7 ms·

No, that is not true. Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes. The Mt

No, that is not true. Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes. The MtM losses are real.

twblalock 4y ago
No matter how many times you say this it's not going to be true. If you hold bonds to maturity you get the principal back. If you sell them at market rates you don't. Those are different outcomes. Nobody is talking about taking on debt at market rates to float the bonds. The bank died because it couldn't do that and couldn't raise capital in other ways either. Now we are talking about the government backstopping things, which is a whole different ballgame.
- rvnx 4y ago
  Also let's not forget that the customers profited from the interests paid by the bonds. If SVB was paying 4.50% (as they claim on their website), then even if the customer takes a 5% loss, it would be only a 0.50% realised loss. I genuinely don't understand why the regulator doesn't push for that unless there is some "lobbying" involved.
- RandomLensman 4y ago
  If you need money now and not in the future, there is cost. The fact that the principal gets paid at maturity is irrelevant - a risky bond does have interest rate sensitivity, too.
  - xmcqdpt2 4y ago
    Of course, that's why SVB failed. But the FDIC doesn't need the money now (well assuming they successfully stop the dominos from falling).
    - RandomLensman 4y ago
      I would have thought that the deposits will leave SVB/what is left of SVB pretty soon, so the FDIC will need to cover that rather now than in the far future.
      - ElevenLathe 4y ago
        The point of doing this is that the deposits hopefully won't feel the need to leave. After all, the BoA account you were planning to move them to doesn't have a public letter from the Treasury Secretary saying it's insured to no limit by the FDIC.
- xorfish 4y ago
  You still have to pay the interest on the loan. If your bond 10y bond you bought two years ago pays 1.5% and you need to take on a loan at 3.5% for 8 years to be liquid, then you are still around 16% in the red. You will find that this is also roughly what the market will discount the bonds.
  - twblalock 4y ago
    The loans we are talking about are from the government and don't need to stick to market rates if the government doesn't want them to.
    - kgwgk 4y ago
      Having the government give zero-interest loans doesn’t quite satisfy the “won’t cost anything to taxpayers” part, does it?
      - twblalock 4y ago
        Depends on where they get the money. The FDIC doesn't take public money at all. The Fed can create money in various ways.
        kgwgk 4y ago
        You’re the one who said “The loans we are talking about are from the government and don't need to stick to market rates if the government doesn't want them to.”
        twblalock 4y ago
        Yes, and? What did I say that contradicted that statement, and what is wrong with that statement?
        kgwgk 4y ago
        I’m lost. The FDIC doesn’t take public money but it will receive loans from the government? If you mean that the Fed will give an zero-interest loan with the bond as collateral that’s the same as just buying it right away at par and eat the loss. Put otherwise, the Fed lends money at almost 5% now. If it does it at 0% it will be earning less than if it was done at the proper rate. In either case, the treasury will get less money in the end. That looks like costing money to the taxpayers.
DebtDeflation 4y ago
>Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes. Correct. This is literally why bond prices move inversely to changes in interest rates. The people criticizing you here are ignoring carrying costs (which are fundamental to finance math) and assuming that default risk is the only form of risk (which is obviously false).

No, that is not true. Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes. The MtM losses are real.

twblalock 4y ago

No matter how many times you say this it's not going to be true. If you hold bonds to maturity you get the principal back. If you sell them at market rates you don't. Those are different outcomes. Nobody is talking about taking on debt at market rates to float the bonds. The bank died because it couldn't do that and couldn't raise capital in other ways either. Now we are talking about the government backstopping things, which is a whole different ballgame.

rvnx 4y ago
Also let's not forget that the customers profited from the interests paid by the bonds. If SVB was paying 4.50% (as they claim on their website), then even if the customer takes a 5% loss, it would be only a 0.50% realised loss. I genuinely don't understand why the regulator doesn't push for that unless there is some "lobbying" involved.
RandomLensman 4y ago
If you need money now and not in the future, there is cost. The fact that the principal gets paid at maturity is irrelevant - a risky bond does have interest rate sensitivity, too.
- xmcqdpt2 4y ago
  Of course, that's why SVB failed. But the FDIC doesn't need the money now (well assuming they successfully stop the dominos from falling).
  - RandomLensman 4y ago
    I would have thought that the deposits will leave SVB/what is left of SVB pretty soon, so the FDIC will need to cover that rather now than in the far future.
    - ElevenLathe 4y ago
      The point of doing this is that the deposits hopefully won't feel the need to leave. After all, the BoA account you were planning to move them to doesn't have a public letter from the Treasury Secretary saying it's insured to no limit by the FDIC.
xorfish 4y ago
You still have to pay the interest on the loan. If your bond 10y bond you bought two years ago pays 1.5% and you need to take on a loan at 3.5% for 8 years to be liquid, then you are still around 16% in the red. You will find that this is also roughly what the market will discount the bonds.
- twblalock 4y ago
  The loans we are talking about are from the government and don't need to stick to market rates if the government doesn't want them to.
  - kgwgk 4y ago
    Having the government give zero-interest loans doesn’t quite satisfy the “won’t cost anything to taxpayers” part, does it?
    - twblalock 4y ago
      Depends on where they get the money. The FDIC doesn't take public money at all. The Fed can create money in various ways.
      - kgwgk 4y ago
        You’re the one who said “The loans we are talking about are from the government and don't need to stick to market rates if the government doesn't want them to.”
        twblalock 4y ago
        Yes, and? What did I say that contradicted that statement, and what is wrong with that statement?
        kgwgk 4y ago
        I’m lost. The FDIC doesn’t take public money but it will receive loans from the government? If you mean that the Fed will give an zero-interest loan with the bond as collateral that’s the same as just buying it right away at par and eat the loss. Put otherwise, the Fed lends money at almost 5% now. If it does it at 0% it will be earning less than if it was done at the proper rate. In either case, the treasury will get less money in the end. That looks like costing money to the taxpayers.

DebtDeflation 4y ago

>Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes. Correct. This is literally why bond prices move inversely to changes in interest rates. The people criticizing you here are ignoring carrying costs (which are fundamental to finance math) and assuming that default risk is the only form of risk (which is obviously false).