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The author ignores that behind the downfall of SVB was a climate of excess liquidity on the markets, a bonanza created by the authorities that made SVB see itse

The author ignores that behind the downfall of SVB was a climate of excess liquidity on the markets, a bonanza created by the authorities that made SVB see itself with a glut of funds. Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. Someone could argue that they could have foreseen that this abundance of liquidity in the markets, along with the supply chain issues, would eventually lead to inflationary pressures and that once inflation has shown its ugly face, those bond's market value would be discounted, and that they could become vulnerable to a bank run. But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. That said, please don't confuse me with a libertarian; I am just raising a somewhat contrarian point. Being called a libertarian would be an enormous source of shame and disgust for my mom.

olivermarks 4y ago
It was their unwise bet on ten year T bonds that got SVB into difficulties, a far larger societal economic issue than is being acknowledged. 'This decade’s learning: bonds aren’t a universally safe asset class.' ...the US federal reserve are playing a dangerous game battling the inflation they enabled with rate hikes http://www.brooock.com/a/svb-collapse-exposes-cracks-in-economy http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...
- mhb 4y ago
  What is the larger issue? That people buying bonds don't understand that their value drops when interest rates go up and that if you might need the money from the bonds before the bond matures you need to hedge for that?
  - olivermarks 4y ago
    From the link I posted: 'What this means going forward An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years. If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
    - mhb 4y ago
      Safe is doing a lot of work here. Government bonds are safe from default. Not from changing value when interest rates change.
    - JohnFen 4y ago
      Don't see how that means it's the fed's fault, though. Anyone who has even halfway paid attention to markets over the just the past few decades should be acutely aware that markets can change very quickly. Expecting current conditions to last forever, or that you will always have notice that change is afoot, is just insanity or incompetence.
  - cal5k 4y ago
    At the time they were purchased, central banks around the world were going out of their way to assure people that rates would not be going up for a long time. Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".
    - olivermarks 4y ago
      It was naive, lazy and dangerous of SVB to assume in a 10 year window nothing would change IMO
      - mhb 4y ago
        Don't forget greedy. Not hedging saves money.
    - eep_social 4y ago
      Central banks have been telegraphing rate increases for over a year. Your statement might have been true on the day of the purchase but SVB had an entire year to fix their mistake and failed to do so.
- shagie 4y ago
  The bonds are worth exactly what they thought they'd be worth if held. There is no bet on that part. The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable. As shown in https://fred.stlouisfed.org/series/T10Y3M https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been. The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds. If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.
  - pg314 4y ago
    > The bonds are worth exactly what they thought they'd be worth if held. That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
    - shagie 4y ago
      Has the amount that it pays when it reaches maturity changed? The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021). And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?countrycode=bx https://www.marketwatch.com/investing/bond/tmubmusd03m?count... But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.
fnordpiglet 4y ago
Well, I’d argue that they should have hedged their rates risk especially as inflation started to tick up. They just don’t have good risk managers. But that said, if there hadn’t been a run the causal issues would have been a foot note in a quarterly filing. Everyone is acting as if SVB were Lehman or Bear Sterns. They just got caught with their pants down and everyone ran over to take a picture and post it on Twitter.
- el_nahual 4y ago
  I saw on another HN thread that when a bank has bonds designated as "hold to maturity" they are not allowed to hedge against rate risk--because there isn't any! The bonds will be held til expiration for purposes of the coupon, not to trade.
- ralph84 4y ago
  Why hedge when we privatize the profits and socialize the losses? SVB execs sold tens of $millions in stock before the failure. Are the execs going to be forced to return the compensation they received for showing higher profits by not hedging?
  - psychlops 4y ago
    Don't forget they also paid bonuses the morning they failed.
    - fnordpiglet 4y ago
      This is the time of the year when banks pay bonuses for the prior years work. My understanding is it was scheduled annually at the same time and happened to occur the day they went insolvent. Frankly I’m down with Nancy in client confirm generation getting her bonus. The senior managers all got fired and their comp clawed back, so seems legit.
      - psychlops 4y ago
        I've no problems with Nancy, she's pretty cool. Firing isn't really enough, loss of license and industry bans should be on the table as well as criminal investigations for fraud and negligence of custodial funds.
sdfghswe 4y ago
> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. Sure excess liquidity was necessary for this behavior to be possible, but it wasn't the cause. That's like saying the person who leaves their car unlocked is the root cause of the theft. No, the thief is. "Your honour... I plead not guilty, the car was unlocked."
- fnordpiglet 4y ago
  I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. The mark to market only comes relevant if you’re experiencing a run, which they were holding sufficient regulatory liquidity for. They should have hedged their rates risk a bit better, especially as inflation became even a whisper, but if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit.
  - sdfghswe 4y ago
    > I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?
    - beezle 4y ago
      Not all of the capital was in a HTM portfolio. SVB I'm sure had a good handle on the typical flow of funds and based off of that with some margin of error (that was obviously not everyone wants everything today).
twblalock 4y ago
It's also very unlikely that SVB is the only bank that made those kind of investments back when rates were low.
ajross 4y ago
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. That's revisionist and silly[1]. Spending all your liquidity on long term bonds isn't "conservative" if you're a bank. It's not your money! It's your customer's money that you're just holding for them, and you just dropped it all in a vehicle that doesn't mature for 10 years. What if the customers want their money back? Yeah, we just found out. No, the conservative option if you can't invest it is just to sit on it. That's what banks do. They sit on other people's money. That they are allowed to spend some of that money on speculation is a reasonable optimization, but it's just that. Obviously just sitting on it wasn't going to get the returns they'd promised to investors though. So they placed bets instead. [1] And I'm not going to touch the idea that the "authorities" somehow forced them into this. No. Just no.
- deleted 4y ago
  [deleted]
- initplus 4y ago
  The government actually wants banks to speculate with customer funds. You might think that the safest bank would be one that doesn’t do anything with customer deposits, just sits on them. Well this “safe bank” actually falls foul of US banking regulation - there are regulatory requirements for minimum levels of “speculation“ as a bank. Now clearly SVB got in over their heads here with risk. But just sit on all the money isn’t a legal alternative.
- wins32767 4y ago
  Do you really think putting it out as mortgages would lock the money up for a shorter duration? SVB had a reasonable amount of liquidity for normal stresses. They'd gotten close to breaching their regulatory cushion for spare capital which was why they were trying to recapitalize. However once the VCs panicked started a bank run, they folded. Just like literally any bank would. ~45b of net withdrawals in a single day is going to cause any bank significant trouble.
  - lscharen 4y ago
swatcoder 4y ago
You can chase root causes all the way back to some Roman prelate if you want. But at some point, there was a cause very close to the material problem you’re looking at. In this case, that’s the compounded risk that SVB took on in courting a concentrated clientele and trying to balance their books with unusually long-term purchases. If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems.
- ramesh31 4y ago
  >If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems. I think it's time we stop imagining that financial institutions will ever do anything that they are not legally required to do. This was a failure of regulation. Calling it personal responsibility is about the same as getting mad at the dog for getting into the garbage. It's our fault for not taking out the trash.
  - tracker1 4y ago
    I think the failure, in terms of regulation, is holding accountability in the first place when they violate existing laws and SEC regulations. Not to mention, ever actually holding executives and boards to account in terms of liability against their personal wealth.
    - lmm 4y ago
      It used to be that the likes of accountants and lawyers weren't allowed to be limited liability corporations - they had to be run as partnerships, with unlimited personal liability. (Sadly, this rule was done away with, and shortly after that we got Enron). Maybe the same should apply to banks.
tppiotrowski 4y ago
I don't know much about finance and have never worked in banking but anyone more than 40 years old should know that fed rates can go into double digits. It's not like a black swan. It's happened before so I'm a bit surprised people are so shocked by the feds moves.
- psychlops 4y ago
  Not taking the side, but there is a strong belief that the fed can't raise rates much more as it needs to inflate away a large portion of debt to get the economy back on track. It's unlikely we will see a volcker economy halting maneuver anytime soon.
jonnycomputer 4y ago
Always want someone else to blame, and why not the Fed. Nobody likes them.
Workaccount2 4y ago
>decided to go the conservative way and buy bonds. While strictly true, they did decide to go with long dated bonds that would tie up those funds for years potentially. Typically banks will buy bonds of shorter duration. SVB however couldn't resist the higher interest rates of those long dated bonds. IIRC they had an average maturity of six years, whereas most banks are typically under one year.
Waterluvian 4y ago
I appreciate you're just playing Devil's Arbalest here, but this feels like the least libertarian take possible. It's the government's fault that my customers are handing me so much money to manage and I managed it poorly? Admittedly, I still don't fully understand the link between investing too cautiously and seeing poor returns and there being a run on the bank.
- Swenrekcah 4y ago
  The link is that the investments went down in value and so the bank couldn’t sell enough of them when they suddenly needed a lot of money to pay out deposits. I agree it’s peculiar to phrase it as the government is to blame. Except perhaps to the degree that the government in 2018 relaxed risk test requirements that would otherwise have included SVB, those requirements were originally set after and in response to the 2008 collapse. But ultimately the blame lies with the bank executives.
khyryk 4y ago
Loading up on bonds when rates are rock bottom instead of bills is asking for trouble. Sure, when yields are at averages or historic highs, back the truck up; otherwise, there's not much difference between yielding 0% and 1%, but a lot of difference in liquidity. As an aside, I remember in recent times various institutions, either by law or voluntarily, loading up on long term bonds at 0% +/- 0.5% bonds. I'm sure that's going to be a fun situation should they face even a slight liquidity crisis of, say, more retirees pulling money out than there are young people depositing into pensions and whatnot.
- jurassic 4y ago
  Can you explain the difference between bills and bonds and why the difference was significant in this case? For myself and probably a lot of engineers reading this comment, it seems like inside baseball.
  - khyryk 4y ago
    Bills are shorter duration, bonds are longer duration. You can look up the terms to get exact time ranges. When the yields for both are very low, there's next to no upside to holding onto the low yield for longer. The downside is that if one is in critical need of cash immediately, nobody wants the old low-yield (compared to current yields) bonds and will only buy them at a discount. For bills, due to the shorter duration, extra liquidity is built-in.
NovemberWhiskey 4y ago
>decided to go the conservative way and buy bonds. Just because government bonds are unlikely to default, that doesn't make acquiring them "conservative". If you're a bank, with an entire function dedicated to making sure that assets match liabilities ("treasury"), and that ought to be aware of things like "DV01" and "duration risk", then you're supposed to know this.
worksonmine 4y ago
SVB locking money they might need access to is the FEDS fault do I understand you correctly? Did they hold a gun to their head? I'm not saying they're doing anything different than their competitors, but that's a stupid excuse. The only thing that's broken is the financial system. A customer should be aware when depositing money that that money might be locked away, and agree to those terms, and get a cut. This is SVB gambling and losing the bet, simple as. Everything else is just a pathetic excuse, don't enable it. Just look at the term "excess liquidity", that's newspeak. I expect the bank to have my 100$ the day I ask for it. I'm not a using bank because I want to, but if I store it under my bed I get to deal with the IRS. They make themselves necessary to live, then expect my deposits to work for them.
- scrozier 4y ago
  Why/how does the IRS care if you store it under your bed? Serious question.
  - notch898a 4y ago
    CTR and/or SAR and/or form 8300 and/or Fincen 105 when you actually spend it, either directly or they investigate and find you're the second link back. And if you escape civil action by IRS, the fed or local government can simply take it as civil asset forfeiture without accusing you of wrongdoing. .gov really really hates big piles of printed currency and if they find out you have it the temptation for them to take it can become overwhelming to various entities that survive off of the taking.
  - dboreham 4y ago
    > Serious question. Because criminals/tax evaders do that.
    - scrozier 4y ago
      That doesn't answer my question. The IRS taxes income, not assets. They don't care where your money is.
avn2109 4y ago
>> "... decided to go the conservative way and buy bonds." Sure but they could have bought shorter bonds instead of a bunch of ten years, there's no reason to take so much duration risk. Every intro to financial engineering class includes a "build a Treasury ladder" exercise, it's not rocket science.
miguelazo 4y ago
Putting aside the glut of misallocated cheap money, isn't the deregulation that allowed this (which SVB pushed for, along with many other banks/Wall Street parasites) precisely the type of policy that Libertarians advocate?
- convolvatron 4y ago
  like always, the market is still insufficiently free to work its true magic. woulda been fine if the fed hadn't been screwing around and ruining things
- fidgewidge 4y ago
  Definitely not. Most libertarians I've encountered want hard money i.e. full reserve banking with no central bank money printing. In FRB you cannot have bank runs and with a restricted central bank which can't print more money you can't have ZIRP and the wild swings all over the financial system that it had caused. Instead you have a system in which bank accounts don't pay interest but that's acceptable in many cases because there also isn't any inflation, and if you want a return you invest in a fund that exposes the liquidity constraints in its terms. The above scheme requires far less government regulation as well, but it does need some, mostly an extension of the idea of theft to encompass fractional reserve banking.
  - miguelazo 4y ago
    I suppose some or even most libertarians would agree with that, although that system is just rigidly regulated in a different way. I think the classic Libertarian model would be private banks, totally disassociated from government. Further, full reserve banking and fixed supply monetary systems are the stuff of fantasies. Totally infeasible in the real world.
    - fidgewidge 4y ago
      They're both entirely feasible. The usual canard is that without fractional reserve there is no lending or not "enough" lending, but with full reserve there is still lending of course because people would like a return on their assets. There would be less bad lending but that's what we want, even if it leads to a temporary drop in GDP.
originalcopying 4y ago
> Being called a libertarian would be an enormous source of shame and disgust for my mom. But you are not your mom. you don't have to share on the disgust and shame, however you may chose to do so if you want. the points being: the disgust is your mom's not necessarily yours. whether to partake on your parent's shame of being called a libertarian is a choice.
- elzbardico 4y ago
  A choice that I deliberately made years ago.
  - originalcopying 4y ago
    good for you! therapy for me has been about finding subconscious choices like those on the other hand, sorry for you... why would one choose to feel negative emotions like shame?
  - ihateyouall123 4y ago
    Yeah this is just weird. Go seek therapy
rufus_foreman 4y ago
>> even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED From SVB's bio of President and CEO Greg Becker at https://www.svb.com/profile/greg-becker https://www.svb.com/profile/greg-becker: "He is a Class A Director for the Federal Reserve Bank of San Francisco"
juve1996 4y ago
> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. The fact that many other banks were prescient disproves this point handily.
- yunwal 4y ago
  This is obviously also stupid, but no other bank has the vast majority of their clientele clued into a single group chat discussion
dpweb 4y ago
Glut yes, but that not the cause - nor was the bank run. Simply, hubris. They bet billions on zero interest rate policy and didn't hedge that bet. Glut or no glut, would have failed just like LTCM or any other huge bets that failed to consider tail risk.
WinstonSmith84 4y ago
Reasonably, the least we could expect from a bank is to keep the money we give to them, instead of gambling it. But even that, despite all the audits, is not a given, as a matter of fact. I wish to see the proof of reserve implemented for traditional banks, or the trust will just keep eroding...
mathattack 4y ago
It’s not a matter of being prescient. They made an explicit bet. “Rates won’t go down, so let’s get as much yield as possible via long term securities” They could have just as easily done what most other financial institutions do: match the duration of their liabilities with the duration of their bonds. If people can quickly pull their money, then keep the money in short term bonds and money market funds. The problem with that is it’s harder to make big bonuses when you’re being fiscally conservative.
- dboreham 4y ago
  They also had to pay out significant interest to depositors. The graph of those outflows looks like a hockey stick. So seeking a high return on their assets wasn't unreasonable. Presumably if they had paid low interest on deposits, depositors would have moved their money to some other institution, leading to the same outcome.
  - mathattack 4y ago
    They chose to. They didn’t need to. If they were getting too many deposits, they could lower the interest they paid on them. The problem is they bought a bunch of long dates securities yielding 1.5-2% and when the deposits flooded in they started paying more than 1.5-2%. They have been better off buying T bills or something else without duration risk and paying something less than Fed Funds. This is what most banks do.
kqvamxurcagg 4y ago
You fail to understand the actual reason for their insolvency. Their risk team chose to buy 10 year treasury bonds instead of 1 year treasury bonds. This is because 10 year bonds offered a higher interest rate (more profit for SVB) but at a much much higher risk. The losses were then unrecognised, hoping the market would turn. Only when it was too late did SVB admit defeat. With their equity gone, they attempted a band aid with an equity raise but the market quite rightly recognised the bank’s shares were worthless. Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail. Don’t blame SVB’s failure on a bank run. SVB caused their own failure with their own risk management policies and it’s insolvency was probably inevitable for months.
- concordDance 4y ago
  > Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail. Jail seems extreme for an error in judgement that neither killed nor maimed anyone.
  - nerdponx 4y ago
    It nearly killed billions of dollars in real value and required untold thousands of taxpayer-funded employees working through the weekend to unfuck the situation. If I drive recklessly, I am still guilty of reckless driving even though I didn't hit anyone or anything.
    - ihateyouall123 4y ago
      [flagged]
      - nerdponx 4y ago
        I see in your post history that you're a comedian, so I can only hope that this is meant to be funny, because the irony here is layered on so thickly.
      - concordDance 4y ago
machina_ex_deus 4y ago
"It turned out that one of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities" And I kind of agree. Yes, the mistake was not hedging MBS and treasuries interest rates. But are they really the only bank in the world doing that mistake? What truly made it fatal is the VCs. That's also why nobody is coming to buy them. The speed at which the bank run happened, showed exactly how much they valued the bank. If you're swimming with sharks, it's a big mistake to bleed. But let's not pretend the sharks are innocents. Bleeding isn't usually so fatal. Which is why I don't think the sharks deserve a bailout.
- yunwal 4y ago
  > But are they really the only bank in the world doing that mistake? I’m not sure that looking to the financial sector for examples of fiscal responsibility is actually reasonable, but I’d guess that they’re the only bank that’s “too-big-to-fail” that could possibly fail because of a single slack discussion.
  - lmm 4y ago
    Meh. Larry Fink could probably kill a non-big-four bank single-handedly if he really wanted to. Wealth is concentrated right now, and power even more so.
UncleOxidant 4y ago
> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. Yes, the FED did leave interest rates too low for much too long. Rates should probably have been in the 3 to 4% range prior to the pandemic which means they should've been tightening more since about 2015. But lowering to essentially 0 during the early stage of the pandemic in order to keep us out of another great depression seems like the right decision. As for the SVB downfall: there's plenty of blame to go around. Yes, SVB should have diversified their bond buys (more shorter term durations mixed in). And as mentioned above, the Fed bears some blame. But so do the VCs who panicked startups into a bank run last week - the VCs who probably strongly recommended that their startups put their money in SVB in the first place. And the startups themselves could have been doing a better job spreading their money around to other banks in order to minimize their risk in case of bank failure (admittedly, most startups probably don't have this top of mind as they're busy with other things). Ultimately, the entire idea of a Silicon Valley Bank that was essentially just serving VC funded startups was probably a bad one from the start. Diversification of customer base, geography, industry served, etc. was absent. It's like monocrop farming: A pest that comes in and attacks your one crop can wipe you out more easily than if you grow a variety of crops.
AustinDev 4y ago
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. They could have taken a look at inflation and the glut of liquidity and bought shorter dated bonds but instead they locked them money up for 3-10 years at paltry interest rates.
reducesuffering 4y ago
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. No, they bought MBS, yielding 1.6% at the time, which aren't conservative. What they should have done is bought 1 month - 1 year Treasuries, yielding 0.10%. Then they couldn't give out above-market interest returns, in excess of 0.5% compared to other banks, which SVB depositors pocketed during the upside, and then failed to realize the risk during the downside, being bailed out by the government.
wunderland 4y ago
Whenever a contradiction of capitalism arrises like this, the problem is always too much interference in the markets, and the solution is always more unfettered capitalism.
garyfirestorm 4y ago
Just saying not all other banks are collapsing like SVB. They were over leveraged and played a risky game. That came to bite them. So it’s important to point blame at the issue and if 98% of other banks didn’t engage in this behavior then it’s not fed issue or systemic issue.
TuringNYC 4y ago
>> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. Once the losses on their bonds approached the totality of the SVB equity tier, they should have either accepted the loss, or they should have hedged it away (with an interest rate swap, and locked in a loss.) At that point they would have had to declare the loss (not hide behind AFS accounting treatment) -- and taken a massive equity hit. However, in the above case, the depositors would not have been at risk. SVB would have lost equity value, but would be a going concern. Instead, once SVB's unrealized losses piled up, SVB rolled the dice hoping things would turn and effectively bet depositor money. This is not the customers/depositors' fault. This is not the government's fault. This is not the Fed's fault. This is the fault of bank management, specifically risk+accounting+exec teams.
- yunwal 4y ago
  > This is not the customers/depositors' fault. To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility
  - TuringNYC 4y ago
    >> To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility Note that many customers had their excess funds not in bank deposits, but in US treasury bills / short term bonds via a Money Market Sweep Account. Except it turned out the assets of the MM account were not in their name but in SVB's name via a custodial account, and hence is locked up, and would have been locked up in bankruptcy.
dools 4y ago
> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. They did try to originate more credit, but couldn't. But you don't "loan out deposits". Having deposits makes your credit creation more profitable because the cost of that capital is zero, but you only need reserves sufficient to satisfy net flows of funds. EDIT: Also note that if the bank buys government bonds, the central bank will always buy them back (or at the very least lend you money against them very inexpensively). Government securities satisfy liquidity requirements.
deleted 4y ago
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exmicrosoldier 4y ago
They had other choices - they could have lowered the interest rate they return to account holders as more and more deposits came in. They could have lowered their profit guidance to shareholders instead of taking actions that wiped them out. As I understand it, the reason they failed is because they gambled on interest rates staying low and chased returns to maximize profits to shareholders. Shareholders deserve to lose money when they are pushing - or even remaining silent on - increasingly risky corporate behaviors as absentee owners.
jmull 4y ago
> it is clear that the root cause of the problems is the actions of the government and the FED That's not clear to me. I think the purpose of banks is to handle funds well. If a bank is "made" to "see itself with a glut of funds" it's needs to be able to figure out how to handle that. I'm not endorsing the last several decades of federal monetary policy, but regardless, it doesn't make senses that it should necessarily focus on making things simple for regional banks.
jmyeet 4y ago
> it is clear that the root cause of the problems is the actions of the government and the FED. No it's not. SVB bought 10 year MBS a couple of years ago to hold capital. They could've instead just rolled 90 day Fed debt and thus have been largely immune to interest rate changes. What they did was they took a risk with custodial assets. This is 100% the bank's fault. Why did they do that? Because 10 year MBS had a higher yield than 90 day debt. So they took a risk. Why? For the benefit of executives and shareholders. SVB did this to themselves, possibly with Thiel instigating a bank run for whatever reason.
GavinMcG 4y ago
Putting all their eggs in an illiquid basket was not “conservative” and the interest rate exposure they had for some time was not unforeseeable.
anigbrowl 4y ago
You understand the fundamental problems here and have chosen to share your insights for free. Banks have professional employees who are paid decent money to make these kind of risk assessments even more rigorously. Why would we accept the idea that they can get by with being less objective? I am not an investor at all and even I understand that when the Fed is raising rates to control inflation portfolio owners need to rebalance their asset mix as the financial environment changes. Stop giving these guys a pass just because of your residual (and justifiable) skepticism about fiscal/monetary policy. I have similar doubts about how government manages public finances, but I also know that depending on a low-yield bond purchased before a pattern of graduated interest rate hikes is gonna leave you with a cash flow problem.
- mturmon 4y ago
  > Stop giving these [bank] guys a pass... Indeed. Greg Becker, the CEO of SVB, was a member of the Board of Directors of the San Francisco Fed, up until last Friday. If anyone had some insight about what federal monetary policy was doing, he should have.
  - yunwal 4y ago
    > Greg Becker, the CEO of SVB, was a member of the Board of Directors of the San Francisco Fed Isn't this like a massive conflict of interest? How is this legal?
    - anigbrowl 4y ago
      No. The Federal Reserve regional banks each have an independent board drawn from a mix of member banks and community stakeholders. Becker resigned or was ousted from his Fed seat on Friday, and ld not have taken part in negotiations - which would not, in any case, be conducted by the board.
TheOtherHobbes 4y ago
It's fascinating how so many of these unfortunate events seem to be explained as "You can't seriously expect us to have a professional understanding of financial risk. We're just a bank."
MrMan 4y ago
[flagged]
- dang 4y ago
  We've banned this account for breaking the site guidelines repeatedly and ignoring our requests to stop. Regardless of how right you are or feel you are, you can't attack other users or post abusively the way you've been making a habit of. If you don't want to be banned, you're welcome to email hn@ycombinator.com and give us reason to believe that you'll follow the rules in the future. They're here: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html. https://news.ycombinator.com/item?id=35011402 https://news.ycombinator.com/item?id=35011402 (March 2023) https://news.ycombinator.com/item?id=30880163 https://news.ycombinator.com/item?id=30880163 (April 2022) https://news.ycombinator.com/item?id=26116788 https://news.ycombinator.com/item?id=26116788 (Feb 2021) https://news.ycombinator.com/item?id=25773589 https://news.ycombinator.com/item?id=25773589 (Jan 2021)
nova22033 4y ago
>a bonanza created by the authorities Are most people here too young to remember the Global Financial Crisis of 2008?
MrMan 4y ago
this is a lie, you are trying to deflect blame on to the Fed to cover for the incompetence of the VCs their companies and the SVB bank. and the upvotes show how all your stupid peers in the tech world would rather tell themselves these lies than face up to their collective ignorance and hubris.
neilwilson 4y ago
"Now, SVB, loaded with money, could have tried loaning it like crazy" It couldn't because that's not how banks works. Banks create deposits by making loans. When external deposits show up, they show up with the equivalent loan already - to the central bank in the shape of banking reserves. What SVB did, foolishly, was to do a floating to fixed exchange at probably the worst possible time and at too high a price. Once a bank's income drops below that required to fulfil its cash letter with the Fed (ie pay the rate of the lender of last resort), it is finished. Hence the FDIC resolution once the cheap money went out the door. Vulnerability to a bank run comes from not being able to pay the going rate at the Fed.

olivermarks 4y ago

It was their unwise bet on ten year T bonds that got SVB into difficulties, a far larger societal economic issue than is being acknowledged. 'This decade’s learning: bonds aren’t a universally safe asset class.' ...the US federal reserve are playing a dangerous game battling the inflation they enabled with rate hikes http://www.brooock.com/a/svb-collapse-exposes-cracks-in-economy http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...

mhb 4y ago
What is the larger issue? That people buying bonds don't understand that their value drops when interest rates go up and that if you might need the money from the bonds before the bond matures you need to hedge for that?
- olivermarks 4y ago
  From the link I posted: 'What this means going forward An unintended side effect of the Federal Reserve’s rate hikes is that many banks and institutions are holding an unfathomable amount of low-yield debt that is now worth far less than it was a year ago. We went from a world where 100-Year Austrian bonds would pay only 0.39% yields, to one where we’re now concerned about 8-9% annual inflation, in just two years. If institutions rightfully start deeming long-dated bonds to be a risky asset that isn't safe to hold on sensitive balance sheets, we could see bond premiums rise for these longer-dated bonds, raising the cost of capital for companies and governments alike...'
  - mhb 4y ago
    Safe is doing a lot of work here. Government bonds are safe from default. Not from changing value when interest rates change.
  - JohnFen 4y ago
    Don't see how that means it's the fed's fault, though. Anyone who has even halfway paid attention to markets over the just the past few decades should be acutely aware that markets can change very quickly. Expecting current conditions to last forever, or that you will always have notice that change is afoot, is just insanity or incompetence.
- cal5k 4y ago
  At the time they were purchased, central banks around the world were going out of their way to assure people that rates would not be going up for a long time. Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".
  - olivermarks 4y ago
    It was naive, lazy and dangerous of SVB to assume in a 10 year window nothing would change IMO
    - mhb 4y ago
      Don't forget greedy. Not hedging saves money.
  - eep_social 4y ago
    Central banks have been telegraphing rate increases for over a year. Your statement might have been true on the day of the purchase but SVB had an entire year to fix their mistake and failed to do so.
shagie 4y ago
The bonds are worth exactly what they thought they'd be worth if held. There is no bet on that part. The purchase of 10 year bonds also implied a bet that faster maturing bonds won't be more valuable. As shown in https://fred.stlouisfed.org/series/T10Y3M https://fred.stlouisfed.org/series/T10Y3M that is no longer a true statement and that bet failed. It was a true statement for about 15 years with one flirtation in August of 2019. It appears that this is is more than a flirtation and more of a dip than past events have been. The bonds are as secure as ever - just that more money can be made faster in something other than the 10 year bonds. If (and that's two letters with a lot of weight) we had continued the tech growth seen in the early part of the pandemic and money flowing into SVB, their plan would have worked (or worked better at least), but they failed to account for the possibility that interest rates would go up and that people would be hesitant to fund startups and the startups would be taking money out for payroll faster than they put it in from new rounds of funding.
- pg314 4y ago
  > The bonds are worth exactly what they thought they'd be worth if held. That's wrong. A 10 year treasury bond with a .60% you bought in august 2020 is now worth significantly less. Whether you hold it or not is irrelevant. If you disagree, I'm willing to give you one, if you give me a 7 year treasury bond at the current interest rate of 3.86%.
  - shagie 4y ago
    Has the amount that it pays when it reaches maturity changed? The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021). And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%. https://www.marketwatch.com/investing/bond/tmubmusd03m?countrycode=bx https://www.marketwatch.com/investing/bond/tmubmusd03m?count... But that's if you were trying to sell it now. The amount it will pay at maturity remains unchanged and in 10 years it will be worth exactly the same no matter what the financial history that brought it to that point was.

fnordpiglet 4y ago

Well, I’d argue that they should have hedged their rates risk especially as inflation started to tick up. They just don’t have good risk managers. But that said, if there hadn’t been a run the causal issues would have been a foot note in a quarterly filing. Everyone is acting as if SVB were Lehman or Bear Sterns. They just got caught with their pants down and everyone ran over to take a picture and post it on Twitter.

el_nahual 4y ago
I saw on another HN thread that when a bank has bonds designated as "hold to maturity" they are not allowed to hedge against rate risk--because there isn't any! The bonds will be held til expiration for purposes of the coupon, not to trade.
ralph84 4y ago
Why hedge when we privatize the profits and socialize the losses? SVB execs sold tens of $millions in stock before the failure. Are the execs going to be forced to return the compensation they received for showing higher profits by not hedging?
- psychlops 4y ago
  Don't forget they also paid bonuses the morning they failed.
  - fnordpiglet 4y ago
    This is the time of the year when banks pay bonuses for the prior years work. My understanding is it was scheduled annually at the same time and happened to occur the day they went insolvent. Frankly I’m down with Nancy in client confirm generation getting her bonus. The senior managers all got fired and their comp clawed back, so seems legit.
    - psychlops 4y ago
      I've no problems with Nancy, she's pretty cool. Firing isn't really enough, loss of license and industry bans should be on the table as well as criminal investigations for fraud and negligence of custodial funds.

sdfghswe 4y ago

> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. Sure excess liquidity was necessary for this behavior to be possible, but it wasn't the cause. That's like saying the person who leaves their car unlocked is the root cause of the theft. No, the thief is. "Your honour... I plead not guilty, the car was unlocked."

fnordpiglet 4y ago
I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. The mark to market only comes relevant if you’re experiencing a run, which they were holding sufficient regulatory liquidity for. They should have hedged their rates risk a bit better, especially as inflation became even a whisper, but if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit.
- sdfghswe 4y ago
  > I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?
  - beezle 4y ago
    Not all of the capital was in a HTM portfolio. SVB I'm sure had a good handle on the typical flow of funds and based off of that with some margin of error (that was obviously not everyone wants everything today).

twblalock 4y ago

It's also very unlikely that SVB is the only bank that made those kind of investments back when rates were low.

ajross 4y ago

> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. That's revisionist and silly[1]. Spending all your liquidity on long term bonds isn't "conservative" if you're a bank. It's not your money! It's your customer's money that you're just holding for them, and you just dropped it all in a vehicle that doesn't mature for 10 years. What if the customers want their money back? Yeah, we just found out. No, the conservative option if you can't invest it is just to sit on it. That's what banks do. They sit on other people's money. That they are allowed to spend some of that money on speculation is a reasonable optimization, but it's just that. Obviously just sitting on it wasn't going to get the returns they'd promised to investors though. So they placed bets instead. [1] And I'm not going to touch the idea that the "authorities" somehow forced them into this. No. Just no.

deleted 4y ago
[deleted]
initplus 4y ago
The government actually wants banks to speculate with customer funds. You might think that the safest bank would be one that doesn’t do anything with customer deposits, just sits on them. Well this “safe bank” actually falls foul of US banking regulation - there are regulatory requirements for minimum levels of “speculation“ as a bank. Now clearly SVB got in over their heads here with risk. But just sit on all the money isn’t a legal alternative.
wins32767 4y ago
Do you really think putting it out as mortgages would lock the money up for a shorter duration? SVB had a reasonable amount of liquidity for normal stresses. They'd gotten close to breaching their regulatory cushion for spare capital which was why they were trying to recapitalize. However once the VCs panicked started a bank run, they folded. Just like literally any bank would. ~45b of net withdrawals in a single day is going to cause any bank significant trouble.
- lscharen 4y ago

swatcoder 4y ago

You can chase root causes all the way back to some Roman prelate if you want. But at some point, there was a cause very close to the material problem you’re looking at. In this case, that’s the compounded risk that SVB took on in courting a concentrated clientele and trying to balance their books with unusually long-term purchases. If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems.

ramesh31 4y ago
>If you step past that and look at the government role, that’s a fine starting point for discussion about systemic issues in our society, but doesn’t absolve SVB of being the most proximate “root cause” of their own problems. I think it's time we stop imagining that financial institutions will ever do anything that they are not legally required to do. This was a failure of regulation. Calling it personal responsibility is about the same as getting mad at the dog for getting into the garbage. It's our fault for not taking out the trash.
- tracker1 4y ago
  I think the failure, in terms of regulation, is holding accountability in the first place when they violate existing laws and SEC regulations. Not to mention, ever actually holding executives and boards to account in terms of liability against their personal wealth.
  - lmm 4y ago
    It used to be that the likes of accountants and lawyers weren't allowed to be limited liability corporations - they had to be run as partnerships, with unlimited personal liability. (Sadly, this rule was done away with, and shortly after that we got Enron). Maybe the same should apply to banks.

tppiotrowski 4y ago

I don't know much about finance and have never worked in banking but anyone more than 40 years old should know that fed rates can go into double digits. It's not like a black swan. It's happened before so I'm a bit surprised people are so shocked by the feds moves.

psychlops 4y ago
Not taking the side, but there is a strong belief that the fed can't raise rates much more as it needs to inflate away a large portion of debt to get the economy back on track. It's unlikely we will see a volcker economy halting maneuver anytime soon.

jonnycomputer 4y ago

Always want someone else to blame, and why not the Fed. Nobody likes them.

Workaccount2 4y ago

>decided to go the conservative way and buy bonds. While strictly true, they did decide to go with long dated bonds that would tie up those funds for years potentially. Typically banks will buy bonds of shorter duration. SVB however couldn't resist the higher interest rates of those long dated bonds. IIRC they had an average maturity of six years, whereas most banks are typically under one year.

Waterluvian 4y ago

I appreciate you're just playing Devil's Arbalest here, but this feels like the least libertarian take possible. It's the government's fault that my customers are handing me so much money to manage and I managed it poorly? Admittedly, I still don't fully understand the link between investing too cautiously and seeing poor returns and there being a run on the bank.

Swenrekcah 4y ago
The link is that the investments went down in value and so the bank couldn’t sell enough of them when they suddenly needed a lot of money to pay out deposits. I agree it’s peculiar to phrase it as the government is to blame. Except perhaps to the degree that the government in 2018 relaxed risk test requirements that would otherwise have included SVB, those requirements were originally set after and in response to the 2008 collapse. But ultimately the blame lies with the bank executives.

khyryk 4y ago

Loading up on bonds when rates are rock bottom instead of bills is asking for trouble. Sure, when yields are at averages or historic highs, back the truck up; otherwise, there's not much difference between yielding 0% and 1%, but a lot of difference in liquidity. As an aside, I remember in recent times various institutions, either by law or voluntarily, loading up on long term bonds at 0% +/- 0.5% bonds. I'm sure that's going to be a fun situation should they face even a slight liquidity crisis of, say, more retirees pulling money out than there are young people depositing into pensions and whatnot.

jurassic 4y ago
Can you explain the difference between bills and bonds and why the difference was significant in this case? For myself and probably a lot of engineers reading this comment, it seems like inside baseball.
- khyryk 4y ago
  Bills are shorter duration, bonds are longer duration. You can look up the terms to get exact time ranges. When the yields for both are very low, there's next to no upside to holding onto the low yield for longer. The downside is that if one is in critical need of cash immediately, nobody wants the old low-yield (compared to current yields) bonds and will only buy them at a discount. For bills, due to the shorter duration, extra liquidity is built-in.

NovemberWhiskey 4y ago

>decided to go the conservative way and buy bonds. Just because government bonds are unlikely to default, that doesn't make acquiring them "conservative". If you're a bank, with an entire function dedicated to making sure that assets match liabilities ("treasury"), and that ought to be aware of things like "DV01" and "duration risk", then you're supposed to know this.

worksonmine 4y ago

SVB locking money they might need access to is the FEDS fault do I understand you correctly? Did they hold a gun to their head? I'm not saying they're doing anything different than their competitors, but that's a stupid excuse. The only thing that's broken is the financial system. A customer should be aware when depositing money that that money might be locked away, and agree to those terms, and get a cut. This is SVB gambling and losing the bet, simple as. Everything else is just a pathetic excuse, don't enable it. Just look at the term "excess liquidity", that's newspeak. I expect the bank to have my 100$ the day I ask for it. I'm not a using bank because I want to, but if I store it under my bed I get to deal with the IRS. They make themselves necessary to live, then expect my deposits to work for them.

scrozier 4y ago
Why/how does the IRS care if you store it under your bed? Serious question.
- notch898a 4y ago
  CTR and/or SAR and/or form 8300 and/or Fincen 105 when you actually spend it, either directly or they investigate and find you're the second link back. And if you escape civil action by IRS, the fed or local government can simply take it as civil asset forfeiture without accusing you of wrongdoing. .gov really really hates big piles of printed currency and if they find out you have it the temptation for them to take it can become overwhelming to various entities that survive off of the taking.
- dboreham 4y ago
  > Serious question. Because criminals/tax evaders do that.
  - scrozier 4y ago
    That doesn't answer my question. The IRS taxes income, not assets. They don't care where your money is.

avn2109 4y ago

>> "... decided to go the conservative way and buy bonds." Sure but they could have bought shorter bonds instead of a bunch of ten years, there's no reason to take so much duration risk. Every intro to financial engineering class includes a "build a Treasury ladder" exercise, it's not rocket science.

miguelazo 4y ago

Putting aside the glut of misallocated cheap money, isn't the deregulation that allowed this (which SVB pushed for, along with many other banks/Wall Street parasites) precisely the type of policy that Libertarians advocate?

convolvatron 4y ago
like always, the market is still insufficiently free to work its true magic. woulda been fine if the fed hadn't been screwing around and ruining things
fidgewidge 4y ago
Definitely not. Most libertarians I've encountered want hard money i.e. full reserve banking with no central bank money printing. In FRB you cannot have bank runs and with a restricted central bank which can't print more money you can't have ZIRP and the wild swings all over the financial system that it had caused. Instead you have a system in which bank accounts don't pay interest but that's acceptable in many cases because there also isn't any inflation, and if you want a return you invest in a fund that exposes the liquidity constraints in its terms. The above scheme requires far less government regulation as well, but it does need some, mostly an extension of the idea of theft to encompass fractional reserve banking.
- miguelazo 4y ago
  I suppose some or even most libertarians would agree with that, although that system is just rigidly regulated in a different way. I think the classic Libertarian model would be private banks, totally disassociated from government. Further, full reserve banking and fixed supply monetary systems are the stuff of fantasies. Totally infeasible in the real world.
  - fidgewidge 4y ago
    They're both entirely feasible. The usual canard is that without fractional reserve there is no lending or not "enough" lending, but with full reserve there is still lending of course because people would like a return on their assets. There would be less bad lending but that's what we want, even if it leads to a temporary drop in GDP.

originalcopying 4y ago

> Being called a libertarian would be an enormous source of shame and disgust for my mom. But you are not your mom. you don't have to share on the disgust and shame, however you may chose to do so if you want. the points being: the disgust is your mom's not necessarily yours. whether to partake on your parent's shame of being called a libertarian is a choice.

elzbardico 4y ago
A choice that I deliberately made years ago.
- originalcopying 4y ago
  good for you! therapy for me has been about finding subconscious choices like those on the other hand, sorry for you... why would one choose to feel negative emotions like shame?
- ihateyouall123 4y ago
  Yeah this is just weird. Go seek therapy

rufus_foreman 4y ago

>> even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED From SVB's bio of President and CEO Greg Becker at https://www.svb.com/profile/greg-becker https://www.svb.com/profile/greg-becker: "He is a Class A Director for the Federal Reserve Bank of San Francisco"

juve1996 4y ago

> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. The fact that many other banks were prescient disproves this point handily.

yunwal 4y ago
This is obviously also stupid, but no other bank has the vast majority of their clientele clued into a single group chat discussion

dpweb 4y ago

Glut yes, but that not the cause - nor was the bank run. Simply, hubris. They bet billions on zero interest rate policy and didn't hedge that bet. Glut or no glut, would have failed just like LTCM or any other huge bets that failed to consider tail risk.

WinstonSmith84 4y ago

Reasonably, the least we could expect from a bank is to keep the money we give to them, instead of gambling it. But even that, despite all the audits, is not a given, as a matter of fact. I wish to see the proof of reserve implemented for traditional banks, or the trust will just keep eroding...

mathattack 4y ago

It’s not a matter of being prescient. They made an explicit bet. “Rates won’t go down, so let’s get as much yield as possible via long term securities” They could have just as easily done what most other financial institutions do: match the duration of their liabilities with the duration of their bonds. If people can quickly pull their money, then keep the money in short term bonds and money market funds. The problem with that is it’s harder to make big bonuses when you’re being fiscally conservative.

dboreham 4y ago
They also had to pay out significant interest to depositors. The graph of those outflows looks like a hockey stick. So seeking a high return on their assets wasn't unreasonable. Presumably if they had paid low interest on deposits, depositors would have moved their money to some other institution, leading to the same outcome.
- mathattack 4y ago
  They chose to. They didn’t need to. If they were getting too many deposits, they could lower the interest they paid on them. The problem is they bought a bunch of long dates securities yielding 1.5-2% and when the deposits flooded in they started paying more than 1.5-2%. They have been better off buying T bills or something else without duration risk and paying something less than Fed Funds. This is what most banks do.

kqvamxurcagg 4y ago

You fail to understand the actual reason for their insolvency. Their risk team chose to buy 10 year treasury bonds instead of 1 year treasury bonds. This is because 10 year bonds offered a higher interest rate (more profit for SVB) but at a much much higher risk. The losses were then unrecognised, hoping the market would turn. Only when it was too late did SVB admit defeat. With their equity gone, they attempted a band aid with an equity raise but the market quite rightly recognised the bank’s shares were worthless. Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail. Don’t blame SVB’s failure on a bank run. SVB caused their own failure with their own risk management policies and it’s insolvency was probably inevitable for months.

concordDance 4y ago
> Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail. Jail seems extreme for an error in judgement that neither killed nor maimed anyone.
- nerdponx 4y ago
  It nearly killed billions of dollars in real value and required untold thousands of taxpayer-funded employees working through the weekend to unfuck the situation. If I drive recklessly, I am still guilty of reckless driving even though I didn't hit anyone or anything.
  - ihateyouall123 4y ago
    [flagged]
    - nerdponx 4y ago
      I see in your post history that you're a comedian, so I can only hope that this is meant to be funny, because the irony here is layered on so thickly.
    - concordDance 4y ago

machina_ex_deus 4y ago

"It turned out that one of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities" And I kind of agree. Yes, the mistake was not hedging MBS and treasuries interest rates. But are they really the only bank in the world doing that mistake? What truly made it fatal is the VCs. That's also why nobody is coming to buy them. The speed at which the bank run happened, showed exactly how much they valued the bank. If you're swimming with sharks, it's a big mistake to bleed. But let's not pretend the sharks are innocents. Bleeding isn't usually so fatal. Which is why I don't think the sharks deserve a bailout.

yunwal 4y ago
> But are they really the only bank in the world doing that mistake? I’m not sure that looking to the financial sector for examples of fiscal responsibility is actually reasonable, but I’d guess that they’re the only bank that’s “too-big-to-fail” that could possibly fail because of a single slack discussion.
- lmm 4y ago
  Meh. Larry Fink could probably kill a non-big-four bank single-handedly if he really wanted to. Wealth is concentrated right now, and power even more so.

UncleOxidant 4y ago

> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. Yes, the FED did leave interest rates too low for much too long. Rates should probably have been in the 3 to 4% range prior to the pandemic which means they should've been tightening more since about 2015. But lowering to essentially 0 during the early stage of the pandemic in order to keep us out of another great depression seems like the right decision. As for the SVB downfall: there's plenty of blame to go around. Yes, SVB should have diversified their bond buys (more shorter term durations mixed in). And as mentioned above, the Fed bears some blame. But so do the VCs who panicked startups into a bank run last week - the VCs who probably strongly recommended that their startups put their money in SVB in the first place. And the startups themselves could have been doing a better job spreading their money around to other banks in order to minimize their risk in case of bank failure (admittedly, most startups probably don't have this top of mind as they're busy with other things). Ultimately, the entire idea of a Silicon Valley Bank that was essentially just serving VC funded startups was probably a bad one from the start. Diversification of customer base, geography, industry served, etc. was absent. It's like monocrop farming: A pest that comes in and attacks your one crop can wipe you out more easily than if you grow a variety of crops.

AustinDev 4y ago

> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. They could have taken a look at inflation and the glut of liquidity and bought shorter dated bonds but instead they locked them money up for 3-10 years at paltry interest rates.

reducesuffering 4y ago

> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. No, they bought MBS, yielding 1.6% at the time, which aren't conservative. What they should have done is bought 1 month - 1 year Treasuries, yielding 0.10%. Then they couldn't give out above-market interest returns, in excess of 0.5% compared to other banks, which SVB depositors pocketed during the upside, and then failed to realize the risk during the downside, being bailed out by the government.

wunderland 4y ago

Whenever a contradiction of capitalism arrises like this, the problem is always too much interference in the markets, and the solution is always more unfettered capitalism.

garyfirestorm 4y ago

Just saying not all other banks are collapsing like SVB. They were over leveraged and played a risky game. That came to bite them. So it’s important to point blame at the issue and if 98% of other banks didn’t engage in this behavior then it’s not fed issue or systemic issue.

TuringNYC 4y ago

>> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. Once the losses on their bonds approached the totality of the SVB equity tier, they should have either accepted the loss, or they should have hedged it away (with an interest rate swap, and locked in a loss.) At that point they would have had to declare the loss (not hide behind AFS accounting treatment) -- and taken a massive equity hit. However, in the above case, the depositors would not have been at risk. SVB would have lost equity value, but would be a going concern. Instead, once SVB's unrealized losses piled up, SVB rolled the dice hoping things would turn and effectively bet depositor money. This is not the customers/depositors' fault. This is not the government's fault. This is not the Fed's fault. This is the fault of bank management, specifically risk+accounting+exec teams.

yunwal 4y ago
> This is not the customers/depositors' fault. To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility
- TuringNYC 4y ago
  >> To be clear, it's not the customers' fault, but they also shouldn't expect FDIC insurance to cover any of their deposits beyond $250k. Whatever happens to their personal money is their responsibility Note that many customers had their excess funds not in bank deposits, but in US treasury bills / short term bonds via a Money Market Sweep Account. Except it turned out the assets of the MM account were not in their name but in SVB's name via a custodial account, and hence is locked up, and would have been locked up in bankruptcy.

dools 4y ago

> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. They did try to originate more credit, but couldn't. But you don't "loan out deposits". Having deposits makes your credit creation more profitable because the cost of that capital is zero, but you only need reserves sufficient to satisfy net flows of funds. EDIT: Also note that if the bank buys government bonds, the central bank will always buy them back (or at the very least lend you money against them very inexpensively). Government securities satisfy liquidity requirements.

deleted 4y ago

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exmicrosoldier 4y ago

They had other choices - they could have lowered the interest rate they return to account holders as more and more deposits came in. They could have lowered their profit guidance to shareholders instead of taking actions that wiped them out. As I understand it, the reason they failed is because they gambled on interest rates staying low and chased returns to maximize profits to shareholders. Shareholders deserve to lose money when they are pushing - or even remaining silent on - increasingly risky corporate behaviors as absentee owners.

jmull 4y ago

> it is clear that the root cause of the problems is the actions of the government and the FED That's not clear to me. I think the purpose of banks is to handle funds well. If a bank is "made" to "see itself with a glut of funds" it's needs to be able to figure out how to handle that. I'm not endorsing the last several decades of federal monetary policy, but regardless, it doesn't make senses that it should necessarily focus on making things simple for regional banks.

jmyeet 4y ago

> it is clear that the root cause of the problems is the actions of the government and the FED. No it's not. SVB bought 10 year MBS a couple of years ago to hold capital. They could've instead just rolled 90 day Fed debt and thus have been largely immune to interest rate changes. What they did was they took a risk with custodial assets. This is 100% the bank's fault. Why did they do that? Because 10 year MBS had a higher yield than 90 day debt. So they took a risk. Why? For the benefit of executives and shareholders. SVB did this to themselves, possibly with Thiel instigating a bank run for whatever reason.

GavinMcG 4y ago

Putting all their eggs in an illiquid basket was not “conservative” and the interest rate exposure they had for some time was not unforeseeable.

anigbrowl 4y ago

You understand the fundamental problems here and have chosen to share your insights for free. Banks have professional employees who are paid decent money to make these kind of risk assessments even more rigorously. Why would we accept the idea that they can get by with being less objective? I am not an investor at all and even I understand that when the Fed is raising rates to control inflation portfolio owners need to rebalance their asset mix as the financial environment changes. Stop giving these guys a pass just because of your residual (and justifiable) skepticism about fiscal/monetary policy. I have similar doubts about how government manages public finances, but I also know that depending on a low-yield bond purchased before a pattern of graduated interest rate hikes is gonna leave you with a cash flow problem.

mturmon 4y ago
> Stop giving these [bank] guys a pass... Indeed. Greg Becker, the CEO of SVB, was a member of the Board of Directors of the San Francisco Fed, up until last Friday. If anyone had some insight about what federal monetary policy was doing, he should have.
- yunwal 4y ago
  > Greg Becker, the CEO of SVB, was a member of the Board of Directors of the San Francisco Fed Isn't this like a massive conflict of interest? How is this legal?
  - anigbrowl 4y ago
    No. The Federal Reserve regional banks each have an independent board drawn from a mix of member banks and community stakeholders. Becker resigned or was ousted from his Fed seat on Friday, and ld not have taken part in negotiations - which would not, in any case, be conducted by the board.

TheOtherHobbes 4y ago

It's fascinating how so many of these unfortunate events seem to be explained as "You can't seriously expect us to have a professional understanding of financial risk. We're just a bank."

MrMan 4y ago

[flagged]

dang 4y ago
We've banned this account for breaking the site guidelines repeatedly and ignoring our requests to stop. Regardless of how right you are or feel you are, you can't attack other users or post abusively the way you've been making a habit of. If you don't want to be banned, you're welcome to email hn@ycombinator.com and give us reason to believe that you'll follow the rules in the future. They're here: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html. https://news.ycombinator.com/item?id=35011402 https://news.ycombinator.com/item?id=35011402 (March 2023) https://news.ycombinator.com/item?id=30880163 https://news.ycombinator.com/item?id=30880163 (April 2022) https://news.ycombinator.com/item?id=26116788 https://news.ycombinator.com/item?id=26116788 (Feb 2021) https://news.ycombinator.com/item?id=25773589 https://news.ycombinator.com/item?id=25773589 (Jan 2021)

nova22033 4y ago

>a bonanza created by the authorities Are most people here too young to remember the Global Financial Crisis of 2008?

MrMan 4y ago

this is a lie, you are trying to deflect blame on to the Fed to cover for the incompetence of the VCs their companies and the SVB bank. and the upvotes show how all your stupid peers in the tech world would rather tell themselves these lies than face up to their collective ignorance and hubris.

neilwilson 4y ago

"Now, SVB, loaded with money, could have tried loaning it like crazy" It couldn't because that's not how banks works. Banks create deposits by making loans. When external deposits show up, they show up with the equivalent loan already - to the central bank in the shape of banking reserves. What SVB did, foolishly, was to do a floating to fixed exchange at probably the worst possible time and at too high a price. Once a bank's income drops below that required to fulfil its cash letter with the Fed (ie pay the rate of the lender of last resort), it is finished. Hence the FDIC resolution once the cheap money went out the door. Vulnerability to a bank run comes from not being able to pay the going rate at the Fed.