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0 pointsSkyMarshal3y ago0 comments

They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since that was one of the lowest risk assets they could invest in and still get enough spread vs their deposits to remain a viable business. It’s strange days when that is considered piling on risk.

While there wasn’t counterparty risk with those assets, there was duration risk. And their mistake seems to have been not selling those the instant the Fed publicly committed to killing inflation with higher interest rates. It should have been clear to them that their exposure to duration risk was rising, and they needed to restructure back in 2021 or early 2022 to mitigate that.

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kasey_junk3y ago

Their a&l committee told them to change their asset mix in 2020 and they didn’t to preserve their profits[0].

All bank risk assessment regimes measure both credit and interest rate risk. Measuring 1 in isolation is idiotic for now obvious reasons.

[0] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

lordfrito3y ago

It's been reported [1] (no paywall [2]) that executives were aware of the risk and continued to purchase higher yielding assets in spite of internal protests.

The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement.

From the article:

     In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there. 

     Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings. 

     Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.

[1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

[2] https://archive.is/HqVWn

digitaltrees3y ago

Thank you for posting. This actually changes my view entirely and makes many of my other posts invalid.

lordfrito3y ago

Yeah I feel this point isn't well known, but likely will be soon.

I love HN because many of us actually listen to each other and debate in good faith, helping each other sharpen our views.

Glad you found it helpful.

2 more replies

jjoonathan3y ago

2008 is an extremely low bar. They still piled on risk.

> that was one of the lowest risk assets they could invest in and still get enough

Was it? They had enormous deposit inflows and were struggling to scale, so their costs should have been undersized by default. They really ought to have been able to survive off the pennies that weren't in front of the steamroller.

lackbeard3y ago

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

tptacek3y ago

They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?

basseq3y ago

No, and that's the point. I understand that banks mark long-term bonds as hold-to-maturity (and only then can list them at par on their balance sheet). But they actually have to hold them. Otherwise, they have to mark them to market, and any sales of HTM bonds flip the entire tranche over to MTM.

So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet.

E.g., a simple balance sheet:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     10k    $1k   $0.8k    $8Mn
  Hold To Maturity Bonds   1M     $1k   $0.8k    $1Bn
  Total                                          $1.08Bn

But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price.

But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     990k   $1k   $0.8k    $792Mn
  Total                                          $792Mn

$16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.

2 more replies

lackbeard3y ago

I guess that's what you normally do when you're overweighted that asset class and you must cover withdrawals!

jandrese3y ago

The rumor I read is that SVB booked those treasuries in some weird way that prevented them from being sold but also prevented them from having to pay taxes on the treasures.

Otherwise you are totally right that it should have been no problem to cover the shortfall by selling off some of the treasuries, even though they would have had to take a haircut on them thanks to the Fed jacking the rates so fast.

j / k navigate · click thread line to collapse

0 comments

kasey_junk3y ago

Their a&l committee told them to change their asset mix in 2020 and they didn’t to preserve their profits[0].

All bank risk assessment regimes measure both credit and interest rate risk. Measuring 1 in isolation is idiotic for now obvious reasons.

[0] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

lordfrito3y ago

It's been reported [1] (no paywall [2]) that executives were aware of the risk and continued to purchase higher yielding assets in spite of internal protests.

The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement.

From the article:

     In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there. 

     Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings. 

     Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.

[1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

[2] https://archive.is/HqVWn

digitaltrees3y ago

Thank you for posting. This actually changes my view entirely and makes many of my other posts invalid.

lordfrito3y ago

Yeah I feel this point isn't well known, but likely will be soon.

I love HN because many of us actually listen to each other and debate in good faith, helping each other sharpen our views.

Glad you found it helpful.

2 more replies

jjoonathan3y ago

2008 is an extremely low bar. They still piled on risk.

> that was one of the lowest risk assets they could invest in and still get enough

lackbeard3y ago

tptacek3y ago

They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?

basseq3y ago

So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet.

E.g., a simple balance sheet:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     10k    $1k   $0.8k    $8Mn
  Hold To Maturity Bonds   1M     $1k   $0.8k    $1Bn
  Total                                          $1.08Bn

But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price.

But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     990k   $1k   $0.8k    $792Mn
  Total                                          $792Mn

$16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.

2 more replies

lackbeard3y ago

I guess that's what you normally do when you're overweighted that asset class and you must cover withdrawals!

jandrese3y ago

The rumor I read is that SVB booked those treasuries in some weird way that prevented them from being sold but also prevented them from having to pay taxes on the treasures.

j / k navigate · click thread line to collapse