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> BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short

> BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes Can't we sort of blame the Fed for that [yield curve inversion and long rates] too? It undertook massive quantitative easing during the pandemic, which depressed the yield of long-term bonds such as those bought by SVB. Perhaps if it hadn't done so much QE, the yield on SVB's long-term bonds would have gone from, say, 3% to 4% instead of 1.56% to 4%. Edit to clarify: I'm not saying that the Fed deserves blame for SVB taking such a risky long-term position, I'm saying the Fed deserves some blame for long-term bonds being risky.

wbl 4y ago
Please explain to me what you think rates would have needed to do given that there was a massive decrease in economic activity due to a pandemic followed by inflation.
- mitthrowaway2 4y ago
  IMO? Overnight term rates should have been zero from 2020 to about July of 2021, then allowed to rise by 0.25 per month to perhaps about 3.5%. Long-term rates should have been left to float with the market, pricing in the expected risk of inflation. Not that my opinion matters, since I wasn't in charge.
  - wbl 4y ago
    That still leads to losses on long term treasuries. That's what it means to raise rates.
    - mitthrowaway2 4y ago
      Yes, of course it does. But there are losses, and then there are losses. 10-year yields going from 1.56% in 2021 to 4% in 2023 is equivalent to a price drop of 17% (given maturity in 2031). If 10-year yields had only been, say, 3% in 2021 before rising to 4%, the bond price drop would have been closer to 7%.
- phoehne 4y ago
  I think the real damage was done between 2008 and 2018, when we spent 10+ years under zero interest rates in the US and negative rates in parts of Europe. I think that conditioned people to forget about things like duration risk and interest rate risk. Had we been under a "normal" rate regime during that period, I don't think people would have thought 10 year t-bonds paying 1.5% were in any sense of the word a "good deal." I think peoples' expectations were so messed up that Austria (?) issued a 97 year zero coupon, zero interest rate bond. Like it was a good thing.
LapsangGuzzler 4y ago
> Can't we sort of blame the Fed for that too? No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equivalent of stupidly storing all of your nitrous fertilizer in one place and then being surprised when the whole thing blows up. SVB made numerous, critical mistakes in their management. If anything, one could argue the Fed enabled this stupidity by keeping rates low for so long. But ultimately, the failure falls on the bank.
- mitthrowaway2 4y ago
  Oh, I'm not looking to absolve SVB of their responsibility for their position. I think you misread my comment. I mean blaming the Fed for the yield curve inversion and the steep change in long-term rates, and thus value of long-term debt, as opposed to only low overnight interest rates. The Fed does not deserve blame for SVB's choice to load up on that long-term debt without hedging those risks. I'm answering the parent's context, which is discussing how the gun got loaded; we all agree it was SVB to blame for pointing it at their own head.
  - reverend_gonzo 4y ago
    I’d say it’s more like the Fed opened up a “Free ammo and cocaine store”. Most banks came by, got their free coke and went on their way. SVB came alone and said “well let’s have a fucking party: get rocked up and play some Russian roulette.” And every other bank that might’ve been eyeing that ammo realized “holy shit this is for reals.”
- jjeaff 4y ago
  I haven't seen a lot of evidence yet that SVB was necessarily pursuing a risky strategy. Certainly, proceeding at all without a risk manager is risky in and of itself. However, the "risky" investments that I have heard described thus far are mostly treasury securities. They simply had too many for a time horizon too far out. There is no bank right now that could withstand a withdrawal rate of nearly 50% of total assets in a single day.
  - 4y ago

wbl 4y ago

Please explain to me what you think rates would have needed to do given that there was a massive decrease in economic activity due to a pandemic followed by inflation.

mitthrowaway2 4y ago
IMO? Overnight term rates should have been zero from 2020 to about July of 2021, then allowed to rise by 0.25 per month to perhaps about 3.5%. Long-term rates should have been left to float with the market, pricing in the expected risk of inflation. Not that my opinion matters, since I wasn't in charge.
- wbl 4y ago
  That still leads to losses on long term treasuries. That's what it means to raise rates.
  - mitthrowaway2 4y ago
    Yes, of course it does. But there are losses, and then there are losses. 10-year yields going from 1.56% in 2021 to 4% in 2023 is equivalent to a price drop of 17% (given maturity in 2031). If 10-year yields had only been, say, 3% in 2021 before rising to 4%, the bond price drop would have been closer to 7%.
phoehne 4y ago
I think the real damage was done between 2008 and 2018, when we spent 10+ years under zero interest rates in the US and negative rates in parts of Europe. I think that conditioned people to forget about things like duration risk and interest rate risk. Had we been under a "normal" rate regime during that period, I don't think people would have thought 10 year t-bonds paying 1.5% were in any sense of the word a "good deal." I think peoples' expectations were so messed up that Austria (?) issued a 97 year zero coupon, zero interest rate bond. Like it was a good thing.

LapsangGuzzler 4y ago

> Can't we sort of blame the Fed for that too? No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equivalent of stupidly storing all of your nitrous fertilizer in one place and then being surprised when the whole thing blows up. SVB made numerous, critical mistakes in their management. If anything, one could argue the Fed enabled this stupidity by keeping rates low for so long. But ultimately, the failure falls on the bank.

mitthrowaway2 4y ago
Oh, I'm not looking to absolve SVB of their responsibility for their position. I think you misread my comment. I mean blaming the Fed for the yield curve inversion and the steep change in long-term rates, and thus value of long-term debt, as opposed to only low overnight interest rates. The Fed does not deserve blame for SVB's choice to load up on that long-term debt without hedging those risks. I'm answering the parent's context, which is discussing how the gun got loaded; we all agree it was SVB to blame for pointing it at their own head.
- reverend_gonzo 4y ago
  I’d say it’s more like the Fed opened up a “Free ammo and cocaine store”. Most banks came by, got their free coke and went on their way. SVB came alone and said “well let’s have a fucking party: get rocked up and play some Russian roulette.” And every other bank that might’ve been eyeing that ammo realized “holy shit this is for reals.”
jjeaff 4y ago
I haven't seen a lot of evidence yet that SVB was necessarily pursuing a risky strategy. Certainly, proceeding at all without a risk manager is risky in and of itself. However, the "risky" investments that I have heard described thus far are mostly treasury securities. They simply had too many for a time horizon too far out. There is no bank right now that could withstand a withdrawal rate of nearly 50% of total assets in a single day.
- 4y ago