[HN Gopher] The Collapse of SVB Exposes the Largest Crack in the...
___________________________________________________________________
The Collapse of SVB Exposes the Largest Crack in the Economy
Author : brockwhittaker
Score : 90 points
Date : 2023-03-10 21:09 UTC (1 hours ago)
(HTM) web link (www.brooock.com)
(TXT) w3m dump (www.brooock.com)
| m348e912 wrote:
| https://twitter.com/DavidSacks/status/1634292056821764099
|
| Looking at the comments here, it's possible that this may trigger
| a run on banks.
| happytoexplain wrote:
| I don't use Twitter. The Tweets I see when I click this link
| are 80% political shitflinging from one side of US politics
| (even the _replies_ to each one are 100% one-sided), and 20%
| non-political. Why?
| danielheath wrote:
| Because that's estimated to maximise the chance of you
| signing up?
| quickthrowman wrote:
| Twitter attempts to manipulate your emotions by showing you
| controversial things to keep you looking at ads as long as
| possible, just like every other social media company.
| spamizbad wrote:
| Sorry, but the systemic risk here is vastly overstated. Yes,
| this will be painful to the tech sector but they made some
| truly awful decisions and have to pay the piper.
|
| We should also consider the moral hazard at play here. How are
| future tech CEO's going to go into work every day and
| completely crush it 200% if they know that the government will
| bail them out if their monkey jpeg startup fails? A bailout
| will only breed lazy entrepreneurs, taking hard-earned tax
| dollars away from America's job-doers.
| yieldcrv wrote:
| all I'm seeing is that the monkey jpeg startup just needs to
| never take VC capital from Andreesen Horowitz and then won't
| be tied to using that one bank
|
| just stick with selling directly to collectors and you
| already have enough money
| 7speter wrote:
| Dunno if you're being intentionally tongue in cheek, but a
| monkey jpeg startup is pretty lazy/scammy/bs-y
| arcanemachiner wrote:
| I believe it is a reference to the NFT craze.
|
| So, yes to all 3.
| tekla wrote:
| There is no evidence of this
| bagels wrote:
| I don't think the statement is completely misplaced as other
| comments on this thread indicate. Everyone has to be wondering
| if their bank is next. Just an anecdote, but, I'm sitting here
| wondering if I should sell the bank bonds I bought because the
| counterparty risk just skyrocketed. It doesn't take much to get
| the snowball going.
| dragontamer wrote:
| 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.
| qqqwerty wrote:
| He is suggesting that the Fed/FDIC make depositors whole, not
| necessarily bail out the bank.
|
| There is a good chance that depositors will be made whole
| regardless, but even if it does require some intervention it
| is probably worth it to prevent this from spreading to other
| banks. There are very valid reasons why certain organizations
| would need to keep more than $250k in an account, and if
| everyone of them started transferring their money to a
| handful of the safest institutions, then things could quickly
| get out of control.
| cplusplusfellow wrote:
| I couldn't give two shits about banks that go under. The
| businesses that concern me are the ones who lose deposits.
| JohnFen wrote:
| 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.
| SketchySeaBeast wrote:
| As a rule let's not use Twitter comments as indicators of
| anything, but most I see seem to either be enjoying the chaos
| or confused as to how SVB's bad decisions leading it to fail
| will lead to other banks failing.
| EwanG wrote:
| Is that universally a bad thing? Are all US Banks so thinly
| capitalized that none of them could survive a run? If so, then
| doesn't that make one question why you'd ever keep money in a
| Bank in the first place?
|
| I get that the FDIC insurance is supposed to make you whole as
| long as you have less than $250K in a bank. But then you have
| to ask if the FDIC can actually cover that for several banks at
| a time - particularly at a time when the debt ceiling has not
| been raised and so Treasury can probably ill afford additional
| unplanned spending.
| dougmwne wrote:
| What you are talking about here is the financial apocalypse.
| If a hundred million people all lose the money in their bank
| accounts, then we go back to the barter system overnight. The
| thing you will be bartering will likely be seeds and
| ammunition.
| 7speter wrote:
| Though I've never connected the dots the way you have, the
| last time major commercial banks (like WaMu) failed it was
| because of being caught swapping much riskier assets than
| this article is pinning the blame of SVB failing for. Also,
| when it was clear that there was a risk for cascade collapse
| of major commercial banks, fed leadership and potentially
| people from the fdic went to congress and told them to stop
| playing partisan football, and TARP was passed within a week.
|
| If SVB really failed because it misstepped and believed it
| would make more money off of government bonds and didn't, I
| don't really see there being a risk of the major banks
| collapsing. If lots of smaller banks banked on (no pun
| intended) doing the same thing though...
| lotsofpulp wrote:
| Did he delete this tweet?
|
| https://twitter.com/TheyCallMeTarz/status/163431641123228877...
| fshbbdssbbgdd wrote:
| The subtext here is David Sacks and his friends are investors
| in Silicon Valley companies. Lots of Silicon Valley companies
| are depositors of SVB and could lose money if there is a
| haircut on assets over $250k, or at least will lose temporary
| access to their cash. David Sacks wants SVB to be bailed out by
| a major bank so those deposits are made good. He's talking
| about a wider economic impact because that's an argument that
| such a bailout is necessary for the country, not just local
| VCs.
| practice9 wrote:
| > friends
|
| Chamath?
| ohashi wrote:
| So gambler wants house to cover his losses because his
| friends and him won't be able to continue gamble if they
| lose.
| cplusplusfellow wrote:
| I don't understand the disgust I'm reading for VCs and
| startups. Bailing out the bank doesn't mean we let the bank
| CEO get richer off this transaction (like we did in 2008). It
| means the startup companies making payroll are going to
| survive and continue building the future of technology and
| healthcare.
|
| What am I missing?
| sseagull wrote:
| There's disgust for a few reasons. One is that the wealthy
| (including VCs) have an undue influence on society and the
| economy just due to being wealthy. It's always nice to see
| them take a hit sometimes.
|
| Silicon Valley is "building the future", but at the same
| time can be very disconnected from the lives of many people
| around the country. That leads to mistrust and lack of
| empathy when these kinds of things happen.
| snuxoll wrote:
| I'll add on an extra layer of disguist: cash management
| accounts exist. They've existed for a long time. They
| serve literally to hedge against the risks of bank
| failures by automatically sweeping funds in them between
| multiple FDIC member banks to:
|
| 1. Increase the amount of funds covered by FDIC insurance
|
| 2. Reduce the potential for loss of funds by a bank
| failure
|
| I get that it's a pain in the ass to manage a bunch of
| accounts, but any business with >$1mm in cash reserves
| really should have everything but their operational float
| in a CMA or manually move it around themselves into
| multiple banks. When I see comments about a startup that
| had $x million in cash with SVB I have to wonder what the
| hell the founder and their investors were thinking
| keeping all of that in a single place.
| yieldcrv wrote:
| you're not missing anything
|
| its not just government bailout versus nothing. private
| equity could have come together and tried to shore of the
| bank in its capital raise, but nobody (not enough) wanted
| to be first. their own collective risk aversion is their
| demise. And on the greed front, people totally plan to buy
| the carcass and firesold assets.
| [deleted]
| morelisp wrote:
| You're basically saying "it's bad when the capital class
| being paid off isn't my subset, but very very good when it
| is my subset."
|
| It's capitalists top to bottom; you all misjudged the risks
| and now you all get to eat shit basically in direct
| proportion to how much you misjudged them. Enjoy!
| JohnFen wrote:
| It means that the bank was gambling, lost, and wants to
| externalize those losses onto the rest of us who weren't
| gambling.
| worik wrote:
| Yes
|
| An alternative is to bankrupt the partners, cancel the
| shares, then take action for depositors
|
| That is what did not happen in 2008
| drstewart wrote:
| Funny they in threads about crypto companies failing
| everyone cries about "this is why we have regulations and
| safety valves in the financial industry!" but now when
| these are in force people cry about these safety valves
| and regulations existing, and how the companies should
| just be allowed to fail
| wpietri wrote:
| The especially funny thing to me is that some VCs were
| telling their portfolio companies to get their money out of
| SVP first thing this morning. So Sacks is a VC asking for a
| bailout on a bank run triggered by VCs. Cry me a river.
|
| It's nice that he took time from his busy schedule decimating
| Twitter to share his views. But in my opinion VCs can't
| simultaneously claim to be such financial geniuses that they
| deserve lower taxes (via the carried interest loophole) but
| such babes in the woods that they need Uncle Sam to bail them
| out for a bad financial decision. Pick a lane, buddy.
| malermeister wrote:
| It's also funny to see a free market absolutist suddenly
| call for bank bailouts.
|
| The Nanny State is good all of a sudden if Big Government
| protects _your_ interests instead of the interests of the
| vulnerable? Interesting.
| wpietri wrote:
| Ah yes, a classic for sure. That pairs well with the
| libertarians who demand freedom to do anything they want
| to others, with a state just large enough to keep their
| inferiors from doing anything in return.
| MrMan wrote:
| yeah its high comedy
| yalogin wrote:
| 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?
| jandrese wrote:
| 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.
| timy2shoes wrote:
| They are related in that crypto (and ftx) and the massive
| explosion of start-ups are a low-interest rate phenomena.
| morelisp wrote:
| Only indirectly; the tide is receding for the first time in
| many years, and it's exposing a variety of... issues.
| UncleOxidant wrote:
| naked swimmers.
| tekla wrote:
| FTX was simple fraud. This isn't really related and is more
| standard bank taking on wayy too much risk.
| thepasswordis wrote:
| FTX was because they took customer deposits and gambled with
| them, lost the gamble, and therefore lost the money.
| UncleOxidant wrote:
| Given the timing one wonders if Silvergate had more impact on
| SVB. SVB claimed to have minimal crypto exposure, but one
| wonders what might come out as the FDIC digs deep into their
| books.
| marcopicentini wrote:
| 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 wrote:
| > In 2008 we learned "cartolarization"
|
| Did we? So what the hell is it?
| rehitman wrote:
| 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.
| jschveibinz wrote:
| 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.
| TooSmugToFail wrote:
| 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
| rr808 wrote:
| Are you sure that is the problem? I see lots of comment today
| they lost a lot of money on long dated treasuries. Which is
| "safest" asset.
| dragontamer wrote:
| No.
|
| My money market fund (VMFXX) is composed of Fed Repo notes
| with 13 _DAYS_ of maturity average
| (https://investor.vanguard.com/investment-products/mutual-
| fun...)
|
| A bank holding customer deposits in lol 30 _Year_ or 10
| _YEAR_ treasuries is anything but safe. That's called
| duration risk, and congrats, they just got burned by duration
| risk.
| rr808 wrote:
| Sure, what I meant was Basel rules mark treasuries as level
| 1 capital. So Basel doesn't have much to do with it, as the
| OP suggested.
| worik wrote:
| > SVB used an exemption from Basel III,
|
| Really?
|
| That is interesting. Why? How? Who else?
| toomuchtodo wrote:
| https://archive.is/Fx1is
| xwdv wrote:
| 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 wrote:
| > 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.
| talideon wrote:
| 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 wrote:
| 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...
| MrMan wrote:
| nonsense - what banking innovations do startups need? is
| there really any such thing as a startup? or are we just
| talking about small businesses some of which grow into larger
| still unprofitable businesses? hopefully this mythologizing
| stops
| layer8 wrote:
| > The exemptees just need to be fucking careful
|
| You mean "need to have sheer luck in their gambling".
| bequanna wrote:
| Head, we get bonuses
|
| Tails, taxpayers bail us out
| nordsieck wrote:
| > Head, we get bonuses
|
| > Tails, taxpayers bail us out
|
| You're doing to have to define "bail us out".
|
| SVB's shareholders got wiped out.
| bequanna wrote:
| Please name one "banking innovation" the banking industry has
| implemented in the last decade which has benefitted
| consumers.
| morelisp wrote:
| VCs and founders must believe SVB offers at least one, or
| why not go with a normal bank?
| Jensson wrote:
| > Downside: this also means bank is going to be less
| profitable.
|
| What are the downsides to society if banks are less profitable?
| They invested in T-Bills, I don't see how that investment
| served society in any way.
| PKop wrote:
| Literally funds the government lol
| phkahler wrote:
| Taxes fund the government. Bonds are just a way to avoid
| managing a budget.
| PKop wrote:
| Ok so you're saying it's bad that they fund the
| government. But given the large budget deficit we have,
| the statement is true.
| arez wrote:
| government doesn't need taxes to fund anything, it can
| just create money and sell bonds. Taxes are just for
| steering money flows
| nostromo wrote:
| Inflation would like a word.
| [deleted]
| dragontamer wrote:
| > They invested in T-Bills
|
| They invested in T-Bonds (10Y or longer) and MBS (mortgages)
| it seems like, not T-Bills (1Y or shorter)
|
| The distinction is extremely important in this case. If they
| were trading T-Bills, they would have survived. Instead, they
| took on much riskier T-Bonds (probably hoping to make more
| money).
| talideon wrote:
| Your username is both very ironic and apt in this particular
| case. Also, your analysis is spot on.
| nodesocket wrote:
| > 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 wrote:
| 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 wrote:
| > 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.
| candiodari wrote:
| 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 wrote:
| 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.
| [deleted]
| quantgenius wrote:
| They would have gotten their principal back but missing out on
| interest for 10 years is a huge cost, particularly if you have
| to pay out interest in the interim to your depositors.
| worik wrote:
| > If they could have held the entire term they would get back
| 100%.
|
| What counts is the real, not nominal, value
| projektfu wrote:
| I noticed that he conflated the safety of a T-note* with the
| asset price. US Treasuries are AAA-rated super safe guaranteed
| returns because they're not expected to default or miss a
| coupon payment, and they'll be redeemed for the full value when
| they mature. That doesn't mean they don't have market prices
| that fluctuate.
|
| *T-bills are up to 52 weeks maturity.
| stefan_ wrote:
| Just so we are all fully aware: SVB bet in ~2020 that interest
| rates they offer could be well below 1% (given their operating
| costs and what not) for 10 years. Obviously, by 2023 already,
| depositors were expecting much more.
|
| So, yeah, these MBS will probably pay out when held to
| maturity, but their customers didn't buy MBS, they deposited
| their money in a bank.
| nostromo wrote:
| Owning bonds that pay 1% for 20 years when inflation is running
| at 7% is a great way to lose lots of money.
|
| You'll get that money back come 2041, it just won't be able to
| buy you much.
| TacticalCoder wrote:
| > 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%.
|
| 100% back in, say, 9 years at 1.5%. Or take the 20% hit today,
| buy back bonds giving 4% yearly and end up with the same
| amount. I mean: it's literally how the price drop is calculated
| right?
| guhcampos wrote:
| 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?
| Apocryphon wrote:
| So between the tech angle and the housing-related investment
| vehicles, are we remixing 2000 with 2008 now?
| cplusplusfellow wrote:
| 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).
| worik wrote:
| > The issue becomes when the fed suddenly raises rates faster
| than any time in their history
|
| No. That is a fact. But it does not collapse properly run
| banks.
| throwaway2847 wrote:
| Nobody forced SVB to buy up long bonds at negative real
| yields.
| testfoobar wrote:
| SVB failed to hedge their interest rate risk.
| teacpde wrote:
| Curious what are the ways SVB could have hedged in this
| scenario?
| wskinner wrote:
| Buy T-Bills or other short maturity assets instead of
| long maturity T-Bonds and mortgage-backed assets.
| snuxoll wrote:
| Not investing such a large percentage of their capital in
| long-duration fixed income vehicles all at once.
|
| There's nothing wrong with going long on duration, it's a
| hedge against decreasing rates. The problem is when you
| go all-in on long duration investments and rates suddenly
| shoot up like they did, you now can't sell those assets
| without eating a massive loss.
|
| An appropriate hedge would have been doing what every
| retail bond trader does, build a ladder. If they had
| simply bought a wider variety of say 1/2/5/10 year
| securities then they could have let the longer-dated ones
| sit and sell the shorter duration ones (and they wouldn't
| have suffered such a huge loss of market value that
| spooked depositors and started the run in the first
| place).
| actionablefiber wrote:
| They took deposits from depositors who would blow up if
| interest rates went up, and then used those deposits to
| buy assets that would blow up if interest rates went up.
| Interest rates went up, so their assets crashed at the
| same time that deposits plummeted and withdrawals
| skyrocketed.
|
| If you want to standardly hedge against interest rate
| risk, that's what swaps are for. If you want to take on a
| comparatively less rate-sensitive portfolio, then you buy
| shorter-dated bonds. They yield less, but surely that's
| better than "the FDIC seizes your bank and your equity
| goes to zero."
| beezle wrote:
| No, please do not even try to imply that this was the Fed's
| fault.
|
| They did not raise "suddenly". The move away from ZIRP was
| well telegraphed. Once they did the first hike the only
| question was how fast and how far. Most in the market
| initially expected an end rate around 3% (ie, 100bp over
| their target inflation rate of 2%). As it became increasingly
| clear that the inflation was not just about supply chain
| disruptions that end rate target went to 4% and higher.
|
| Further - every bank has a team with one responsibility -
| asset and liability management. They are responsible for not
| just the product choices (ie, MBS vs Treasuries, etc) but
| also matching durations. The Treasurer of the bank is also
| responsible for oversight, including whether or not any of
| these positions should be hedged and to what extent.
|
| This is entirely on the bank staff and management.
___________________________________________________________________
(page generated 2023-03-10 23:00 UTC)