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SVB shows that there are few libertarians in a financial foxhole

ft.com

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Re: SVB shows that there are few libertarians in a financial foxhole

#131

Post by khyryk »

jurassic wrote: post #80
khyryk wrote: post #49

Earlier quoted context omitted.

Loading up on bonds when rates are rock bottom instead of bills is asking for trouble. Sure, when yields are at averages or historic highs, back the truck up; otherwise, there's not much difference between yielding 0% and 1%, but a lot of difference in liquidity. As an aside, I remember in recent times various institutions, either by law or voluntarily, loading up on long term bonds at 0% +/- 0.5% bonds. I'm sure tha…

Can you explain the difference between bills and bonds and why the difference was significant in this case? For myself and probably a lot of engineers reading this comment, it seems like inside baseball.

Bills are shorter duration, bonds are longer duration. You can look up the terms to get exact time ranges. When the yields for both are very low, there's next to no upside to holding onto the low yield for longer. The downside is that if one is in critical need of cash immediately, nobody wants the old low-yield (compared to current yields) bonds and will only buy them at a discount. For bills, due to the shorter duration, extra liquidity is built-in.

Re: SVB shows that there are few libertarians in a financial foxhole

#132

Post by notch898a »

sdfghswe wrote: post #124
notch898a wrote: post #107

Earlier quoted context omitted.

Demand deposits can be immediately be recalled, so where exactly do you suggest they park it? In the central bank -- no bueno they've denied banking license for narrow banking. Margin lending that allows recall at any moment? I can think of some options but frankly I'd rather have my money in a bank that over-extends themselves on treasuries than most the alternatives. At least I'd most likely get 90+% of my money ba…

> Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit. Exactly, so don't lock it up. Glad you agree with me.

So put it where? Narrow banking is illegal by virtue of denying the banking license. You're basically left with what, something like recallable loans/margin? What are the other options?

Re: SVB shows that there are few libertarians in a financial foxhole

#133

Post by alchemist1e9 »

thepasswordis wrote: post #96

Why on earth would libertarians give up tens of billions of dollars to a bank which the government could decide to nationalize?

Exactly there isn’t lots of libertarian depositors at SVB, quite the opposite most likely. It seems because of Thiel involvement the FT author decided it was enough to write a propaganda article.

Re: SVB shows that there are few libertarians in a financial foxhole

#134

Post by doodlesdev »

sdfghswe wrote: post #110
doodlesdev wrote: post #97

Earlier quoted context omitted.

I suggest that the FDIC does what it should do and cover all losses that were insured, and let the uninsured losses be realized, as they should be normally. There's a gigantic moral risk in the FDIC covering uninsured losses, because that's a value judgement, and if next week my bank fails why shouldn't the FDIC cover all of my uninsured losses too? The value judgement that was done here is that if they didn't do it…

> I suggest that the FDIC does what it should do and cover all losses that were insured, and let the uninsured losses be realized, as they should be normally To which someone like would you say "but who's paying for that? the other banks? and guess where their money comes from?

That is ok as long everyone plays by the same rules. The problem I have specifically is the fact they are making a "special exception" for Silicon Valley bank, but haven't done for other bank collapses. This case of course had the potential to generate contagion, but if that's a thing that happens too often, then there is a systemic issue with how banks are regulated in the United States. I should note this is my point of view as an outsider. Outside the United States issues such as the one we are discussing simply aren't a thing because banks are held to much larger scrutiny, and thus spending depositors money into MBS is not really a thing.

Again, regardless of your political stance or economical, I recommend you read the linked Forbes article about the "Reform Act" I linked to previously [0].

[0]: https://www.forbes.com/sites/mayrarodriguezvalladares/2023/0...

Re: SVB shows that there are few libertarians in a financial foxhole

#135

Post by pg314 »

fnordpiglet wrote: post #36
sdfghswe wrote: post #24

Earlier quoted context omitted.

> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. Sure excess liquidity was necessary for this behavior to be pos…

I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. The mark to market only comes relevant if you’re experiencing a run, which they were holding sufficient regulatory liquidity for. They should have hedged their rates risk a bit better, especially as infla…

> If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market

The NPV calculation should use the market intrest rate. If you use that, it should be pretty much the same thing: an efficient market should value a bond at its NPV.

However, they were allowed to value HTM (hold to maturity) bonds at face value. That is just non-sensical from an economics perspective and just hides losses.

Re: SVB shows that there are few libertarians in a financial foxhole

#136

Post by johnbellone »

thereddaikon wrote: post #115
doodlesdev wrote: post #59

Earlier quoted context omitted.

Depositors aren't though, which is the issue. FDIC will cover losses that weren't actually insured (above $250K). The money doesn't come out of the "taxpayer" but instead from the banks, but guess from where the banks get money from?

They are getting it from liquidating the assets of the Bank. There are three parties who are "owed" here. The depositors, holders of debt and investors. Depositors are being made whole. Anyone who holds secured debt will get what's left. Owners of unsecured debt and investors are left out. Which is fine by me.

Those assets may take years to liquidate. Nobody wants to be in the business of holding the bag on an interest free loan for that length of time. Especially when that totals to >$150B.

Re: SVB shows that there are few libertarians in a financial foxhole

#137

Post by mhb »

olivermarks wrote: post #71
cal5k wrote: post #63

Earlier quoted context omitted.

At the time they were purchased, central banks around the world were going out of their way to assure people that rates would not be going up for a long time. Not excusing their failure to properly account for duration risk, but regulators didn't see this coming either - what they were doing was considered to be not only wholly acceptable, but downright "safe".

It was naive, lazy and dangerous of SVB to assume in a 10 year window nothing would change IMO

Don't forget greedy. Not hedging saves money.

Re: SVB shows that there are few libertarians in a financial foxhole

#138

Post by fnordpiglet »

psychlops wrote: post #66
ralph84 wrote: post #47

Earlier quoted context omitted.

Why hedge when we privatize the profits and socialize the losses? SVB execs sold tens of $millions in stock before the failure. Are the execs going to be forced to return the compensation they received for showing higher profits by not hedging?

Don't forget they also paid bonuses the morning they failed.

This is the time of the year when banks pay bonuses for the prior years work. My understanding is it was scheduled annually at the same time and happened to occur the day they went insolvent. Frankly I’m down with Nancy in client confirm generation getting her bonus. The senior managers all got fired and their comp clawed back, so seems legit.

Re: SVB shows that there are few libertarians in a financial foxhole

#139

Post by UncleOxidant »

elzbardico wrote: post #11

The author ignores that behind the downfall of SVB was a climate of excess liquidity on the markets, a bonanza created by the authorities that made SVB see itself with a glut of funds. Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds. Someone could argue that they could have foreseen that this abundance of liquidity in the markets, alon…

> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED.

Yes, the FED did leave interest rates too low for much too long. Rates should probably have been in the 3 to 4% range prior to the pandemic which means they should've been tightening more since about 2015. But lowering to essentially 0 during the early stage of the pandemic in order to keep us out of another great depression seems like the right decision.

As for the SVB downfall: there's plenty of blame to go around. Yes, SVB should have diversified their bond buys (more shorter term durations mixed in). And as mentioned above, the Fed bears some blame. But so do the VCs who panicked startups into a bank run last week - the VCs who probably strongly recommended that their startups put their money in SVB in the first place. And the startups themselves could have been doing a better job spreading their money around to other banks in order to minimize their risk in case of bank failure (admittedly, most startups probably don't have this top of mind as they're busy with other things).

Ultimately, the entire idea of a Silicon Valley Bank that was essentially just serving VC funded startups was probably a bad one from the start. Diversification of customer base, geography, industry served, etc. was absent. It's like monocrop farming: A pest that comes in and attacks your one crop can wipe you out more easily than if you grow a variety of crops.

Re: SVB shows that there are few libertarians in a financial foxhole

#140

Post by varispeed »

Libertarianism, socialism, capitalism etc. all fail to take into account human nature and that's where all the conflicts come from.

Regulation is necessary to ensure that people who manage to get into position of power, who have certain kinds of personality disorders and other issues won't be able to game the system to their own personal advantage or satisfaction.

In most cases whether it is socialism or capitalism, while they have good intentions, they are always ruined by corruption and other other undesirable behaviours that typically people climbing to the top have.

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