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It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States G

It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments. I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.

matwood 4y ago
And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine. With that said, it's good they got punished for poor decisions given their depositor profile.
- lazide 4y ago
  That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though? If it was a short period of time (a week?) this was going on, then sure. The emperor darting to the bathroom without his clothes on is unlikely to be a scandal after all. But even if fed rates dropped tomorrow those bonds will not recover to par, because inflation on their principal amounts has already happened, and their interest rates are too low to ever recover back how much they have lost value barring truly exceptional deflation. So unless they somehow come up with even more cash on hand to be able to avoid ever realizing those losses (good luck when everyone starts drawing down savings and boomers start retiring more and more), they’re boned inevitably. Deflation wise, the fed will fight THAT even harder than the current inflation fight they are doing, and that’s relatively easy to combat - print more money. It’s why they’ve been printing money since ‘08. Since the expectation is that inflation will continue for some time of course makes the math and present value even worse, but there is no plausible situation right now where the expected future dollar value of those bonds will be high enough to recoup a large percentage of their purchase value in today’s or a future dates currency. That value is gone.
  - matwood 4y ago
    > That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though? This is banking in general though. Any bank will struggle if a significant portion of deposits suddenly outflow. SVB was unique in that it had relatively large balances concentrated in relatively few depositors. This made it especially susceptible to a bank run. Of course they knew this and should have handled their risk appropriately. Also, according to reports, they were very close to getting bridge financing. The run caused the financing to fall through, and we all saw what happened.
    - lazide 4y ago
      Eh, kinda. There is the run from ‘can’t liquidate fast enough’, and there is the run from ‘can liquidate fast enough, but don’t have enough value if they do’. The first one any bank is susceptible to, the second one is a bad bank issue - and it means that any sustained rate of deposit outflow is going to eventually implode it, as they’ll run out of value at some point regardless of how slow the draw down is. That’s because that second scenario is essentially forced ‘mark to market’, which unlike ‘stress tests’ and regulator driven accounting standards, can’t be gamed. That’s the real issue here. SVB was in the last category, but everyone is pretending it was in the first category because this problem is systemic due to fed reductions in interest rates for so long. We’re trying really hard to not look behind the curtain because it’s too scary. The really interesting thing is easy fed cash has caused this issue globally. Global interest rates have been suppressed everywhere the USD touches, even China. Now that they’re ending, the bill coming due is a global one. That’s why the fed is willing to take all these bonds at par for cash - they recognize they created this mess and don’t want it to spread, as it will implode the system and break the orderly turnaround they are trying to accomplish. Pain spread over years in ways the system can absorb without causing an out of control spiral is the goal. Retirees eating dogfood (or starving), and mobs of angry unemployed 20 something men burning cities are the thing they are trying to avoid.
rufus_foreman 4y ago
>> those bonds were, and still are safe investments No, whether they are safe or not depends on what you are using them for. If you have to mark them to market, they aren't safe investments. If you can hold them to maturity, they are safe investments.

matwood 4y ago

And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine. With that said, it's good they got punished for poor decisions given their depositor profile.

lazide 4y ago
That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though? If it was a short period of time (a week?) this was going on, then sure. The emperor darting to the bathroom without his clothes on is unlikely to be a scandal after all. But even if fed rates dropped tomorrow those bonds will not recover to par, because inflation on their principal amounts has already happened, and their interest rates are too low to ever recover back how much they have lost value barring truly exceptional deflation. So unless they somehow come up with even more cash on hand to be able to avoid ever realizing those losses (good luck when everyone starts drawing down savings and boomers start retiring more and more), they’re boned inevitably. Deflation wise, the fed will fight THAT even harder than the current inflation fight they are doing, and that’s relatively easy to combat - print more money. It’s why they’ve been printing money since ‘08. Since the expectation is that inflation will continue for some time of course makes the math and present value even worse, but there is no plausible situation right now where the expected future dollar value of those bonds will be high enough to recoup a large percentage of their purchase value in today’s or a future dates currency. That value is gone.
- matwood 4y ago
  > That’s a pretty solid ‘as long as no one says the emperor has no clothes, he is fully clothed’ line though? This is banking in general though. Any bank will struggle if a significant portion of deposits suddenly outflow. SVB was unique in that it had relatively large balances concentrated in relatively few depositors. This made it especially susceptible to a bank run. Of course they knew this and should have handled their risk appropriately. Also, according to reports, they were very close to getting bridge financing. The run caused the financing to fall through, and we all saw what happened.
  - lazide 4y ago
    Eh, kinda. There is the run from ‘can’t liquidate fast enough’, and there is the run from ‘can liquidate fast enough, but don’t have enough value if they do’. The first one any bank is susceptible to, the second one is a bad bank issue - and it means that any sustained rate of deposit outflow is going to eventually implode it, as they’ll run out of value at some point regardless of how slow the draw down is. That’s because that second scenario is essentially forced ‘mark to market’, which unlike ‘stress tests’ and regulator driven accounting standards, can’t be gamed. That’s the real issue here. SVB was in the last category, but everyone is pretending it was in the first category because this problem is systemic due to fed reductions in interest rates for so long. We’re trying really hard to not look behind the curtain because it’s too scary. The really interesting thing is easy fed cash has caused this issue globally. Global interest rates have been suppressed everywhere the USD touches, even China. Now that they’re ending, the bill coming due is a global one. That’s why the fed is willing to take all these bonds at par for cash - they recognize they created this mess and don’t want it to spread, as it will implode the system and break the orderly turnaround they are trying to accomplish. Pain spread over years in ways the system can absorb without causing an out of control spiral is the goal. Retirees eating dogfood (or starving), and mobs of angry unemployed 20 something men burning cities are the thing they are trying to avoid.

rufus_foreman 4y ago

>> those bonds were, and still are safe investments No, whether they are safe or not depends on what you are using them for. If you have to mark them to market, they aren't safe investments. If you can hold them to maturity, they are safe investments.