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The collapse of SVB exposes the largest crack in the economy

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Re: The collapse of SVB exposes the largest crack in the economy

#121

Post by snuxoll »

teacpde wrote: post #110
snuxoll wrote: post #83

Earlier quoted context omitted.

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…

Makes me wonder why they made the risky move in the first place, they surely knew the risks, but still did it, because of greed for higher yields?

Yields on short-term fixed income securities were absolute shit, barely above 0%. If you've got a bunch of cash and nowhere to put it to work then even a horribly yielding MBS seems like a good idea, and the inflation monster hadn't yet come to roost making the Fed start jacking rates up far earlier than anybody would have expected.

Even at the time it should have been seen as a short-sighted move, however. It was obvious ZIRP wouldn't go on forever and rate risk would bite you in the backside, so I can't call it anything but careless yield chasing without proper risk management.

Re: The collapse of SVB exposes the largest crack in the economy

#122

Post by kqr2 »

rehitman wrote: post #80

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.

https://www.marketwatch.com/story/20-banks-that-are-sitting-...

Re: The collapse of SVB exposes the largest crack in the economy

#123

Post by Forgeties79 »

xwdv wrote: post #11
TooSmugToFail wrote: post #2

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 leve…

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.

“The exemption for dumping hazardous materials should still be allowed, as it led to great manufacturing innovations for startups.

The exemptees just need to be f**ing careful with this advanced mode of operation.”

This sounds tongue in cheek I know, but SVB’s situation has created real world consequences even for me, someone who has no money tied up with them. My go-to for bonded cellular networks (so i can run a livestream for my employer, a small tech start up) had to tell all of us who use them to pause payments immediately today as this unfolded and are not taking new rentals in the meantime. They’re literally not getting paid right now. This is not a holding pattern that can last long and is highly disruptive for them and, consequentially, me. A video content guy at a small start up on nearly the other side of the country.

Re: The collapse of SVB exposes the largest crack in the economy

#124

Post by saurik »

morelisp wrote: post #70
bequanna wrote: post #54

Earlier quoted context omitted.

Please name one “banking innovation” the banking industry has implemented in the last decade which has benefitted consumers.

VCs and founders must believe SVB offers at least one, or why not go with a normal bank?

And how did that work out for them? Are many of the people who were using SVB yesterday happy about their decision today? If they could go back in time and give up whatever that innovation was, and not be praying that they still have their money next week, are you saying most of them would be happy where they are? The problem here is that the system just isn't transparent enough: you put your money in a bank and I guess you just have to assume that they are really really smart or you lose your money... people make fun of crypto here constantly, but at least there everything is an open book. At the end of the day, the situation with SVB is actually worse than some scary DeFi protocol.

Re: The collapse of SVB exposes the largest crack in the economy

#125

Post by morelisp »

gesticulator wrote: post #107
morelisp wrote: post #70

Earlier quoted context omitted.

VCs and founders must believe SVB offers at least one, or why not go with a normal bank?

This has to do with a web of relationships and risk tolerance, not some product set…

Whatever you mean by "relationships" is in fact an "innovation" in the banking sense.

Re: The collapse of SVB exposes the largest crack in the economy

#126

Post by bjornsing »

guhcampos wrote: post #90

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 h…

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-protec...

Re: The collapse of SVB exposes the largest crack in the economy

#127

Post by Dalewyn »

majewsky wrote: post #120
nostromo wrote: post #63

Earlier quoted context omitted.

Inflation would like a word.

Speaking from my German perspective. Our (European) central bank printed central bank money like crazy the last 10 years, and apparently it was not a problem. Prices only shot up once there were supply shocks due to Covid and Putin. And sure enough, the supply shocks are slowly waning, and hence YoY inflation rates are also rapidly declining. Yet everyone keeps talking about how the money supply is causing inflation,…

At a very basic level, more monies in circulation means each individual money is worth less than before. If each individual money is worth less than before, you need more monies to buy something. This is fine if you have more monies on hand to compensate, but generally this isn't the case for individual persons.

Thus, you have inflation: The price of goods inflate(!) because the value of monies drops inversely to the monies in circulation.

Re: The collapse of SVB exposes the largest crack in the economy

#128

Post by bjornsing »

actionablefiber wrote: post #85
teacpde wrote: post #76

Earlier quoted context omitted.

Curious what are the ways SVB could have hedged in this scenario?

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 ra…

> They yield less, but surely that's better than "the FDIC seizes your bank and your equity goes to zero."

For the individual banker, perhaps it's not? If rates stay low they get a fat bonus, if they go up they just get a new job somewhere else.

Re: The collapse of SVB exposes the largest crack in the economy

#129

Post by talideon »

astrange wrote: post #114
bequanna wrote: post #54

Earlier quoted context omitted.

Please name one “banking innovation” the banking industry has implemented in the last decade which has benefitted consumers.

Same-day ACH, aka why you now get paid two days earlier than you used to. Check deposits by smartphone camera. Most of the stuff on https://www.bitsaboutmoney.com .

OK, how about mentioning something that isn't typical in the EU while still adhering to Basel III. Plenty of time here...

Meanwhile, how close is the US to making Chip-and-PIN a thing?

And who still uses cheques these days?!

Re: The collapse of SVB exposes the largest crack in the economy

#130

Post by bequanna »

astrange wrote: post #114
bequanna wrote: post #54

Earlier quoted context omitted.

Please name one “banking innovation” the banking industry has implemented in the last decade which has benefitted consumers.

Same-day ACH, aka why you now get paid two days earlier than you used to. Check deposits by smartphone camera. Most of the stuff on https://www.bitsaboutmoney.com .

So, they restrict my access to money that is mine for less time? I’m not sure I would call this an innovation.
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