%, It is the absolute definition of yield chasing. >and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If your $1000 bond is worth $1005 at maturity, and it has dropped to $990 and you want to borrow from me against the bond, I will charge you at least $15 in this scenario. That's slightly oversimplified, but lenders (other than the Fed/QE) will loan at a rate where you're essentially locking in a loss, because they have what you need to offset your risk you failed to hedge against (liquidity). >If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk. Not that I am aware of, at that scale of money. There's also high-risk lending to borrowers (which SVB did) but companies might borrow $10M, $20M, maybe $100M. When you're talking $50-100B, Bonds are the only game in town.
      - Zetice 4y ago
        I honestly have no clue how to even research alternatives to the 10 year T note as an investment vehicle for SVB, but plenty of gigantic funds seem to be able to do all kinds of riskier investing so it doesn't seem like a fair question. There are tons of places to put money that are riskier, even billions, that would have yielded better returns. 30 year T notes, for example, seem to have been at double the 10 year notes in return at this time. Why not go for those if we're assuming greed as the driving factor here?
- ketzo 4y ago
  SVB could have bought 3-year, 1-year, 6-month Treasury bills with that money -- which during 2020 and 2021 were yielding <0.25%. This would have been "safer", but lost them money. Instead, they bought 10-, 20-, and 30-year T-Bills which were yielding more like 2-3%. Not much by today's interest-rate standards, but significantly more than 0.25%. That appetite for long-dated bills could, I think, be described as "yield chasing." It was a decision made for short-term financial gain in ignorance of the risks involved.
  - Zetice 4y ago
    My understanding was they they were 10 year T notes @ ~1%, which is kind of where I get lost. There are way better ways to "yield chase" than this, why are we presuming greed here when it seems just as likely to be incompetence?
    - jmathai 4y ago
      My guess is because this is supposed to be a core competency of a bank. If a doctor unknowingly took out your heart instead of your gall bladder, it may be incompetence but that's unlikely.
      - Zetice 4y ago
        Isn't this exactly what Hanlon's Razor was invented for?
    - oarabbus_ 4y ago
      >There are way better ways to "yield chase" than this, Such as what? There are not, if you have $50-100B. Your options as a bank are either treasury bonds or mortgage-backed securities. As a private sector investor (e.g. Warren Buffett) you have the additional option of equity investing, but it will take many years to move that much money.
  - oarabbus_ 4y ago
    >This would have been "safer", but lost them money. In a short-term sense, but the point of short-dated maturities is not to produce yield but rather provide liquidity, which allows you to purchase higher-yielding 10+ year notes in the event the interest rate rises. They would've actually gained money by (1) not being forced to sell assets at a loss, thereby leading to a run and also becoming insolvent and (2) e.g. used the maturing short-dated bonds to purchase 3-year treasuries at today's 4.1% rate, rather than their shitty 1.8% 10-year notes.
- stephen_g 4y ago
  What? Keeping much of the deposits as federal reserves would have been fine. The Fed pays interest on those balances, so they would have been safe and wouldn’t have collapsed if they’d done that. Instead they made very risky moves to chase higher yield. Banks make basically all their profit on lending, so they shouldn’t be making risky moves with deposits.

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.
- Zetice 4y ago
  Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Those sound absurdly secure, and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.
  - oarabbus_ 4y ago
    >Sure, but the thing they bought also had almost no yield, so that's what I'm not understanding. Why is shitty 1% 10 year T notes "yield chasing"? Exactly. the 1-year notes had zero interest rate risk, and almost no yield. The 10-year notes offered very high interest rate risk (remember: rates were almost zero) and barely-more-than-no-yield. Choosing 1.5% return at high interest rate risk vs. 0.5% return for low rate risk. Either way you are getting almost nothing, but one has the risk of putting you into a liquidity crisis. In a sense you're willing to risk it all to squeeze an extra 1%, It is the absolute definition of yield chasing. >and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario. If your $1000 bond is worth $1005 at maturity, and it has dropped to $990 and you want to borrow from me against the bond, I will charge you at least $15 in this scenario. That's slightly oversimplified, but lenders (other than the Fed/QE) will loan at a rate where you're essentially locking in a loss, because they have what you need to offset your risk you failed to hedge against (liquidity). >If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk. Not that I am aware of, at that scale of money. There's also high-risk lending to borrowers (which SVB did) but companies might borrow $10M, $20M, maybe $100M. When you're talking $50-100B, Bonds are the only game in town.
    - Zetice 4y ago
      I honestly have no clue how to even research alternatives to the 10 year T note as an investment vehicle for SVB, but plenty of gigantic funds seem to be able to do all kinds of riskier investing so it doesn't seem like a fair question. There are tons of places to put money that are riskier, even billions, that would have yielded better returns. 30 year T notes, for example, seem to have been at double the 10 year notes in return at this time. Why not go for those if we're assuming greed as the driving factor here?
ketzo 4y ago
SVB could have bought 3-year, 1-year, 6-month Treasury bills with that money -- which during 2020 and 2021 were yielding <0.25%. This would have been "safer", but lost them money. Instead, they bought 10-, 20-, and 30-year T-Bills which were yielding more like 2-3%. Not much by today's interest-rate standards, but significantly more than 0.25%. That appetite for long-dated bills could, I think, be described as "yield chasing." It was a decision made for short-term financial gain in ignorance of the risks involved.
- Zetice 4y ago
  My understanding was they they were 10 year T notes @ ~1%, which is kind of where I get lost. There are way better ways to "yield chase" than this, why are we presuming greed here when it seems just as likely to be incompetence?
  - jmathai 4y ago
    My guess is because this is supposed to be a core competency of a bank. If a doctor unknowingly took out your heart instead of your gall bladder, it may be incompetence but that's unlikely.
    - Zetice 4y ago
      Isn't this exactly what Hanlon's Razor was invented for?
  - oarabbus_ 4y ago
    >There are way better ways to "yield chase" than this, Such as what? There are not, if you have $50-100B. Your options as a bank are either treasury bonds or mortgage-backed securities. As a private sector investor (e.g. Warren Buffett) you have the additional option of equity investing, but it will take many years to move that much money.
- oarabbus_ 4y ago
  >This would have been "safer", but lost them money. In a short-term sense, but the point of short-dated maturities is not to produce yield but rather provide liquidity, which allows you to purchase higher-yielding 10+ year notes in the event the interest rate rises. They would've actually gained money by (1) not being forced to sell assets at a loss, thereby leading to a run and also becoming insolvent and (2) e.g. used the maturing short-dated bonds to purchase 3-year treasuries at today's 4.1% rate, rather than their shitty 1.8% 10-year notes.
stephen_g 4y ago
What? Keeping much of the deposits as federal reserves would have been fine. The Fed pays interest on those balances, so they would have been safe and wouldn’t have collapsed if they’d done that. Instead they made very risky moves to chase higher yield. Banks make basically all their profit on lending, so they shouldn’t be making risky moves with deposits.