[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)