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Site isn't working. That said, it seems the core of the issue was that SVB wasn't properly hedged against interest rate hikes. My question is: why not? I und

Site isn't working. That said, it seems the core of the issue was that SVB wasn't properly hedged against interest rate hikes. My question is: why not? I understand that they were without a Chief Risk Officer for the last 10-11 months, but that's not really a problem if you think about it on a more macro-scale - as we've had a near-zero-interest-rate environment for a lot longer than that, so wouldn't the most basic plan of action when rates first hit that low for some officer of the bank to say "gee, these rates are dangerously low...and one day before these 10-year bonds fully mature, rates will probably go up, so shouldn't we take the obvious step to ensure we don't get absolutely fucked if rates go higher again?". I mean, these are bankers we're talking about...their whole job is to identify and manage risks. EDIT: I am aware there are financial instruments and vehicles that banks' trading desks can't trade, so buying specific ETFs or stocks as a hedge is off the table - but that begs the question - why not go and buy some shorter-dated vehicles such as Treasury Notes that mature a lot faster and are much more liquid?

readthenotes1 4y ago
hedging reduces profits if the hedge isn't needed
- filoleg 4y ago
  Well yeah, but that's kind of like doctors saying that malpractice insurance reduces their profits in cases where it ends up not being needed. Having a hedge and not needing it is kind of a good problem to have, assuming they didn't overleverage on that hedge. But if the hedge is overleveraged, I am not sure if it can be called a hedge anymore. Because that would make the position it was supposed to offset the hedge position instead.
  - aeternum 4y ago
    Just as a doctor needs to buy the right amount of malpractice insurance, the banks need to size the hedge properly. SVB did have other investments and some hedge. One of the core issues is that the Fed raised rates faster than any time in history and starting from some of the lowest interest rates in history. That's very difficult to predict and hedge against.
MuffinFlavored 4y ago
> That said, it seems the core of the issue was that SVB wasn't properly hedged against interest rate hikes. Not being sarcastic or implying anything: who could have predicted interest rate hikes at the time SVB was being pushed to generate yield/return on their assets (like 2020-2021 if I understand correctly)? In hindsight, what should they have done? Who/what forces drove them to park lots of $ into MBS yielding 1.5% or whatever? What should they have done instead once Fed start hiking interest rates, sell at a smaller loss then? Maybe they didn't believe the Fed?
- deleted 4y ago
  [deleted]
dangjc 4y ago
They decided not to hedge on purpose, take the risk, hoping to earn the extra profits. Slate money did a good episode on this last week. SVB has high touch relationships with their clients, and they need money to pay for all that client service. This was a bet that went bad (in a very foreseeable way).
- kwillets 4y ago
  If they wanted to increase risk/return, why did they buy T bonds in the first place?
  - Jensson 4y ago
    Regulations, they aren't allowed to buy that much of other risky assets.
    - dragontamer 4y ago
      And T-bonds are the riskiest that those regulations allow for. One can say that maybe our regulations should be tighter. But I'm not sure if we can solve the "banks taking risks that are inappropriate for their own damn survival" problem. Its clear that there will be a bank that's too stupid to figure out and hedge its own risks here on out. If we regulate with lists of "these are safe" and "those are not safe" piles, they'll still figure out how to buy the "riskest of the safe pile", and get into trouble. -------- Case in point: if they bought T-Bills instead, they would have been safe. But no, they wanted the higher risk T-Bonds.
      - jldugger 4y ago
        > And T-bonds are the riskiest that those regulations allow for. From finance podcasts I have learned that the most important bit may have been that the Basel capital requirement for T-bonds is zero. (bonus citation)[1]. From a repayment risk perspective, that makes sense. From an FDIC puts your bank in receivership perspective, it's kind of a moral hazard. > Its clear that there will be a bank that's too stupid to figure out and hedge its own risks here on out. Everyone says hedge risks but that costs money that will likely be equal to or in excess of the entire "go long on interest rate risk" strategy profit. [1]: https://www.investopedia.com/terms/r/riskweightedassets.asp https://www.investopedia.com/terms/r/riskweightedassets.asp
kwillets 4y ago
The irony of these riskmeister VC types failing to manage a Treasury Bond portfolio is pretty thick. It also seems like they should have made some credible loans instead of buying bonds - that whole "reinvest in the community" thing. Although they might be required to keep some low-risk (when managed by adults) assets.
- dlemire 4y ago
  Invest in a modern mass transportation system? Affordable housing? The possibilities are endless.
lordnacho 4y ago
My guess is the incentives are misplaced. If you get paid to generate carry, you will pick up the coins on the track. Whatever incentive system the bank was using, it did not take into account the potential for loss. This is a perennial problem with this kind of position: you can borrow at a low rate but lend as far out the curve as you like. If you just max out duration, every day that you don't go bust, you make maximum money. Especially as you can pretend that high interest bond is still worth what you paid. It's only when such a trade unwinds you see the risk.

readthenotes1 4y ago

hedging reduces profits if the hedge isn't needed

filoleg 4y ago
Well yeah, but that's kind of like doctors saying that malpractice insurance reduces their profits in cases where it ends up not being needed. Having a hedge and not needing it is kind of a good problem to have, assuming they didn't overleverage on that hedge. But if the hedge is overleveraged, I am not sure if it can be called a hedge anymore. Because that would make the position it was supposed to offset the hedge position instead.
- aeternum 4y ago
  Just as a doctor needs to buy the right amount of malpractice insurance, the banks need to size the hedge properly. SVB did have other investments and some hedge. One of the core issues is that the Fed raised rates faster than any time in history and starting from some of the lowest interest rates in history. That's very difficult to predict and hedge against.

MuffinFlavored 4y ago

> That said, it seems the core of the issue was that SVB wasn't properly hedged against interest rate hikes. Not being sarcastic or implying anything: who could have predicted interest rate hikes at the time SVB was being pushed to generate yield/return on their assets (like 2020-2021 if I understand correctly)? In hindsight, what should they have done? Who/what forces drove them to park lots of $ into MBS yielding 1.5% or whatever? What should they have done instead once Fed start hiking interest rates, sell at a smaller loss then? Maybe they didn't believe the Fed?

deleted 4y ago
[deleted]

dangjc 4y ago

They decided not to hedge on purpose, take the risk, hoping to earn the extra profits. Slate money did a good episode on this last week. SVB has high touch relationships with their clients, and they need money to pay for all that client service. This was a bet that went bad (in a very foreseeable way).

kwillets 4y ago
If they wanted to increase risk/return, why did they buy T bonds in the first place?
- Jensson 4y ago
  Regulations, they aren't allowed to buy that much of other risky assets.
  - dragontamer 4y ago
    And T-bonds are the riskiest that those regulations allow for. One can say that maybe our regulations should be tighter. But I'm not sure if we can solve the "banks taking risks that are inappropriate for their own damn survival" problem. Its clear that there will be a bank that's too stupid to figure out and hedge its own risks here on out. If we regulate with lists of "these are safe" and "those are not safe" piles, they'll still figure out how to buy the "riskest of the safe pile", and get into trouble. -------- Case in point: if they bought T-Bills instead, they would have been safe. But no, they wanted the higher risk T-Bonds.
    - jldugger 4y ago
      > And T-bonds are the riskiest that those regulations allow for. From finance podcasts I have learned that the most important bit may have been that the Basel capital requirement for T-bonds is zero. (bonus citation)[1]. From a repayment risk perspective, that makes sense. From an FDIC puts your bank in receivership perspective, it's kind of a moral hazard. > Its clear that there will be a bank that's too stupid to figure out and hedge its own risks here on out. Everyone says hedge risks but that costs money that will likely be equal to or in excess of the entire "go long on interest rate risk" strategy profit. [1]: https://www.investopedia.com/terms/r/riskweightedassets.asp https://www.investopedia.com/terms/r/riskweightedassets.asp

kwillets 4y ago

The irony of these riskmeister VC types failing to manage a Treasury Bond portfolio is pretty thick. It also seems like they should have made some credible loans instead of buying bonds - that whole "reinvest in the community" thing. Although they might be required to keep some low-risk (when managed by adults) assets.

dlemire 4y ago
Invest in a modern mass transportation system? Affordable housing? The possibilities are endless.

lordnacho 4y ago

My guess is the incentives are misplaced. If you get paid to generate carry, you will pick up the coins on the track. Whatever incentive system the bank was using, it did not take into account the potential for loss. This is a perennial problem with this kind of position: you can borrow at a low rate but lend as far out the curve as you like. If you just max out duration, every day that you don't go bust, you make maximum money. Especially as you can pretend that high interest bond is still worth what you paid. It's only when such a trade unwinds you see the risk.