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SVB shows that there are few libertarians in a financial foxhole

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

#221

Post by wstuartcl »

yunwal wrote: post #193
fisherjeff wrote: post #149

Earlier quoted context omitted.

I mean, it’s a balancing act, right? If you plan to be able to accommodate 20% redemption in a single day , you’re left with a portfolio maturity of 5 days. You will be almost unavoidably marked to market but your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway.

If your customers actions are all highly correlated, you need to be planning for things like this. The fact that having your whole customer base in a single group chat is a bad business model for a bank should not be the taxpayers’ problem.

it's good then that the funds to support the deposits are coming from the bank funded fdic fund not taxes then.

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

#222

Post by nerdponx »

concordDance wrote: post #208
kqvamxurcagg wrote: post #119

Earlier quoted context omitted.

You fail to understand the actual reason for their insolvency. Their risk team chose to buy 10 year treasury bonds instead of 1 year treasury bonds. This is because 10 year bonds offered a higher interest rate (more profit for SVB) but at a much much higher risk. The losses were then unrecognised, hoping the market would turn. Only when it was too late did SVB admit defeat. With their equity gone, they attempted a ba…

> Anyone working in risk management will tell you SVB’s risk team and executive team should be in jail. Jail seems extreme for an error in judgement that neither killed nor maimed anyone.

It nearly killed billions of dollars in real value and required untold thousands of taxpayer-funded employees working through the weekend to unfuck the situation.

If I drive recklessly, I am still guilty of reckless driving even though I didn't hit anyone or anything.

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

#223

Post by smugma »

The key line says it all about how the US (in agreement with tech tycoons) does things:

"Just like many of the banking titans after the global financial crisis of 2008, tech tycoons appear to favour the privatisation of profits and the socialisation of losses. There are few libertarians in a financial foxhole."

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

#224

Post by beezle »

vkou wrote: post #150
sdfghswe wrote: post #75

Earlier quoted context omitted.

Wrong. The business model of banking is managing the money to an appropriate duration. Locking it up isn't a business model.

The whole point of banking is that you borrow money from your depositors at low interest rates, but at a variable term length (The depositor can always withdraw), and you lend money to borrowers at high interest rates, but at a fixed term length (The bank can't just call in your mortgage tomorrow.) Borrow short, lend long. The latter necessitates 'locking money up'. A well-managed bank will properly manage the risk o…

I know you are generalizing but there are times the yield curve is the other way and it is better to lend short and borrow long. But a well managed bank takes care to duration(not maturity) match their assets and liabilities while also taking into account liquidity needs and buffers. Also, the above applies to use of their own capital as well.

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

#225

Post by TuringNYC »

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.

Once the losses on their bonds approached the totality of the SVB equity tier, they should have either accepted the loss, or they should have hedged it away (with an interest rate swap, and locked in a loss.) At that point they would have had to declare the loss (not hide behind AFS accounting treatment) -- and taken a massive equity hit. However, in the above case, the depositors would not have been at risk.

SVB would have lost equity value, but would be a going concern. Instead, once SVB's unrealized losses piled up, SVB rolled the dice hoping things would turn and effectively bet depositor money.

This is not the customers/depositors' fault.

This is not the government's fault.

This is not the Fed's fault.

This is the fault of bank management, specifically risk+accounting+exec teams.

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

#226

Post by dools »

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…

> Now, SVB, loaded with money, could have tried loaning it like crazy, but instead, decided to go the conservative way and buy bonds.

They did try to originate more credit, but couldn't.

But you don't "loan out deposits". Having deposits makes your credit creation more profitable because the cost of that capital is zero, but you only need reserves sufficient to satisfy net flows of funds.

EDIT: Also note that if the bank buys government bonds, the central bank will always buy them back (or at the very least lend you money against them very inexpensively). Government securities satisfy liquidity requirements.

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

#227

Post by doodlesdev »

senko wrote: post #159
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. And then a bunch of small business fail, then everyone else looks at 20 other small and middle-tier banks and realizes they don't want to end up the same way and pull their money out, then they fail, per your suggestion FDIC still does nothing, then another cou…

   > And then a bunch of small business fail, then everyone else looks at 20 other small and middle-tier banks and realizes they don't want to end up the same way and pull their money out, then they fail
Why the hell should a bank fail if people take their money out of it? THAT's the problem. It's just not a thing in other parts of the world _even with fractional banking_. The fact a "bank run" can generate losses for depositors is simply a consequence of a lack of regulation. The further fact this can generate a "contagion" is a consequence of the banking system simply not hedging their investments correctly and not applying simple risk-management mechanisms, and they do it for the same reason: lack of regulation that keeps the accountable.

Again, this kind of problem simply doesn't exist elsewhere. Just look outside the United States and the solution is simple: either you deregulate or you regulate, you can't have your cake and eat it too.

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

#229

Post by shagie »

lordfrito wrote: post #209
shagie wrote: post #194

Earlier quoted context omitted.

Has the amount that it pays when it reaches maturity changed? The yield curve has gone negative - the shorter term bonds are worth more than the longer term ones (and certainly the longer term ones bought back in 2021). And if you were trying to sell me a 10 year note at 0.6% I'd want a serious discount because even your 7 year note at 3.86%, I can do better with a 3 month note at 4.794% or a 6 month note at 5.086%.…

> But that's if you were trying to sell it now . The amount it will pay at maturity remains unchanged and in 10 years This point is lost on everyone. They will get their money back, in 10 years. That's why it's a called 10 year note. They messed up not considering they'd need the money sooner, and failed to seriously consider that no one would want to buy their notes if interest rates went up, because there would be…

A Planet Money episode on bonds as turtles and the impact of changing rates. https://www.npr.org/2022/10/06/1127357539/why-are-stocks-and...

Note that Planet Money is intended more for accessibility and entertainment than hard hitting economic news... but they still get their facts right.

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

#230

Post by tripletao »

notch898a wrote: post #132
sdfghswe wrote: post #124

Earlier quoted context omitted.

> 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?

Put it in bonds of whatever duration the bank chooses, but require sufficient equity that the shareholders will bear the loss and not the depositors?

Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine.

In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.

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