4 ms·

SVB and FRC did not “leverage themselves on risky speculation bets.” They made lots of very safe investments but did not adequately hedge against large and rapi

SVB and FRC did not “leverage themselves on risky speculation bets.” They made lots of very safe investments but did not adequately hedge against large and rapid rate increases. Also not good but it’s a big difference, IMO.

foota 3y ago
The only safe investment is a hedged investment, antthing else is up to your priors. While interest rates going up as much as they did may have seemed unlikely, it was still irresponsible not to hedge their risk.
- fisherjeff 3y ago
  Oh absolutely. My point was just that if you truly wanted to make a big risky bet, you would definitely not be going out and buying a bunch of agency bonds.
  - foota 3y ago
    Sure, I'm just pedantic :) Re: the risk of interest rate backed securities "I too like to live dangerously" as they say.
- hibikir 3y ago
  Not even most hedged investments at large scales. Hedging doesn't make risk disappear: It just shifts it somewhere else, either to someone even larger, or dispersed among many parties. When the risk is correlated with the risk from others, like the trillions in underperforming treasuries that the bing banks have in their balance sheets, who is the safe counterparty? Not the next bank, which also has a similar position. We saw this with the housing crisis and synthetic CDOs, and we see this on insurance against sufficiently large natural disasters. So sure, small banks failing to hedge is irresponsible, but at a large enough scale, someone holds the bag.
  - foota 3y ago
    I'm not an expert on interest rate securities, but with e.g., physical goods the bag holder has physical goods or contracts for supply that allows them to meet their obligations. Is something similar not possible with interest rates? I imagine for instance someone with lots of cash and little desire for risk could lend their money to the banks at overnight rates, collect the interest, and then offer swaps against that steam, no? Of course, no one's going to get their 10th mansion off of this. A little riskier, someone holding variable payment debts could do the same, as long as the loans are diverse the risk could stay low. In this way, the risk at least shifts from "we're screwed if interest rates change" to "we're screwed if interest rates change and many diverse loans start to fail to make payments" in which case you're probably screwed regardless.
wavefunction 3y ago
I read one of their customers on here raving about the mortgage rate they got through SVB because it was so much better than anything offered by anyone else. I don't see any evidence of any overall prudent investing on their part considering the entire bank had to be bailed out and FDIC limits relaxed.
- fisherjeff 3y ago
  I think an overlooked issue here is that, beginning in 2020, SVB suddenly had tons of deposits. Yields all around were zero-ish and they had money burning holes in their pockets. I can sorta see how they could be incentivized to close some loans. Also, I think that as with FRC, their loans tended to have fairly low credit risk, so again not super sketchy, just poorly hedged.
photochemsyn 3y ago
Hindsight may be 20/20 (01/11/2023) > "SVB's focus on the innovation economy was a big winner in the past but may not remain so in the future, according to Dick Bove, the prominent banking analyst at Odeon Capital Group. The U.S. economy, in Bove's view, is shifting from a consumer-oriented economy driven by plenty of low-cost capital to a manufacturing economy marked by limited access to capital that's relatively costly." https://www.bizjournals.com/sanfrancisco/news/2023/01/11/svb-financial-silicon-valley-bank-dick-bove-sivb.html https://www.bizjournals.com/sanfrancisco/news/2023/01/11/svb... > "And despite his downcast report, Bove maintained his hold rating on SVB's stock. Investors seem to be a bit more optimistic. After SVB's shares lost two-thirds of their value last year, they're up nearly 11% so far this year, closing Wednesday at $254.99 a piece." Reading the tea leaves is an imprecise art, I guess.

foota 3y ago

The only safe investment is a hedged investment, antthing else is up to your priors. While interest rates going up as much as they did may have seemed unlikely, it was still irresponsible not to hedge their risk.

fisherjeff 3y ago
Oh absolutely. My point was just that if you truly wanted to make a big risky bet, you would definitely not be going out and buying a bunch of agency bonds.
- foota 3y ago
  Sure, I'm just pedantic :) Re: the risk of interest rate backed securities "I too like to live dangerously" as they say.
hibikir 3y ago
Not even most hedged investments at large scales. Hedging doesn't make risk disappear: It just shifts it somewhere else, either to someone even larger, or dispersed among many parties. When the risk is correlated with the risk from others, like the trillions in underperforming treasuries that the bing banks have in their balance sheets, who is the safe counterparty? Not the next bank, which also has a similar position. We saw this with the housing crisis and synthetic CDOs, and we see this on insurance against sufficiently large natural disasters. So sure, small banks failing to hedge is irresponsible, but at a large enough scale, someone holds the bag.
- foota 3y ago
  I'm not an expert on interest rate securities, but with e.g., physical goods the bag holder has physical goods or contracts for supply that allows them to meet their obligations. Is something similar not possible with interest rates? I imagine for instance someone with lots of cash and little desire for risk could lend their money to the banks at overnight rates, collect the interest, and then offer swaps against that steam, no? Of course, no one's going to get their 10th mansion off of this. A little riskier, someone holding variable payment debts could do the same, as long as the loans are diverse the risk could stay low. In this way, the risk at least shifts from "we're screwed if interest rates change" to "we're screwed if interest rates change and many diverse loans start to fail to make payments" in which case you're probably screwed regardless.

wavefunction 3y ago

I read one of their customers on here raving about the mortgage rate they got through SVB because it was so much better than anything offered by anyone else. I don't see any evidence of any overall prudent investing on their part considering the entire bank had to be bailed out and FDIC limits relaxed.

fisherjeff 3y ago
I think an overlooked issue here is that, beginning in 2020, SVB suddenly had tons of deposits. Yields all around were zero-ish and they had money burning holes in their pockets. I can sorta see how they could be incentivized to close some loans. Also, I think that as with FRC, their loans tended to have fairly low credit risk, so again not super sketchy, just poorly hedged.

photochemsyn 3y ago

Hindsight may be 20/20 (01/11/2023) > "SVB's focus on the innovation economy was a big winner in the past but may not remain so in the future, according to Dick Bove, the prominent banking analyst at Odeon Capital Group. The U.S. economy, in Bove's view, is shifting from a consumer-oriented economy driven by plenty of low-cost capital to a manufacturing economy marked by limited access to capital that's relatively costly." https://www.bizjournals.com/sanfrancisco/news/2023/01/11/svb-financial-silicon-valley-bank-dick-bove-sivb.html https://www.bizjournals.com/sanfrancisco/news/2023/01/11/svb... > "And despite his downcast report, Bove maintained his hold rating on SVB's stock. Investors seem to be a bit more optimistic. After SVB's shares lost two-thirds of their value last year, they're up nearly 11% so far this year, closing Wednesday at $254.99 a piece." Reading the tea leaves is an imprecise art, I guess.