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I leave it to others to judge the validity, but I found Brad DeLong's epithet for Thiel amusing (https://braddelong.substack.com/p/saturday-night-thoughts-on-th
by throwaway81523 4y ago
I leave it to others to judge the validity, but I found Brad DeLong's epithet for Thiel amusing (https://braddelong.substack.com/p/saturday-night-thoughts-on-the-need https://braddelong.substack.com/p/saturday-night-thoughts-on...):
> Even so, SVB knew it had gotten itself into trouble—that it had put too large a share of its assets into long-term Treasuries that it intended to hold-to-maturity, and that while it was notionally hedged against interest-rate duration risk by this hold-to-maturity strategy, that strategy put those assets outside the circle of those available to meet unexpected withdrawals, and so caused liquidity problems. SVB was, I am told by sources who really should know, because they talked to people talking to people doing the deal, that SVB came within twenty minutes of getting enough additional cash to fix likely problems.
> Then chaos monkey Peter Thiel showed up: advising companies to pull their money out of SVB.
- bigtex88 4y agoInsightful writing but that man needs an editor in a bad way.
- mhb 4y ago> notionally hedged against interest-rate duration risk WTF does that mean?
- grumple 4y agoIt means that your bonds having a low interest rate is only a problem if you plan on selling the bonds instead of holding them until maturity.
- jojobas 4y agoNo? If you hold a 1.5% bond to maturity when the cash rate is 4.5% and projected to rise further you lose money in a very literal sense. Also they had to sell some at loss to just keep going before any gossip of trouble.
- SoftTalker 4y agoYou lose earnings. You don’t lose the stake. But when you are forced to sell early, you do lose the stake.
- jojobas 4y agoMoney is money, lost earnings are just as lossy as lost anything else. You could say they'd lose less if they "wait and hold"-ed, but they couldn't afford that, again, even before any hint of a bank run, and the risk exposure was increasing.
- wstuartcl 4y agoyeah in that regard SVB also lost hundreds of billions on trades it could have made optimally in the market with those funds (looking with hindsight). Should you look at the opportunity costs for lost potential gains in this scenario -- yeah. Does it "lose money" -- no, not unless you are forced to sell before maturity. lost earnings are a wish for what could have been, not lost in reality.
- jojobas 4y agoWhen you own a 1.5% 10-year and balance it against a 3% deposit your losses are very real and amount to 15%. If you don't offer 3% deposits you lose clients and your problem just got worse.
- hguant 4y agoBreaking down the full context of the sentence makes it easier to parse >notionally hedged against on paper, SVB had protection from... >...interest-rate duration risk the danger that rising interest rates would mean it lost money on long term bonds at the historic (low) rate... >...by this hold-to-maturity strategy, using a common financial technique that valued the assets in question at their final value, not their current market value... >that strategy put those assets outside the circle of those available to meet unexpected withdrawals however, doing so meant those bonds weren't available if they needed immediate cash
- seabass-labrax 4y agoExcellent explanation; I think understand the whole situation better thanks to you.
- 1adam1200 4y agoGetting a little more specific, notionally hedged means that Assets (the banks investments, originated loans) > Liabilities (deposits). But as you said, on paper.
- dragontamer 4y agoThe 30Y bond was "declared" to be held-to-maturity, meaning you didn't have to book the paper-losses from the Fed Interest rate hikes / change in interest rates over the past year. But of course, that ended up not being true, now was it? So it was only 'notionally' hedged, not truly hedged.
- mhb 4y agoRight, if hedging isn't necessary for those bonds then I guess one way of saying it is that they're "notionally hedged". Another is that they weren't hedged.
- dragontamer 4y agoBe that what it may, declaring some bonds to be "held to maturity" is common practice in banking. However, for _these_ bonds, and so much of it, to be declared "held to maturity" is a mistake. There's always wiggleroom in how accountants add up the numbers. They messed up on this part.
- ALittleLight 4y agoI think it's fair to think of "notionally" as "not actually".
- Scubabear68 4y agoHoping interest rates won’t go up is hardly “notionally hedged”.
- alfalfasprout 4y agoComing within 20 minutes is "too little too late".