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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

#201

Post by Ataraxic »

rcme wrote: post #191

I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed create…

I think you're suggesting that somehow SVB a large and sophisticated bank could not contemplate that the fed would raise interest rates. Not to mention despite the size of their bet, they could have unwound this position for the last couple years since their initial bet.

>And they bought safe assets with that money.

The point is that you can't buy 100B of bonds and say "oh bonds are safe". When you buy low yield bonds with a 10 year maturation you're inherently betting that rates aren't going to rise since their valuation will go down if rates rise.

When you're a bank risk management does not involve hoping the fed doesn't raise interest rates. Sometimes you make the wrong bet but you recognize your mistake, take the loss and sell those T-Bonds earlier. Then you plan your communication to clearly explain why so that a bank run doesn't happen.

It seems the one of the pieces in the chain is that there was a big disconnect between the internal perception of the magnitude of the problem and what was communicated. Silicon Valley VCs and startups are twitchy right now and they tried to exit this position too late with too little explanation and got hit with a very old and very traditional bank run.

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

#202

Post by dannyw »

flangola7 wrote: post #182
gruez wrote: post #176

Earlier quoted context omitted.

>But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly What you're describing is pretty close to a "narrow bank", minus the "owned by government" part. The Fed doesn't like it for several reasons: >The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary…

I have a hard time seeing his 3 and especially 2 are even that bad

The Fed has shareholders, pays dividends, and are partially owned by the biggest banks.

Interests are not perfectly aligned.

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

#203

Post by yuliyp »

Jensson wrote: post #168
Godel_unicode wrote: post #146

Earlier quoted context omitted.

T-Bonds tie up money for a long time, bank deposit are largely retrievable on demand. Banks take a fee for bundling lots of deposits together to invest and depositors trade upside for convenience. If you know you have a 10-year horizon, by all means buy treasuries instead of depositing at a bank.

But that doesn't work if the bank is allowed to put your money into T-Bonds, then your money is locked there just without the upsides. And you can sell T-Bonds, they are as liquid as any other assets, the bank just lost money on it. If the T-bonds hadn't lost value they wouldn't have collapsed, they would have just sold the bonds.

It works usually. The bank can spread out the maturity dates of money such that they'd generally have enough cash on hand to be able to meet withdrawals. The higher yields mean they can still have some cash on hand and still pay some interest to their depositors.

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

#204

Post by steve76 »

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…

[dead]

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

#205

Post by chii »

AnimalMuppet wrote: post #141
Jensson wrote: post #13

Earlier quoted context omitted.

> 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.

There is no downside to society if banks are less profitable. There is a definite downside to the banks , though. And given the chance, at least some banks will try to get out of that downside.

if banking was less profitable, all else being equal, you'd expect that there'd be less banking activities including loans. Less loans means less economic activity from what those loans are funding (such as business loans, or construction loans etc).

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

#206

Post by gruez »

dannyw wrote: post #202
flangola7 wrote: post #182

Earlier quoted context omitted.

I have a hard time seeing his 3 and especially 2 are even that bad

The Fed has shareholders, pays dividends, and are partially owned by the biggest banks. Interests are not perfectly aligned.

> The Fed has shareholders, pays dividends, and are partially owned by the biggest banks.

Those statements might technically be true, but the implied conclusion (ie. that the fed is beholden to banks because of its ownership structure) is not. The federal government essentially controls the fed because the president appoints all the board members, and nearly all of its profits are paid to the treasury.

>The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits, after dividends on member banks' capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury,[22] and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion.[23]

https://en.wikipedia.org/wiki/Federal_Reserve

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

#207

Post by nayuki »

talideon wrote: post #15
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…

Your username is both very ironic and apt in this particular case. Also, your analysis is spot on.

On Reddit they call this phenomenon beetlejuicing. (Subreddit, Know Your Meme, Urban Dictionary)

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

#208

Post by marcosdumay »

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…

AFAIK, variable rate bounds aren't common anywhere else. They are more of an inheritance of the hyperinflation times, and the government really hates them.

But people do love buying them, exactly because they never lose nominal value.

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

#209

Post by she11c0de »

denimnerd42 wrote: post #184
delfinom wrote: post #175

Earlier quoted context omitted.

Bonds weren't the problem. The financial strategy employed to use those bonds was the problem. You can do the same thing to yourself. Take your life savings and emergency fund and put it locked up into 10 year treasuries bought direct from the treasury. Now go have an emergency. Good luck, have fun.

you can transfer your treasuries to a broker and then sell them. i do see your point though. if your emergency is you need your life savings TODAY then yeah you'd have a problem. but you could probably find a source of credit while you sell.

> you can transfer your treasuries to a broker and then sell them.

Only to find out that because of the raised rates nobody wants to pay for them enough to cover your emergency.

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

#210

Post by illiarian »

rco8786 wrote: post #22
xwdv wrote: post #11

Earlier quoted context omitted.

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 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.

Or that any business will not be careful given the opportunity.
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