7 ms·

They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since tha

They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since that was one of the lowest risk assets they could invest in and still get enough spread vs their deposits to remain a viable business. It’s strange days when that is considered piling on risk. While there wasn’t counterparty risk with those assets, there was duration risk. And their mistake seems to have been not selling those the instant the Fed publicly committed to killing inflation with higher interest rates. It should have been clear to them that their exposure to duration risk was rising, and they needed to restructure back in 2021 or early 2022 to mitigate that.

jandrese 4y ago
The rumor I read is that SVB booked those treasuries in some weird way that prevented them from being sold but also prevented them from having to pay taxes on the treasures. Otherwise you are totally right that it should have been no problem to cover the shortfall by selling off some of the treasuries, even though they would have had to take a haircut on them thanks to the Fed jacking the rates so fast.
kasey_junk 4y ago
Their a&l committee told them to change their asset mix in 2020 and they didn’t to preserve their profits[0]. All bank risk assessment regimes measure both credit and interest rate risk. Measuring 1 in isolation is idiotic for now obvious reasons. [0] https://www.bloomberg.com/news/articles/2023-03-13/svb-failure-sparks-blame-game-over-trump-era-regulatory-rollback https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
jjoonathan 4y ago
2008 is an extremely low bar. They still piled on risk. > that was one of the lowest risk assets they could invest in and still get enough Was it? They had enormous deposit inflows and were struggling to scale, so their costs should have been undersized by default. They really ought to have been able to survive off the pennies that weren't in front of the steamroller.
lackbeard 4y ago
It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.
- tptacek 4y ago
  They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?
  - lackbeard 4y ago
    I guess that's what you normally do when you're overweighted that asset class and you must cover withdrawals!
  - basseq 4y ago
    No, and that's the point. I understand that banks mark long-term bonds as hold-to-maturity (and only then can list them at par on their balance sheet). But they actually have to hold them. Otherwise, they have to mark them to market, and any sales of HTM bonds flip the entire tranche over to MTM. So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet. E.g., a simple balance sheet: Assets Qty. Par Market Total ----- Mark To Market Bonds 10k $1k $0.8k $8Mn Hold To Maturity Bonds 1M $1k $0.8k $1Bn Total $1.08Bn But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price. But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this: Assets Qty. Par Market Total ----- Mark To Market Bonds 990k $1k $0.8k $792Mn Total $792Mn $16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.
lordfrito 4y ago
It's been reported [1] (no paywall [2]) that executives were aware of the risk and continued to purchase higher yielding assets in spite of internal protests. The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement. From the article: In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there. Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings. Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late. [1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failure-sparks-blame-game-over-trump-era-regulatory-rollback https://www.bloomberg.com/news/articles/2023-03-13/svb-failu... [2] https://archive.is/HqVWn https://archive.is/HqVWn
- digitaltrees 4y ago
  Thank you for posting. This actually changes my view entirely and makes many of my other posts invalid.
  - lordfrito 4y ago
    Yeah I feel this point isn't well known, but likely will be soon. I love HN because many of us actually listen to each other and debate in good faith, helping each other sharpen our views. Glad you found it helpful.
    - SkyMarshal 4y ago
      Yes, same here, thanks. It’s crazy they were so forewarned and yet did nothing, even having lived through the GFC and knowing how quickly things can go sideways. Just 15yrs and they already forgot, /smh.

jandrese 4y ago

The rumor I read is that SVB booked those treasuries in some weird way that prevented them from being sold but also prevented them from having to pay taxes on the treasures. Otherwise you are totally right that it should have been no problem to cover the shortfall by selling off some of the treasuries, even though they would have had to take a haircut on them thanks to the Fed jacking the rates so fast.

kasey_junk 4y ago

Their a&l committee told them to change their asset mix in 2020 and they didn’t to preserve their profits[0]. All bank risk assessment regimes measure both credit and interest rate risk. Measuring 1 in isolation is idiotic for now obvious reasons. [0] https://www.bloomberg.com/news/articles/2023-03-13/svb-failure-sparks-blame-game-over-trump-era-regulatory-rollback https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

jjoonathan 4y ago

2008 is an extremely low bar. They still piled on risk. > that was one of the lowest risk assets they could invest in and still get enough Was it? They had enormous deposit inflows and were struggling to scale, so their costs should have been undersized by default. They really ought to have been able to survive off the pennies that weren't in front of the steamroller.

lackbeard 4y ago

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

tptacek 4y ago
They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?
- lackbeard 4y ago
  I guess that's what you normally do when you're overweighted that asset class and you must cover withdrawals!
- basseq 4y ago
  No, and that's the point. I understand that banks mark long-term bonds as hold-to-maturity (and only then can list them at par on their balance sheet). But they actually have to hold them. Otherwise, they have to mark them to market, and any sales of HTM bonds flip the entire tranche over to MTM. So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet. E.g., a simple balance sheet: Assets Qty. Par Market Total ----- Mark To Market Bonds 10k $1k $0.8k $8Mn Hold To Maturity Bonds 1M $1k $0.8k $1Bn Total $1.08Bn But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price. But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this: Assets Qty. Par Market Total ----- Mark To Market Bonds 990k $1k $0.8k $792Mn Total $792Mn $16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.

lordfrito 4y ago

It's been reported [1] (no paywall [2]) that executives were aware of the risk and continued to purchase higher yielding assets in spite of internal protests. The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement. From the article: In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there. Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings. Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late. [1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failure-sparks-blame-game-over-trump-era-regulatory-rollback https://www.bloomberg.com/news/articles/2023-03-13/svb-failu... [2] https://archive.is/HqVWn https://archive.is/HqVWn

digitaltrees 4y ago
Thank you for posting. This actually changes my view entirely and makes many of my other posts invalid.
- lordfrito 4y ago
  Yeah I feel this point isn't well known, but likely will be soon. I love HN because many of us actually listen to each other and debate in good faith, helping each other sharpen our views. Glad you found it helpful.
  - SkyMarshal 4y ago
    Yes, same here, thanks. It’s crazy they were so forewarned and yet did nothing, even having lived through the GFC and knowing how quickly things can go sideways. Just 15yrs and they already forgot, /smh.