3 ms·

If only there had been legislation preventing financial institutions from engaging in high-risk investment and lower risk deposit operations at the same time.

blibble 4y ago
SVB bought the most boring assets possible which is what caused the problem
- lotsofpulp 4y ago
  Shorter term treasuries would have been more boring.
- ElevenLathe 4y ago
  I'm not an expert or a bank examiner but have read a number of explanations for SVB over the past week or so. All of them seem to paint the same picture of SVB owning a lot of "safe" but long-dated government bonds, with the long-datedness actually being pretty risky because it exposed them to risk of interest rates rising suddenly, which then happened. Is there some nuance I'm missing where the "safeness" of the bonds caused the problem rather than the "long-datedness?"
  - eloff 4y ago
    No, it was the long dated part that was the issue. It magnifies the losses when interest rates go up.
    - retrocryptid 4y ago
      I think they bought the "boring" investments as a risk hedge against the corporate paper they were buying. If they weren't so heavy in channeling cheap QE-esqe fed cash to small caps that were selling paper to buy back stock, the down-side of mid-term fed notes wouldn't have been as large a percentage of their risk budget. Other institutions bought the exact same fed securities and are not going insolvent. Either that means they have better risk management strategies or the corporate paper bubble hasn't caught up with them yet. I've been hearing about a corporate paper bubble for at least a decade, yet it never seems to pop. What do you call a bubble that doesn't pop?
      - ElevenLathe 4y ago
        > What do you call a bubble that doesn't pop? Capitalism!
- bpodgursky 4y ago
  Technically it bought incredibly boring assets with too-long maturity dates. But yeah, blaming this on excess risk is a joke.
  - lotsofpulp 4y ago
    Too-long maturity is a risk, as indicated by the word “too”.
  - PokedBear 4y ago
    "Risk" has mutliple dimensions. But by over-optimizing on one kind of risk they completely dropped the ball on other risks. They also whiffed on the kinds of risks that come from building a business based on the flywheel effects of a social network. Works great when times are good, but disastrous when tbe same effect works against you.
- eloff 4y ago
  And failed to hedge or prepare for higher interest rates despite seeing them coming from 18 months ago. It’s like standing at the mouth of a train tunnel, hearing a train, seeing the reflections from its lights, and deciding to walk through it anyway with no contingency plan.
  - jerf 4y ago
    I think this is being oversold as a solution. These insurance policies are just that, insurance policies. I'm sure they are not all independently backed by enough currency to make everyone good, any more than any other insurance policy is. Those "hedges" are probably derivatives stacked on other derivatives stacked on other derivatives until the situations has been satisfactorily fudged to everyone's satisfaction that permits them to pretend they're "hedged", but I'd bet if the entire banking system tried to draw on them at once it would rapidly turn out there wasn't anywhere near enough "there" there. You can't have a system where everybody pays X into it and then simultaneously tries to draw 1000X (who knows what the cost of this was, but certainly much greater than X) out of it. You can build a derivative structure that hides this fact from everyone as long as they don't test it, but there is no derivative structure that can make that work if they do. Proper hedging might have delayed this, but something bad still would have happened. It's possible proper hedging might also have put the first fire out, but it would have over time only made the situation more volatile as those hedges would have had to spike in cost and possibly driven other things over the brink. The fundamental problem is that the financial system is so stuffed with tinder that it makes the California forests look like they're not even trying. What sparks it is of a certain amount of academic interest, but in the end, it's not the sparks that create the raging conflagration. A spark may cause a fire, but the raging conflagration is caused by the fuel. Sparks are inevitable. A "hedge" that promises to send out a couple dozen fire fighters if a particular spark starts a fire is of little consequence if a hundred fires start at once and the "hedge" is the exact same dozen fire fighters for all of them.
    - eloff 4y ago
      Yes, there’s limitations to hedging. The problem here is making a huge directional bet that interest rates won’t go up, not adjusting that bet as it becomes clear they will go up, not adjusting as they start going up, etc. It’s like you bought a stock with half your portfolio that’s clearly going to suffer and you hold on hoping you’ll be able to get your money back in 10 years. Oh and using 10x leverage too, so even a 20% drop is enough to wipe out your portfolio completely. It’s just so stupid. And predictably stupid.
- BiteCode_dev 4y ago
  And didn't setup a swap to protect it, which any bank in europe would have done.
  - AnimalMuppet 4y ago
    Or any competent bank in the US.
- dwater 4y ago
  Overexposure to interest rate risks taken on to increase profits is what caused the problem.

blibble 4y ago

SVB bought the most boring assets possible which is what caused the problem

lotsofpulp 4y ago
Shorter term treasuries would have been more boring.
ElevenLathe 4y ago
I'm not an expert or a bank examiner but have read a number of explanations for SVB over the past week or so. All of them seem to paint the same picture of SVB owning a lot of "safe" but long-dated government bonds, with the long-datedness actually being pretty risky because it exposed them to risk of interest rates rising suddenly, which then happened. Is there some nuance I'm missing where the "safeness" of the bonds caused the problem rather than the "long-datedness?"
- eloff 4y ago
  No, it was the long dated part that was the issue. It magnifies the losses when interest rates go up.
  - retrocryptid 4y ago
    I think they bought the "boring" investments as a risk hedge against the corporate paper they were buying. If they weren't so heavy in channeling cheap QE-esqe fed cash to small caps that were selling paper to buy back stock, the down-side of mid-term fed notes wouldn't have been as large a percentage of their risk budget. Other institutions bought the exact same fed securities and are not going insolvent. Either that means they have better risk management strategies or the corporate paper bubble hasn't caught up with them yet. I've been hearing about a corporate paper bubble for at least a decade, yet it never seems to pop. What do you call a bubble that doesn't pop?
    - ElevenLathe 4y ago
      > What do you call a bubble that doesn't pop? Capitalism!
bpodgursky 4y ago
Technically it bought incredibly boring assets with too-long maturity dates. But yeah, blaming this on excess risk is a joke.
- lotsofpulp 4y ago
  Too-long maturity is a risk, as indicated by the word “too”.
- PokedBear 4y ago
  "Risk" has mutliple dimensions. But by over-optimizing on one kind of risk they completely dropped the ball on other risks. They also whiffed on the kinds of risks that come from building a business based on the flywheel effects of a social network. Works great when times are good, but disastrous when tbe same effect works against you.
eloff 4y ago
And failed to hedge or prepare for higher interest rates despite seeing them coming from 18 months ago. It’s like standing at the mouth of a train tunnel, hearing a train, seeing the reflections from its lights, and deciding to walk through it anyway with no contingency plan.
- jerf 4y ago
  I think this is being oversold as a solution. These insurance policies are just that, insurance policies. I'm sure they are not all independently backed by enough currency to make everyone good, any more than any other insurance policy is. Those "hedges" are probably derivatives stacked on other derivatives stacked on other derivatives until the situations has been satisfactorily fudged to everyone's satisfaction that permits them to pretend they're "hedged", but I'd bet if the entire banking system tried to draw on them at once it would rapidly turn out there wasn't anywhere near enough "there" there. You can't have a system where everybody pays X into it and then simultaneously tries to draw 1000X (who knows what the cost of this was, but certainly much greater than X) out of it. You can build a derivative structure that hides this fact from everyone as long as they don't test it, but there is no derivative structure that can make that work if they do. Proper hedging might have delayed this, but something bad still would have happened. It's possible proper hedging might also have put the first fire out, but it would have over time only made the situation more volatile as those hedges would have had to spike in cost and possibly driven other things over the brink. The fundamental problem is that the financial system is so stuffed with tinder that it makes the California forests look like they're not even trying. What sparks it is of a certain amount of academic interest, but in the end, it's not the sparks that create the raging conflagration. A spark may cause a fire, but the raging conflagration is caused by the fuel. Sparks are inevitable. A "hedge" that promises to send out a couple dozen fire fighters if a particular spark starts a fire is of little consequence if a hundred fires start at once and the "hedge" is the exact same dozen fire fighters for all of them.
  - eloff 4y ago
    Yes, there’s limitations to hedging. The problem here is making a huge directional bet that interest rates won’t go up, not adjusting that bet as it becomes clear they will go up, not adjusting as they start going up, etc. It’s like you bought a stock with half your portfolio that’s clearly going to suffer and you hold on hoping you’ll be able to get your money back in 10 years. Oh and using 10x leverage too, so even a 20% drop is enough to wipe out your portfolio completely. It’s just so stupid. And predictably stupid.
BiteCode_dev 4y ago
And didn't setup a swap to protect it, which any bank in europe would have done.
- AnimalMuppet 4y ago
  Or any competent bank in the US.
dwater 4y ago
Overexposure to interest rate risks taken on to increase profits is what caused the problem.