Earlier quoted context omitted.
SVB failed to hedge their interest rate risk.
Curious what are the ways SVB could have hedged in this scenario?
Buy T-Bills or other short maturity assets instead of long maturity T-Bonds and mortgage-backed assets.
The collapse of SVB exposes the largest crack in the economy
81–90 of 311 posts
Re: The collapse of SVB exposes the largest crack in the economy
#82Earlier quoted context omitted.
Are you sure that is the problem? I see lots of comment today they lost a lot of money on long dated treasuries. Which is "safest" asset.
No. My money market fund (VMFXX) is composed of Fed Repo notes with 13 _DAYS_ of maturity average ( https://investor.vanguard.com/investment-products/mutual-fun... ) A bank holding customer deposits in lol 30 _Year_ or 10 _YEAR_ treasuries is anything but safe. That's called duration risk, and congrats, they just got burned by duration risk.
Sure, what I meant was Basel rules mark treasuries as level 1 capital. So Basel doesn't have much to do with it, as the OP suggested.
Re: The collapse of SVB exposes the largest crack in the economy
#83Earlier quoted context omitted.
SVB failed to hedge their interest rate risk.
Curious what are the ways SVB could have hedged in this scenario?
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 retail bond trader does, build a ladder. If they had simply bought a wider variety of say 1/2/5/10 year securities then they could have let the longer-dated ones sit and sell the shorter duration ones (and they wouldn't have suffered such a huge loss of market value that spooked depositors and started the run in the first place).
Re: The collapse of SVB exposes the largest crack in the economy
#84Earlier quoted context omitted.
The especially funny thing to me is that some VCs were telling their portfolio companies to get their money out of SVP first thing this morning. So Sacks is a VC asking for a bailout on a bank run triggered by VCs. Cry me a river. It's nice that he took time from his busy schedule decimating Twitter to share his views. But in my opinion VCs can't simultaneously claim to be such financial geniuses that they deserve lo…
[flagged]
yeah its high comedy
Re: The collapse of SVB exposes the largest crack in the economy
#85Earlier quoted context omitted.
SVB failed to hedge their interest rate risk.
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 rate-sensitive portfolio, then you buy shorter-dated bonds. They yield less, but surely that's better than "the FDIC seizes your bank and your equity goes to zero."
Re: The collapse of SVB exposes the largest crack in the economy
#86https://twitter.com/DavidSacks/status/1634292056821764099 Looking at the comments here, it's possible that this may trigger a run on banks.
Sorry, but the systemic risk here is vastly overstated. Yes, this will be painful to the tech sector but they made some truly awful decisions and have to pay the piper. We should also consider the moral hazard at play here. How are future tech CEO's going to go into work every day and completely crush it 200% if they know that the government will bail them out if their monkey jpeg startup fails? A bailout will only b…
all I’m seeing is that the monkey jpeg startup just needs to never take VC capital from Andreesen Horowitz and then won’t be tied to using that one bank
just stick with selling directly to collectors and you already have enough money
Re: The collapse of SVB exposes the largest crack in the economy
#87https://twitter.com/DavidSacks/status/1634292056821764099 Looking at the comments here, it's possible that this may trigger a run on banks.
Did he delete this tweet?
https://twitter.com/TheyCallMeTarz/status/163431641123228877...
Re: The collapse of SVB exposes the largest crack in the economy
#88As someone that is not following this as closely as I would like, does the collapse of this bank have nothing to do with FTX and Crypto?
FTX was simple fraud. This isn't really related and is more standard bank taking on wayy too much risk.
FTX was because they took customer deposits and gambled with them, lost the gamble, and therefore lost the money.
Re: The collapse of SVB exposes the largest crack in the economy
#89In 2008 we learned “cartolarization”. In 2022-23: “Bond convexity”. This word is still not on headlines yet, so maybe more loses has to come.
> In 2008 we learned "cartolarization"
Did we? So what the hell is it?
Re: The collapse of SVB exposes the largest crack in the economy
#90This 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 hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it's likely the government will increase interest rates to compensate, and so on.
Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?