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there was an interesting interview on Kudlow the other day (which I guess was a WSJ piece also? https://www.youtube.com/watch?v=D2OELV5vVZU https://www.youtube.

there was an interesting interview on Kudlow the other day (which I guess was a WSJ piece also? https://www.youtube.com/watch?v=D2OELV5vVZU https://www.youtube.com/watch?v=D2OELV5vVZU ) about "how it happened" at SVB. I don't know if "the experts" all agree with "this expert" but he pointed out that in buying all the mortgage backed securities, SVB got to put them in a "hold to maturity" account that is not "marked to market" (the value in the account does not match their decreased market value, so on the books it looks like a lot of value in there, but in reality it's not) at the same time, as the coupons on these bonds pay out and the bank collects them, that money just shows up on the bank's income statement, not landing in the hold to maturity account itself as part of the value of the asset. This rings all the "hey, look we are profitable" and "hey don't I get a bonus" bells, twisting incentives for the bank and its officers (and other banks) to keep do this, lather rinse repeat. recipe for disaster when interest rates go up.

appleiigs 4y ago
They're conflating 2 issues. The first issue is liquidity management. The second is accounting. If the accounting auditors are doing their job then the bank managers don't get to cook the books. The accounting rules are set by the accounting industry. If the financial statements don't reflect what's happening, it's the accountants fault. So, it's incorrect to imply that bankers are doing something nefarious. At this point no one has suggested an Enron or FTX type scandal. What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling.
- fsckboy 4y ago
  > What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling. no, what's more likely (if what has been said between the two of us comports with reality) is that the incentives for the officers of the bank are in conflict with the healthy management of the bank. Bankers running a bank into the ground cannot be blamed on regulators or the accounting profession which only "review" what has happened, they never have their fingers on the levers (although additional accounting and banking regulations may be required to avoid this type of problem in the future)
  - chris_va 4y ago
    In this case, those folks lost all their money, so it seems like they actually did have pretty well aligned incentives... I think the more subtle distinction would be making short term risk adjusted incentive identical to long term risk adjusted incentive, so people don't mistakenly think gambling is a good idea.
  - appleiigs 4y ago
    If the accounting and regulations reflected what was actually happening (mark-to-market) instead of some accounting non-sense (book-value), then the performance of the bankers would be reported accordingly. The accountants don’t just review. As i mentioned, they established the accounting rules for the financial statements - which incentives are measured against. The accounting is so far off that financial analysts spend a significant amount of time un-doing the obsfuscation the accounting does. And if they can’t see it, stuff like SVB happens
seanhunter 4y ago
The difference between mark to market and hold to maturity is an accounting difference to do with when profits and losses get realised. Secondly the rules about MTM vs HTM accounting tend to be dominated by whether or not there is a liquid market price for an asset (these are known as Level 1 mark to market assets), a liquid market price only for hedges or hedge equivalents of an asset (level 2) or whether a price has to be synthesised via a model (level 3, colloquially known as “mark to myth” during the crisis). There was a liquid market price for the vast majority of the assets in SVB’s portfolio. In any case P&L realisation wasn’t at all an issue relevant to the failure of SVB as I understand it. My understanding was that realising losses on swaps used to hedge their MBS portfolio led them to require more regulatory capital and when they mishandled communication during the raise, it failed leaving them essentially dead in the water. The next day all the VCs who had been in conversations about the raise told their portfolio cos to move funds out, those founders told their friends and SVB was a dead bank.

appleiigs 4y ago

They're conflating 2 issues. The first issue is liquidity management. The second is accounting. If the accounting auditors are doing their job then the bank managers don't get to cook the books. The accounting rules are set by the accounting industry. If the financial statements don't reflect what's happening, it's the accountants fault. So, it's incorrect to imply that bankers are doing something nefarious. At this point no one has suggested an Enron or FTX type scandal. What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling.

fsckboy 4y ago
> What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling. no, what's more likely (if what has been said between the two of us comports with reality) is that the incentives for the officers of the bank are in conflict with the healthy management of the bank. Bankers running a bank into the ground cannot be blamed on regulators or the accounting profession which only "review" what has happened, they never have their fingers on the levers (although additional accounting and banking regulations may be required to avoid this type of problem in the future)
- chris_va 4y ago
  In this case, those folks lost all their money, so it seems like they actually did have pretty well aligned incentives... I think the more subtle distinction would be making short term risk adjusted incentive identical to long term risk adjusted incentive, so people don't mistakenly think gambling is a good idea.
- appleiigs 4y ago
  If the accounting and regulations reflected what was actually happening (mark-to-market) instead of some accounting non-sense (book-value), then the performance of the bankers would be reported accordingly. The accountants don’t just review. As i mentioned, they established the accounting rules for the financial statements - which incentives are measured against. The accounting is so far off that financial analysts spend a significant amount of time un-doing the obsfuscation the accounting does. And if they can’t see it, stuff like SVB happens

seanhunter 4y ago

The difference between mark to market and hold to maturity is an accounting difference to do with when profits and losses get realised. Secondly the rules about MTM vs HTM accounting tend to be dominated by whether or not there is a liquid market price for an asset (these are known as Level 1 mark to market assets), a liquid market price only for hedges or hedge equivalents of an asset (level 2) or whether a price has to be synthesised via a model (level 3, colloquially known as “mark to myth” during the crisis). There was a liquid market price for the vast majority of the assets in SVB’s portfolio. In any case P&L realisation wasn’t at all an issue relevant to the failure of SVB as I understand it. My understanding was that realising losses on swaps used to hedge their MBS portfolio led them to require more regulatory capital and when they mishandled communication during the raise, it failed leaving them essentially dead in the water. The next day all the VCs who had been in conversations about the raise told their portfolio cos to move funds out, those founders told their friends and SVB was a dead bank.