9 ms·

The collapse of SVB exposes the largest crack in the economy

291 points by brockwhittaker 4y ago

marcopicentini 4y ago
In 2008 we learned “cartolarization”. In 2022-23: “Bond convexity”. This word is still not on headlines yet, so maybe more loses has to come.
- SideburnsOfDoom 4y ago
  > In 2008 we learned "cartolarization" Did we? So what the hell is it?
  - astrange 4y ago
    Italian-English for securitization?
    - notpeter 4y ago
      I think you got it. cartolarization ~= cartolari(zzazione) + (securiti)zation. https://it.wikipedia.org/wiki/Cartolarizzazione https://it.wikipedia.org/wiki/Cartolarizzazione
  - rationalist 4y ago
    A misspelling of "collateralization"?
TooSmugToFail 4y ago
SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion. Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable. European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leveraged this loophole. For those interested, FT Alphaville describes this in ample detail: Silicon Valley Bank is a very American mess https://on.ft.com/3ywMURD https://on.ft.com/3ywMURD
- xwdv 4y ago
  The exemption should still be allowed, as it led to great banking innovations for startups. The exemptees just need to be fucking careful with this advanced mode of operation.
  - rco8786 4y ago
    > The exemptees just need to be fucking careful with this advanced mode of operation. How many times will we get burned until we learned that banks will not be careful if they are given an opportunity to not be.
    - illiarian 4y ago
      Or that any business will not be careful given the opportunity.
      - deleted 4y ago
        [deleted]
  - talideon 4y ago
    So, you're essentially proposing a weaker, informal version of Basel III. In which case, why have such an exemption in the first place? What innovations does it lead to? Restrictions on banking typically exist for a _really_ good reason. After all, we saw what happened when retail and investment banking were allowed to mingle because it 'lead to [...] innovations'. If you're going to advocate for something beyond saying 'but look, innovation!', you need to be more explicit about what those innovations are, because European banking is plenty innovative within the constraints of Basel III.
    - worik 4y ago
      Yes. And the pace of innovation in US banking was very slow, essentially stalled, for a generation from the consumer's POV Here in Aotearoa we have ATMs on every street corner since the 1980s. All but the tiniest traders have had pos electronic transactions for nearly thirty years Other countries are even more advanced (our banks are all like yous now, consumers now viewed as pests) I want innovation in customer services, but what we get is innovations in financial engineering. May they all rot...
m348e912 4y ago
https://twitter.com/DavidSacks/status/1634292056821764099 https://twitter.com/DavidSacks/status/1634292056821764099 Looking at the comments here, it's possible that this may trigger a run on banks.
- tekla 4y ago
  There is no evidence of this
- dragontamer 4y ago
  Why? My money at VMFXX is almost entirely composed of safe Fed Repos with average maturity of 2-weeks. VUSXX is mostly Treasury Bills, again of maturity averaging like 2-weeks. My money at SWVXX is composed of AAA-rated bank notes, of similar 2-weeks-ish maturity average. The idea of a bank, like SIVB, being composed of largely 30-year mortgages and 10Y or 30Y Treasury Bonds is insane. The bank deserves to die after taking such high duration risks. There should be _NO_ bailout. I can barely believe a bank was so stupid to keep customer deposits backed by something so risky. ---------- We've been preparing our financial system for the last 15 years (since 2008) for the next financial storm. We've got "stress tests" to see that various banks have severed contamination between each other, at least in theory. Lets see how good our preparations have held up. No point giving up and bailing things out before we've even tested our new financial system regulations. We can afford to let some banks go under. Only if the contagion has a chance of spreading everywhere should we consider the last-ditch effort of a bailout.
  - cplusplusfellow 4y ago
    I couldn’t give two shits about banks that go under. The businesses that concern me are the ones who lose deposits.
    - JohnFen 4y ago
      They won't lose deposits except insofar as they decided it was OK to exceed the 250k limit for FDIC insurance. And in deciding to do that, they were deciding to take a risk and got burned by it -- but it was a risk they willingly took on.
nodesocket 4y ago
> A 10Y T-Bill purchased on the first trading day of 2021 is now worth less than $0.80 on the dollar Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.
- dougmwne 4y ago
  Yes, another way to think about this is that if you bought an .80 t-bill today it would have the return on investment equivalent to a 1.00 bill bought last year. That’s because the new t-bill has a much higher interest rate. So in effect, as the fed raises interest rates, they are destroying the principle of every existing bond on the market. That’s a big problem for anyone owning bonds, especially if they are using them as collateral for leverage.
  - JohnFen 4y ago
    > they are destroying the principle of every existing bond on the market What principle are they destroying? Bonds are not, and never were, immune to economic changes. They're just less volatile and react differently than stocks and, if you hold them to maturity, will pay what what they promised. It seems to me that the problem is that a whole bunch of people made investments assuming that there was effectively no risk in doing so. Like the good times would last forever or something.
    - deleted 4y ago
      [deleted]
    - candiodari 4y ago
      These bonds are not held as investments, but as collateral for getting other things (like money to buy mortgages with). If your collateral gets worse ...
      - JohnFen 4y ago
        Either way, they were treating them as if their value was guaranteed prior to maturity. That has never been a thing that these instruments guaranteed. They were gambling, because they failed to hedge that risk.
Apocryphon 4y ago
So between the tech angle and the housing-related investment vehicles, are we remixing 2000 with 2008 now?
- cplusplusfellow 4y ago
  Self inflicted wounds this time, though. There is nothing wrong with a bank purchasing 80bln of MBS with their depositors money. The issue becomes when the fed suddenly raises rates faster than any time in their history while still failing to fight inflation (which is a result of having a stronger economy).
  - UncleOxidant 4y ago
    Not the Fed's fault. SVB's fault for going all-in on 10year duration MBS. If they had mixed in a good amount of shorter duration tbonds/tbills they would've been fine.
    - Scoundreller 4y ago
      It’s also a clientele mix issue. If you have a healthy mix of business and retail clients, payday is a wash. If it’s a lot of business customers; every payday is like a predictable mini bank run. If you have a small number of large, correlated and communicating players, you have a huge bank run risk.
  - testfoobar 4y ago
    SVB failed to hedge their interest rate risk.
    - teacpde 4y ago
      Curious what are the ways SVB could have hedged in this scenario?
      - wskinner 4y ago
        Buy T-Bills or other short maturity assets instead of long maturity T-Bonds and mortgage-backed assets.
yalogin 4y ago
As someone that is not following this as closely as I would like, does the collapse of this bank have nothing to do with FTX and Crypto?
- morelisp 4y ago
  Only indirectly; the tide is receding for the first time in many years, and it's exposing a variety of... issues.
  - UncleOxidant 4y ago
    naked swimmers.
- tekla 4y ago
  FTX was simple fraud. This isn't really related and is more standard bank taking on wayy too much risk.
  - thepasswordis 4y ago
    FTX was because they took customer deposits and gambled with them, lost the gamble, and therefore lost the money.
    - mannerheim 4y ago
      Yes, but it was also fraud because they weren't supposed to gamble with that money because they were an exchange, not a bank.
    - fullsend 4y ago
      What is different here? FTX bought shitcoins. SVB bought MBS. They gambled rates wouldn’t change and customer’s wouldn’t withdraw.
- jandrese 4y ago
  Only indirectly. They released a statement after the FTX collapse saying effectively "don't worry, no problem here", which caused a bank run that they couldn't manage and forced the collapse.
rehitman 4y ago
Everyone says SVB had bad investment and they deserv it etc. However, I am worried about this being the first of many similar financial instutation failing. After all, bonds are supposed to be safe on paper. Increasintg interest rate fast can break many people who are not able to adjust.
- delfinom 4y ago
  Bonds weren't the problem. The financial strategy employed to use those bonds was the problem. You can do the same thing to yourself. Take your life savings and emergency fund and put it locked up into 10 year treasuries bought direct from the treasury. Now go have an emergency. Good luck, have fun.
  - denimnerd42 4y ago
    you can transfer your treasuries to a broker and then sell them. i do see your point though. if your emergency is you need your life savings TODAY then yeah you'd have a problem. but you could probably find a source of credit while you sell.
    - she11c0de 4y ago
      > you can transfer your treasuries to a broker and then sell them. Only to find out that because of the raised rates nobody wants to pay for them enough to cover your emergency.
- jschveibinz 4y ago
  Just something to consider… A casual look at the regional bank index ETF will show that starting about two weeks ago, the price started to steadily decline and then a sudden drop with SVB. I’m not sure if this decline is well correlated with the total market index over the same period, but if not, it suggests that some people “saw this coming” a couple of weeks ago and the other shoe may still need to drop. Was it just good analysis? Was there some whispering going on? If so, I hope the SEC is watching.
guhcampos 4y ago
This whole discussion around bonds makes me feel like I'm either too stupid or too smart, because it does not make sense to me that SVB would not have any sort of hedging around government bonds? I don't know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It's common sense between investors you need to hold a mix of the 3 to hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it's likely the government will increase interest rates to compensate, and so on. Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?
- jfengel 4y ago
  The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions. You can, however, buy bonds with varying maturity times. That's generally OK, since there's a liquid market in those bonds. They appear to have been caught flat footed by a sudden run.
  - gruez 4y ago
    > The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions. You're thinking of I-bonds, but that's not the only inflation indexed bonds out there. There's also TIPS https://treasurydirect.gov/marketable-securities/tips/ https://treasurydirect.gov/marketable-securities/tips/
- bjornsing 4y ago
  I'm not aware of any useful hedge for long term US government bonds. There are inflation protected bonds (TIPS), but they wouldn't have worked as a hedge in this case [1]. 1. https://www.schwab.com/learn/story/treasury-inflation-protected-securities-faqs-about-tips https://www.schwab.com/learn/story/treasury-inflation-protec...
  - inconceivable 4y ago
1vuio0pswjnm7 4y ago
The author myopically tries to extrapolate this incident to "the economy" and "other industries". SVB's customers panicked. But who are SVB's customers. For the most part, VC, PE and non-profitable "tech" startups. Not surprising they would panic. They produce nothing themselves, conduct surveillance, sell advertising services, pay employees from funding rounds and call this a "business model". This is not "the economy". This is a giant sucking leech attached to it. A parasitic fungus that has attacked the minds of an alarming number of susceptible people. But not everyone is a mindless zombie. Among other things, the parasite needs "zero" interest rate borrowing to survive. "The economy" is not synonymous with Silicon Valley nor the SV mind virus.
- soundsgoodtome 4y ago
  Hey can we save this kind of comment for Reddit? Literally the majority the tech you use today was born from companies that were unprofitable and leveraged VC funds at some point. I don’t know about you, but I come to HN for discourse that I could not get on race-to-the-bottom social media sites.
  - MrMan 4y ago
    HN is much worse than many sub-reddits. Look at the belligerent ignorance on display not just here, but that which is demonstrated by the VCs who seem to collectively lack a sufficient knowledge of finance and other things. The decline in quality is evident here, and it doesn't stack up well compared to places where people mostly know what they are talking about.
  - tgv 4y ago
    Well, Intel, Apple and Microsoft, to name a few, have (nearly) always been profitable. But isn't VC supposed to invest in things that are likely to return a profit? There's some risk, which is offset against the ROI, but I don't see a good reason to invest in companies that run a loss.
  - izacus 4y ago
    It absolutely was not.
PKop 4y ago
In the short term, it is interesting to see if this problem grows[0]...if Fed keeps rates at high levels for longer, there is going to be a gravitational pull into treasuries which will cause more banks to fail. It would be very prudent to not have more than the FDIC insured amount in especially smaller regional banks that may have made same errors as SIVB while avoiding Basel III regulations [1] [0] https://twitter.com/TOzgokmen/status/1634329176554520576 https://twitter.com/TOzgokmen/status/1634329176554520576 [1] https://archive.ph/Fx1is https://archive.ph/Fx1is
- esotericimpl 4y ago
  [dead]
mullingitover 4y ago
> In the 2008 crisis, a major lesson was that you can’t effectively reduce risk by bundling together lots of risky assets into one major asset. That was the first domino to fall, but that was survivable. The real problem was that the banking system had a suicide pact in the form of credit default swaps on each other that they couldn't cover. The MBS stuff was bad, but that wasn't what caused 2008. Now I'm just waiting to find out if some other bank is going to need to pay out credit default swaps for SVB in excess of their market cap...
PaulHoule 4y ago
Interest rates were going to go up at some point anyway.
pasquinelli 4y ago
this is a response to the title: the crack that just appeared must be the largest!
rcme 4y ago
I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed created expectations that interest rates had a reasonable chance of staying 0 for the next decade. This blame falls squarely with Powell. He lowered rates in 2019, well before the pandemic. Who can blame someone for seeing near-0 rates in 2019 and believing they would stay that way well into the 2020s? Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.
- phlakaton 4y ago
  So I would say it's safe in one way (if you hold it to the end, you'll get your money back plus interest), unsafe in another (its value on the market before then is not guaranteed). I disagree that the Fed set an expectation for indeterminate 0% interest. I'm sure that's what sugar addicts in the market told themselves, but I think the Fed was clearly, if gingerly, trying to dig themselves out of a 0% hole, having started to raise rates again in 2015. As they should have been!
  - caddemon 4y ago
    You get back your money plus a garbage interest rate relative to what you could've gotten if your money were available now though. That is why it is cheaper, it's not like it's an irrational market dip due to a panic, where the time-value will eventually recover. Unless interest rates go back down very soon the time-value on this thing is definitely a loss. And yeah as a bank it's an extremely stupid move to put 40% of your money into an entirely unhedged bet that interest rates will not go up for 10 straight years. Maybe the Fed didn't handle things as well as they could, and similarly maybe VCs exacerbated the problem unnecessarily, but I don't see how the lion's share of the blame doesn't go to SVB here.
    - 4y ago
senorrib 4y ago
It only takes one bank to default, and an infinite amount of articles like this are instantly published. Urgh.
weeksie 4y ago
I dunno. Fucking duh, a government bond that pays you a fixed amount of interest is going to lose value when inflation is higher than the loan rate.
chernevik 4y ago
There are LOTS of financial players looking for low credit risk long-term assets who can tolerate the associated interest rate risk. Pension funds and life insurance companies have highly predictable long-term cash outflows and often happily buy long-term bonds to match up inflows. They do not care that the market value of their holdings has been hammered by interest rate increases because the assets were selected to fund a future liquidity need. Just because the tech community is just now discovering interest rate risk and maturity matching problems doesn't mean any of this is new to the rest of us.
DeathArrow 4y ago
I thought Bear Stearns going under was exposing a crack. Same for New Century Financial Corp. declaring bancrupcy. Is this going to end with similar results as 2018 by affecting the whole financial system? If yes I hope there will be no bailouts using public money and the financial system will start to be properly regulated and supervised.

In 2008 we learned “cartolarization”. In 2022-23: “Bond convexity”. This word is still not on headlines yet, so maybe more loses has to come.

SideburnsOfDoom 4y ago
> In 2008 we learned "cartolarization" Did we? So what the hell is it?
- astrange 4y ago
  Italian-English for securitization?
  - notpeter 4y ago
    I think you got it. cartolarization ~= cartolari(zzazione) + (securiti)zation. https://it.wikipedia.org/wiki/Cartolarizzazione https://it.wikipedia.org/wiki/Cartolarizzazione
- rationalist 4y ago
  A misspelling of "collateralization"?

TooSmugToFail 4y ago

SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion. Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable. European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leveraged this loophole. For those interested, FT Alphaville describes this in ample detail: Silicon Valley Bank is a very American mess https://on.ft.com/3ywMURD https://on.ft.com/3ywMURD

xwdv 4y ago
The exemption should still be allowed, as it led to great banking innovations for startups. The exemptees just need to be fucking careful with this advanced mode of operation.
- rco8786 4y ago
  > The exemptees just need to be fucking careful with this advanced mode of operation. How many times will we get burned until we learned that banks will not be careful if they are given an opportunity to not be.
  - illiarian 4y ago
    Or that any business will not be careful given the opportunity.
    - deleted 4y ago
      [deleted]
- talideon 4y ago
  So, you're essentially proposing a weaker, informal version of Basel III. In which case, why have such an exemption in the first place? What innovations does it lead to? Restrictions on banking typically exist for a _really_ good reason. After all, we saw what happened when retail and investment banking were allowed to mingle because it 'lead to [...] innovations'. If you're going to advocate for something beyond saying 'but look, innovation!', you need to be more explicit about what those innovations are, because European banking is plenty innovative within the constraints of Basel III.
  - worik 4y ago
    Yes. And the pace of innovation in US banking was very slow, essentially stalled, for a generation from the consumer's POV Here in Aotearoa we have ATMs on every street corner since the 1980s. All but the tiniest traders have had pos electronic transactions for nearly thirty years Other countries are even more advanced (our banks are all like yous now, consumers now viewed as pests) I want innovation in customer services, but what we get is innovations in financial engineering. May they all rot...

m348e912 4y ago

https://twitter.com/DavidSacks/status/1634292056821764099 https://twitter.com/DavidSacks/status/1634292056821764099 Looking at the comments here, it's possible that this may trigger a run on banks.

tekla 4y ago
There is no evidence of this
dragontamer 4y ago
Why? My money at VMFXX is almost entirely composed of safe Fed Repos with average maturity of 2-weeks. VUSXX is mostly Treasury Bills, again of maturity averaging like 2-weeks. My money at SWVXX is composed of AAA-rated bank notes, of similar 2-weeks-ish maturity average. The idea of a bank, like SIVB, being composed of largely 30-year mortgages and 10Y or 30Y Treasury Bonds is insane. The bank deserves to die after taking such high duration risks. There should be _NO_ bailout. I can barely believe a bank was so stupid to keep customer deposits backed by something so risky. ---------- We've been preparing our financial system for the last 15 years (since 2008) for the next financial storm. We've got "stress tests" to see that various banks have severed contamination between each other, at least in theory. Lets see how good our preparations have held up. No point giving up and bailing things out before we've even tested our new financial system regulations. We can afford to let some banks go under. Only if the contagion has a chance of spreading everywhere should we consider the last-ditch effort of a bailout.
- cplusplusfellow 4y ago
  I couldn’t give two shits about banks that go under. The businesses that concern me are the ones who lose deposits.
  - JohnFen 4y ago
    They won't lose deposits except insofar as they decided it was OK to exceed the 250k limit for FDIC insurance. And in deciding to do that, they were deciding to take a risk and got burned by it -- but it was a risk they willingly took on.

nodesocket 4y ago

> A 10Y T-Bill purchased on the first trading day of 2021 is now worth less than $0.80 on the dollar Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.

dougmwne 4y ago
Yes, another way to think about this is that if you bought an .80 t-bill today it would have the return on investment equivalent to a 1.00 bill bought last year. That’s because the new t-bill has a much higher interest rate. So in effect, as the fed raises interest rates, they are destroying the principle of every existing bond on the market. That’s a big problem for anyone owning bonds, especially if they are using them as collateral for leverage.
- JohnFen 4y ago
  > they are destroying the principle of every existing bond on the market What principle are they destroying? Bonds are not, and never were, immune to economic changes. They're just less volatile and react differently than stocks and, if you hold them to maturity, will pay what what they promised. It seems to me that the problem is that a whole bunch of people made investments assuming that there was effectively no risk in doing so. Like the good times would last forever or something.
  - deleted 4y ago
    [deleted]
  - candiodari 4y ago
    These bonds are not held as investments, but as collateral for getting other things (like money to buy mortgages with). If your collateral gets worse ...
    - JohnFen 4y ago
      Either way, they were treating them as if their value was guaranteed prior to maturity. That has never been a thing that these instruments guaranteed. They were gambling, because they failed to hedge that risk.

Apocryphon 4y ago

So between the tech angle and the housing-related investment vehicles, are we remixing 2000 with 2008 now?

cplusplusfellow 4y ago
Self inflicted wounds this time, though. There is nothing wrong with a bank purchasing 80bln of MBS with their depositors money. The issue becomes when the fed suddenly raises rates faster than any time in their history while still failing to fight inflation (which is a result of having a stronger economy).
- UncleOxidant 4y ago
  Not the Fed's fault. SVB's fault for going all-in on 10year duration MBS. If they had mixed in a good amount of shorter duration tbonds/tbills they would've been fine.
  - Scoundreller 4y ago
    It’s also a clientele mix issue. If you have a healthy mix of business and retail clients, payday is a wash. If it’s a lot of business customers; every payday is like a predictable mini bank run. If you have a small number of large, correlated and communicating players, you have a huge bank run risk.
- testfoobar 4y ago
  SVB failed to hedge their interest rate risk.
  - teacpde 4y ago
    Curious what are the ways SVB could have hedged in this scenario?
    - wskinner 4y ago
      Buy T-Bills or other short maturity assets instead of long maturity T-Bonds and mortgage-backed assets.

yalogin 4y ago

As someone that is not following this as closely as I would like, does the collapse of this bank have nothing to do with FTX and Crypto?

morelisp 4y ago
Only indirectly; the tide is receding for the first time in many years, and it's exposing a variety of... issues.
- UncleOxidant 4y ago
  naked swimmers.
tekla 4y ago
FTX was simple fraud. This isn't really related and is more standard bank taking on wayy too much risk.
- thepasswordis 4y ago
  FTX was because they took customer deposits and gambled with them, lost the gamble, and therefore lost the money.
  - mannerheim 4y ago
    Yes, but it was also fraud because they weren't supposed to gamble with that money because they were an exchange, not a bank.
  - fullsend 4y ago
    What is different here? FTX bought shitcoins. SVB bought MBS. They gambled rates wouldn’t change and customer’s wouldn’t withdraw.
jandrese 4y ago
Only indirectly. They released a statement after the FTX collapse saying effectively "don't worry, no problem here", which caused a bank run that they couldn't manage and forced the collapse.

rehitman 4y ago

Everyone says SVB had bad investment and they deserv it etc. However, I am worried about this being the first of many similar financial instutation failing. After all, bonds are supposed to be safe on paper. Increasintg interest rate fast can break many people who are not able to adjust.

delfinom 4y ago
Bonds weren't the problem. The financial strategy employed to use those bonds was the problem. You can do the same thing to yourself. Take your life savings and emergency fund and put it locked up into 10 year treasuries bought direct from the treasury. Now go have an emergency. Good luck, have fun.
- denimnerd42 4y ago
  you can transfer your treasuries to a broker and then sell them. i do see your point though. if your emergency is you need your life savings TODAY then yeah you'd have a problem. but you could probably find a source of credit while you sell.
  - she11c0de 4y ago
    > you can transfer your treasuries to a broker and then sell them. Only to find out that because of the raised rates nobody wants to pay for them enough to cover your emergency.
jschveibinz 4y ago
Just something to consider… A casual look at the regional bank index ETF will show that starting about two weeks ago, the price started to steadily decline and then a sudden drop with SVB. I’m not sure if this decline is well correlated with the total market index over the same period, but if not, it suggests that some people “saw this coming” a couple of weeks ago and the other shoe may still need to drop. Was it just good analysis? Was there some whispering going on? If so, I hope the SEC is watching.

guhcampos 4y ago

This whole discussion around bonds makes me feel like I'm either too stupid or too smart, because it does not make sense to me that SVB would not have any sort of hedging around government bonds? I don't know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It's common sense between investors you need to hold a mix of the 3 to hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it's likely the government will increase interest rates to compensate, and so on. Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?

jfengel 4y ago
The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions. You can, however, buy bonds with varying maturity times. That's generally OK, since there's a liquid market in those bonds. They appear to have been caught flat footed by a sudden run.
- gruez 4y ago
  > The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions. You're thinking of I-bonds, but that's not the only inflation indexed bonds out there. There's also TIPS https://treasurydirect.gov/marketable-securities/tips/ https://treasurydirect.gov/marketable-securities/tips/
bjornsing 4y ago
I'm not aware of any useful hedge for long term US government bonds. There are inflation protected bonds (TIPS), but they wouldn't have worked as a hedge in this case [1]. 1. https://www.schwab.com/learn/story/treasury-inflation-protected-securities-faqs-about-tips https://www.schwab.com/learn/story/treasury-inflation-protec...
- inconceivable 4y ago

1vuio0pswjnm7 4y ago

The author myopically tries to extrapolate this incident to "the economy" and "other industries". SVB's customers panicked. But who are SVB's customers. For the most part, VC, PE and non-profitable "tech" startups. Not surprising they would panic. They produce nothing themselves, conduct surveillance, sell advertising services, pay employees from funding rounds and call this a "business model". This is not "the economy". This is a giant sucking leech attached to it. A parasitic fungus that has attacked the minds of an alarming number of susceptible people. But not everyone is a mindless zombie. Among other things, the parasite needs "zero" interest rate borrowing to survive. "The economy" is not synonymous with Silicon Valley nor the SV mind virus.

soundsgoodtome 4y ago
Hey can we save this kind of comment for Reddit? Literally the majority the tech you use today was born from companies that were unprofitable and leveraged VC funds at some point. I don’t know about you, but I come to HN for discourse that I could not get on race-to-the-bottom social media sites.
- MrMan 4y ago
  HN is much worse than many sub-reddits. Look at the belligerent ignorance on display not just here, but that which is demonstrated by the VCs who seem to collectively lack a sufficient knowledge of finance and other things. The decline in quality is evident here, and it doesn't stack up well compared to places where people mostly know what they are talking about.
- tgv 4y ago
  Well, Intel, Apple and Microsoft, to name a few, have (nearly) always been profitable. But isn't VC supposed to invest in things that are likely to return a profit? There's some risk, which is offset against the ROI, but I don't see a good reason to invest in companies that run a loss.
- izacus 4y ago
  It absolutely was not.

PKop 4y ago

In the short term, it is interesting to see if this problem grows[0]...if Fed keeps rates at high levels for longer, there is going to be a gravitational pull into treasuries which will cause more banks to fail. It would be very prudent to not have more than the FDIC insured amount in especially smaller regional banks that may have made same errors as SIVB while avoiding Basel III regulations [1] [0] https://twitter.com/TOzgokmen/status/1634329176554520576 https://twitter.com/TOzgokmen/status/1634329176554520576 [1] https://archive.ph/Fx1is https://archive.ph/Fx1is

esotericimpl 4y ago
[dead]

mullingitover 4y ago

> In the 2008 crisis, a major lesson was that you can’t effectively reduce risk by bundling together lots of risky assets into one major asset. That was the first domino to fall, but that was survivable. The real problem was that the banking system had a suicide pact in the form of credit default swaps on each other that they couldn't cover. The MBS stuff was bad, but that wasn't what caused 2008. Now I'm just waiting to find out if some other bank is going to need to pay out credit default swaps for SVB in excess of their market cap...

PaulHoule 4y ago

Interest rates were going to go up at some point anyway.

pasquinelli 4y ago

this is a response to the title: the crack that just appeared must be the largest!

rcme 4y ago

I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed created expectations that interest rates had a reasonable chance of staying 0 for the next decade. This blame falls squarely with Powell. He lowered rates in 2019, well before the pandemic. Who can blame someone for seeing near-0 rates in 2019 and believing they would stay that way well into the 2020s? Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.

phlakaton 4y ago
So I would say it's safe in one way (if you hold it to the end, you'll get your money back plus interest), unsafe in another (its value on the market before then is not guaranteed). I disagree that the Fed set an expectation for indeterminate 0% interest. I'm sure that's what sugar addicts in the market told themselves, but I think the Fed was clearly, if gingerly, trying to dig themselves out of a 0% hole, having started to raise rates again in 2015. As they should have been!
- caddemon 4y ago
  You get back your money plus a garbage interest rate relative to what you could've gotten if your money were available now though. That is why it is cheaper, it's not like it's an irrational market dip due to a panic, where the time-value will eventually recover. Unless interest rates go back down very soon the time-value on this thing is definitely a loss. And yeah as a bank it's an extremely stupid move to put 40% of your money into an entirely unhedged bet that interest rates will not go up for 10 straight years. Maybe the Fed didn't handle things as well as they could, and similarly maybe VCs exacerbated the problem unnecessarily, but I don't see how the lion's share of the blame doesn't go to SVB here.
  - 4y ago

senorrib 4y ago

It only takes one bank to default, and an infinite amount of articles like this are instantly published. Urgh.

weeksie 4y ago

I dunno. Fucking duh, a government bond that pays you a fixed amount of interest is going to lose value when inflation is higher than the loan rate.

chernevik 4y ago

There are LOTS of financial players looking for low credit risk long-term assets who can tolerate the associated interest rate risk. Pension funds and life insurance companies have highly predictable long-term cash outflows and often happily buy long-term bonds to match up inflows. They do not care that the market value of their holdings has been hammered by interest rate increases because the assets were selected to fund a future liquidity need. Just because the tech community is just now discovering interest rate risk and maturity matching problems doesn't mean any of this is new to the rest of us.

DeathArrow 4y ago

I thought Bear Stearns going under was exposing a crack. Same for New Century Financial Corp. declaring bancrupcy. Is this going to end with similar results as 2018 by affecting the whole financial system? If yes I hope there will be no bailouts using public money and the financial system will start to be properly regulated and supervised.