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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 l

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.
  - landemva 4y ago
    To allow the bond sale before they had a cash infusion basically flushed the business. I wonder if board of directors had an understanding of how it would detonate the balance sheet. After that, the regulators took the obvious necessary action.
  - UncleEntity 4y ago
    And people saw this is what they were doing and were tweeting about it in advance of all their “problems”.
    - basseq 4y ago
      Sure, though in all fairness, I understand it's standard GAAP accounting for all banks, and your balance sheet has to have a footnote explaining the market value as well. I.e., this particular play or accounting standard is extremely common. It seems like SVB was perhaps a little more exposed to interest rate risk than others, and had a pool of depositors that were more likely to withdraw significant funds in lockstep.
deleted 4y ago
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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.
- landemva 4y ago
  To allow the bond sale before they had a cash infusion basically flushed the business. I wonder if board of directors had an understanding of how it would detonate the balance sheet. After that, the regulators took the obvious necessary action.
- UncleEntity 4y ago
  And people saw this is what they were doing and were tweeting about it in advance of all their “problems”.
  - basseq 4y ago
    Sure, though in all fairness, I understand it's standard GAAP accounting for all banks, and your balance sheet has to have a footnote explaining the market value as well. I.e., this particular play or accounting standard is extremely common. It seems like SVB was perhaps a little more exposed to interest rate risk than others, and had a pool of depositors that were more likely to withdraw significant funds in lockstep.

deleted 4y ago

[deleted]