4 ms·

But the thing that did SVB in was, overwhelmingly, Treasury bonds, due to duration risk and interest rates going up, nothing to do with the bank's more exotic p

by SilasX 4y ago

But the thing that did SVB in was, overwhelmingly, Treasury bonds, due to duration risk and interest rates going up, nothing to do with the bank's more exotic practices.

fdgsdfogijq 4y ago
This isnt the truth. 10% of their portfolio was worthless VC loans.
- walrus01 4y ago
  They also hold (held?) $80bn in mortgage backed securities, which I'm consistently suspicious of how much is really grade A investment material.
  - cameldrv 4y ago
    MBS having too many defaults was the problem in 2008, which I think is making people turn their attention to this issue. However, we are in a different situation today. IMO the tradable securities that SVB held are probably the least of their problems. The MBS certainly has the problem of being worth less due to higher interest rates. The MBS at least though is tradable and has a market price. Their own book of loans though is much larger and is subject to the same interest rate problems as their MBS and treasuries, and in addition to having lost value due to interest rate issues, it may now have default issues as well. Not a good combination.
- raws 4y ago
  Another 10% was low % 5yrs bonds which they had to sell early with penalties to cover the run on the bank which incurred considerable losses. I would think a VC bank knows that some of its VC investments would not outperform. My understanding is that if the run does not happen, it's business as usual, nothing like '08 when borrowers started failing to pay en mass on internationally overrated loans in AAApackages.
- tomatocracy 4y ago
  Bank regulations are designed to ensure that this type of thing is a shareholder (and pref/AT1) risk - I haven't seen any claims that they were inappropriately or incorrectly rating those risks for capital purposes (but perhaps they were, who knows).
ummonk 4y ago
And mortgage backed securities. Both highly safe. It was in managing interest rate risk that they failed.
cameldrv 4y ago
The problem with the T-bonds and MBS losing value when rates went up may be the proximate cause, but there certainly is more to the story. They actually had a good portion of this exposure hedged in 2021 and didn't renew the hedge in 2022. The people running SVB were not stupid and were very aware of this risk, yet they chose to take it. There is a reason for this which we will find out in the fullness of time.
kurthr 4y ago
Well, that's where the losses came in, but why were so many startups holding so much uninsured money at a medium sized (not systemically regulated) bank? I really can't wrap my head around holding $500M earning almost no interest (>$10M annual) in an uninsured account. Why? It's not like they had that much in monthly expenses or income. Was it just more incompetence or as has been suggested in other posts were there "benefits" of doing this that may not have accrued to the corporation? Of course it was the run of those giant uninsured depositors that caused the immediate cash. Of course it's not clear (had all depositors not been bailed out) that anyone withdrawing within the last 90 days would have not had their withdrawals clawed back... we'll never know. If that had happened, I think we would see a lot fewer flash runs. edit: https://www.thestreet.com/banking/svb-collapse-roku-had-487-million-in-cash-at-failed-bank-rocket-lab-roblox-also-affected https://www.thestreet.com/banking/svb-collapse-roku-had-487-...
- aeternum 4y ago
  Bank failures is just not something that most startups think about. It's also weird that we expect large depositors to think about it. If we created the system today, we would never think it okay to just destroy people's money at scale. Large depositors get almost nothing (very low interest rate) in return for that immense risk.
  - kurthr 4y ago
    Exactly, so why are they holding it there? It could have provided 5-10% of (their negative) net income.
    - aeternum 4y ago
      It takes time & effort to engage with one of the few fintech companies that ensures you store only 250k in each bank. That also opens you up to other types of risk as now you have some relatively new startup that has access to your company funds. Companies and individuals are not trying to invest in their bank when they open a checking account. Does it really make sense that they need to dive into their bank's financials?

by SilasX 4y ago

But the thing that did SVB in was, overwhelmingly, Treasury bonds, due to duration risk and interest rates going up, nothing to do with the bank's more exotic practices.

fdgsdfogijq 4y ago

This isnt the truth. 10% of their portfolio was worthless VC loans.

walrus01 4y ago
They also hold (held?) $80bn in mortgage backed securities, which I'm consistently suspicious of how much is really grade A investment material.
- cameldrv 4y ago
  MBS having too many defaults was the problem in 2008, which I think is making people turn their attention to this issue. However, we are in a different situation today. IMO the tradable securities that SVB held are probably the least of their problems. The MBS certainly has the problem of being worth less due to higher interest rates. The MBS at least though is tradable and has a market price. Their own book of loans though is much larger and is subject to the same interest rate problems as their MBS and treasuries, and in addition to having lost value due to interest rate issues, it may now have default issues as well. Not a good combination.
raws 4y ago
Another 10% was low % 5yrs bonds which they had to sell early with penalties to cover the run on the bank which incurred considerable losses. I would think a VC bank knows that some of its VC investments would not outperform. My understanding is that if the run does not happen, it's business as usual, nothing like '08 when borrowers started failing to pay en mass on internationally overrated loans in AAApackages.
tomatocracy 4y ago
Bank regulations are designed to ensure that this type of thing is a shareholder (and pref/AT1) risk - I haven't seen any claims that they were inappropriately or incorrectly rating those risks for capital purposes (but perhaps they were, who knows).

ummonk 4y ago

And mortgage backed securities. Both highly safe. It was in managing interest rate risk that they failed.

cameldrv 4y ago

The problem with the T-bonds and MBS losing value when rates went up may be the proximate cause, but there certainly is more to the story. They actually had a good portion of this exposure hedged in 2021 and didn't renew the hedge in 2022. The people running SVB were not stupid and were very aware of this risk, yet they chose to take it. There is a reason for this which we will find out in the fullness of time.

kurthr 4y ago

Well, that's where the losses came in, but why were so many startups holding so much uninsured money at a medium sized (not systemically regulated) bank? I really can't wrap my head around holding $500M earning almost no interest (>$10M annual) in an uninsured account. Why? It's not like they had that much in monthly expenses or income. Was it just more incompetence or as has been suggested in other posts were there "benefits" of doing this that may not have accrued to the corporation? Of course it was the run of those giant uninsured depositors that caused the immediate cash. Of course it's not clear (had all depositors not been bailed out) that anyone withdrawing within the last 90 days would have not had their withdrawals clawed back... we'll never know. If that had happened, I think we would see a lot fewer flash runs. edit: https://www.thestreet.com/banking/svb-collapse-roku-had-487-million-in-cash-at-failed-bank-rocket-lab-roblox-also-affected https://www.thestreet.com/banking/svb-collapse-roku-had-487-...

aeternum 4y ago
Bank failures is just not something that most startups think about. It's also weird that we expect large depositors to think about it. If we created the system today, we would never think it okay to just destroy people's money at scale. Large depositors get almost nothing (very low interest rate) in return for that immense risk.
- kurthr 4y ago
  Exactly, so why are they holding it there? It could have provided 5-10% of (their negative) net income.
  - aeternum 4y ago
    It takes time & effort to engage with one of the few fintech companies that ensures you store only 250k in each bank. That also opens you up to other types of risk as now you have some relatively new startup that has access to your company funds. Companies and individuals are not trying to invest in their bank when they open a checking account. Does it really make sense that they need to dive into their bank's financials?