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Comment by chx | Hacker News Reader

I found https://www.livemint.com/news/world/explainer-silicon-valley... much easier to understand. It would seem the crux of the matter is:

> the bank purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Almost 97% of these MBS were 10+ years in duration, with a weighted average yield of 1.56%.

> with the rise in Fed rates, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield. Precisely, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value.

The second paragraph explains what the original article summarized as "The trouble is that when rates started to go up, mortgage assets got hit hard".

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1. Bank buys lots of mortgages (well, assets backed by mortgages) at 0 interest rates. Let's say those mortgages are $100 each.

2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105.

3. Tech sector experiences a crunch. All the sudden more and more companies are taking money out of their bank account.

4. In order to process withdrawals, SVB is now forced to sell the mortgages it bought for $100 for $75. If this continues SVB won't be able to find enough money to pay depositors.

thank you, this was helpful

Great summary, thanks (assuming it's accurate!).

> 2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105.

It's not that new mortgages are shiny and old mortgages aren't; it's that $100 in 5 years (or whatever) is now worth less. It's easier with zero coupon bonds, because there's only the maturity, so a $100 zero coupon bond that matures on date X is worth $Y, regardless of when it was issued; and $100 mortgage that completes on date X needs to have each payment adjusted for current value. Clearly, a smaller series of payments is worth less than a larger series of payments, even though the principal amount is the same.

Yeah really its based on long-term t-bills and the risk premium.

Because safe interest rates went up, people can get a better deal on long term debt unless they get a discount on the bonds from SVB so that in the end the SVB bonds work out to a the current interest rates, if held to maturity.

This is how bond prices move opposite to the external interest rate environment.

There is also a risk premium since t-bills are considered perfectly safe, while these mortgage backed securities are likely now carrying a risk premium so buyers want an even higher effective interest rate out of them.

It isn't really new-vs-old, it is just the interest rate environment. If there was zero new issuance of debt people would still be trading the old debt at the same interest rates and the value of the bonds held by SVB still would have been underwater. Of course if there wasn't enough debt to satisfy the appetite for buying debt then the prices would rise and get bid up, but we'd see this as a lowering of interest rates in these markets (which isn't happening).

> SVB is now forced to sell the mortgages it bought for $100 for $75.

Not quite. The article addresses this in detail. They bought mostly hold-to-maturity (HTM) bonds which could not be sold.

(Technically such bonds could be sold, but selling would trigger a portfolio revaluation of all their HTM bonds, which would have made them immediately insolvent.)

Here is a quote I found in the article: "The decision dictates whether the securities are designated as “held-to-maturity” (HTM) assets " - HTM was an internal designation - an accounting convention. It does not have anything to do with the bond terms.

I'm not an expert. But it appears to be an accounting designation that shows up in filings, so it's not purely internal. You are correct that they are not part of the bond terms, which I was unclear on before.

"HTM assets are not marked to market... they remain glued to balance sheets at amortised cost regardless. By contrast, AFS assets are marked-to-market... Sell even a single bond out of an HTM portfolio, however, and the entire portfolio would need to be re-marked accordingly."

There's a bit more detail here, but it doesn't get into the re-marking aspect. https://www.investopedia.com/terms/h/held-to-maturity-securi...

https://twitter.com/fabiusmercurius/status/16342279961723658... (The whole thread dives in more).

Essentially, when interest rates go up, current bonds temporarily fall in value as people can buy higher yielding ones. For a variety of reasons, SVB needed to sell the bonds at a loss now to cover deposit withdrawals, etc.

If one were, in theory, to have the working capital for one’s employer tied up in this bank, how bad is it?

Going to miss payroll bad?

The facts are:

- All funds in SVB are frozen

- FDIC has implied that insured funds (up to $250K per account) will be released within 7 days.

- It's entirely unclear how long it will take to recoup uninsured funds (above $250K per account).

- It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%)

If given the above fact pattern, your company can't make payroll, then it will have to raise emergency cash to do so. Whether or not that's feasible isn't an answer anyone here can provide.

>It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%)

Where is this 80% number coming from?

The FDIC's statement shared that: As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits

The question is what haircut the FDIC will take on the $209b when they forcefully liquidate all securities. If the above data is still accurate, the FDIC can make depositors whole as long as they don't take more than a 16% haircut when liquidating.

SVB recently liquidated their AFS bond portfolio at ~90c on the dollar. And, this traunch of securities is very sensitive to interest rate changes.

Their HTM bond portfolio consists mostly of securities that could be sold today for ~80c on the dollar.

Given the above, it seems likely depositors will be made close to whole. Then again, who knows what's hidden from public eye.

https://www.fdic.gov/news/press-releases/2023/pr23016.html

At the very least the 20b from yesterday will be there right? So atleast 10%

this is incorrect: "FDIC has implied that insured funds (up to $250K per account) will be released within 7 days." Specifically, the FDIC has explicitly stated (rather than implied) that insured funds will be released on Monday (rather than within 7 days). https://www.fdic.gov/news/press-releases/2023/pr23016.html

The same statement also says "The FDIC will pay uninsured depositors an advance dividend within the next week." which I assume means some percentage of the uninsured funds based on a worst case scenario of the recovery.

Another issue is that this isn't just about the company not having funds, but also funds that may have been transiting through SVB today. At least one payroll provider was affected.

- It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%)

How much would you pay for a property that will instantly be worth 20% less than the day you purchased it?

In normal times I can see it, but we all know (or most of the smart folks, at least) that the economy is on the brink of falling over.

Note that before this news broke out, SVB shares were frozen. If this were simply a 20% loss?

FDIC only covers $250,000 per depositor per bank per account type, so it depends on how many employees are making how much money. $250k is enough to pay about 20 employees who make ~$150k a year for another month, to give you a rough idea. So it depends on how many employees your employer has and how much they get paid on average. Also it depends on how much incoming revenue your employer has.

What isn't being discussed is that SVB was probably seeing an initial drawdown in deposits because VC funding has locked up and startups are just burning through cash and can't raise money. SVB was likely a bet across the entire startup economy that funding wouldn't dry up.

This probably foreshadows waves of startups failing as they run out of runway.

> I found https://www.livemint.com/news/world/explainer-silicon-valley... much easier to understand.

It appears that text from this story may have been stolen from https://twitter.com/jamiequint/status/1633956163565002752 https://news.ycombinator.com/item?id=35099982

2.a They sold some of the assets bought at step #1 at a loss (dont know why). 2.b Flubbed the PR game while trying to raise to cover the loss 2.c Bank run!

> They sold some of the assets bought at step #1 at a loss (dont know why)

I imagine they ran out of their more liquid instruments.

Ah! That would make sense why they would sell 10T at loss instead of riding out

If 20 people give you $1,000 each totaling $20,000 and you just know you can make $50,000 by holding it for X amount of years thanks to the economic gods, what happens if your $20,000 suddenly is only worth $5,000 thanks to you having to sell said asset much sooner than you would like?

Now you know why.

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