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Comment by gizmo | Hacker News Reader

When assets << liabilities nobody wants to buy the bank. Especially when you don't get any time to do due diligence.

This isn't just a liquidity problem, this is a solvency problem. The bonds they have aren't temporarily worth less because nobody wants to buy them, the bonds are liquid and have a fair market value based on the current interest rate environment.

Your cash isn't at the bank anymore. Your cash has been invested in bonds and those bonds are now worth less than the number you see in your bank account. That's bad.

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It's not a solvency problem. The bonds are valued based on when they mature, not what they fetch on the open market.

It is a liquidity issue, which means the money is there, but they can not access the money in the amount of time they need it by.

There is that economic adage attributed to Keynes: In the long run we're all dead.

If you need money but your current assets in whatever form can't furnish that fund for you, I am afraid you're broke.

So you're saying having zero money is equivalent to having future money that can be borrowed against in the present?

Obviously the latter is not as good as just having money. But it's clearly better than the former.

Therein lies the difference between solvency and liquidity problems.

Not at all, my point is to avoid fancy words like "solvency" and "liquidity", they blind you to the basic fact that if you need cash today and you can't get it then you're broke.

Whether you have assets that *you* believe you could draw on in the future doesn't matter when your need is immediate.

You say blindingly fancy words. I say important difference.

You say basic fact. I say oversimplification.

We can argue about the semantics of the word "broke", but the difference here is between losing all your money vs. having to take out a loan now that you're pretty much guaranteed to be able to repay when your bonds mature and only losing the interest payments on that loan.

But here's the the bugger: Folk don't give you loans when you're insolvent.

That's why it's so much better to be illiquid! :)

If you're willing to close your account with payment in bonds that mature in 8 years sure, if you're looking to withdraw cash, no.

It is a solvency issue because they are legally obligated to give people their money back when they ask for it. If none of the customers would withdraw money for the next 10 years they would be fine.

But the customers are startups that have expenses like payroll and AWS. And the climate for raising money is bad, which means a lot of money is being withdrawn every month, and not much new money is getting deposited.

That is not what insolvent means though. There is a difference in not being able to pay back depositors bc you gambled it away on magic beans vs it’s tied up in safe bonds. In both situations you can’t satisfy depositors immediately, but they’re otherwise very different.

For one thing, people buy companies that are insolvent, eg svb, they don’t buy magic bean farms, eg ftx.

The money is not tied up in bonds. Because those bonds are liquid and can be sold on the market in exchange for dollars. And when depositors ask for their money the bank is forced to sell those bonds at a big loss to get dollars. That results in assets < liabilities. Which is insolvency.

All the small banks are going to face this problem.

No, it's absolutely a solvency issue.

A 2023 USD is not the same thing as a 2043 USD; those are difference currencies with an exchange rate. (That'd be nice, but we've collectively agreed a little inflation is good.)

Liquidity is a logistical issue.

Solvency is a value issue.

You cannot with a straight face say "It's just a liquidity issue......that lasts many years."

>The bonds they have aren't temporarily worth less because nobody wants to buy them, the bonds are liquid and have a fair market value based on the current interest rate environment.

Maybe I’m missing something but couldn’t you just potentially wait for the bonds to mature?

"Dear customer, we're currently having a teensy tiny problem with liquidity. Kindly do not withdraw any money for the next 10 years. No worries, though! Everything is fine. Please don't panic."

From what I understand, for this method to become profitable (or even reasonably close) the interest rates have to drop down to where they were when the bonds were purchased. Otherwise the bond yields will never be worth it and the price of the bond(s) continue to stay lower than what they were purchased for.

These bonds were most likely purchased when interest rates were near 0 and I don't think anyone is banking on those rates returning any time soon.

That being said, I'm going off of some basic reading I've done this morning: https://www.fbfs.com/learning-center/bonds-interest-rates-an...

Stupid question but why were they buying bonds when interest rated was near 0? Were they betting on negative interest rates?

Short-term rates were near 0, but Long-term rates were 1.x%, which doesn't sound like much but keep in mind they bought tens of billions of dollars of these bonds.

That 1.x% on that huge amount would be over $1 Billion per year.

It's a mismatch in terms of the duration, ie your depositors can ask for their money back at any time but the bonds don't mature for many years, but as long as the deposits are kept there the bank can get away with it.

The succinct answer is: Greed.

This is a concise follow up, nicely put.

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