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Comment by rcme | Hacker News Reader

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 created expectations that interest rates had a reasonable chance of staying 0 for the next decade. This blame falls squarely with Powell. He lowered rates in 2019, well before the pandemic. Who can blame someone for seeing near-0 rates in 2019 and believing they would stay that way well into the 2020s?

Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.

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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.

I think you’re simplifying things too much. The issue wasn’t that SVB couldn’t foresee higher interest rates. There were a number of other issues, almost all caused by the Fed and the federal government:

1. Covid stimulus vastly increased the amount of cash at the bank.

2. Artificially low interest rates plus the cash infusion caused inflation.

3. While inflation was beginning, the Fed somehow got it in its head that inflation was “transitory” and rate hikes weren’t needed.

4. The Fed waited too long to raise rates, so they needed to spike rates as quickly as possible once they changed their opinion on inflation.

Basically the government gave banks hundreds of billions of dollars to lend via stimulus spending, and then made those loans worthless by spiking interest rates less than a year later. Whose fault is that really?

> The issue wasn’t that SVB couldn’t foresee higher interest rates.

Becoming insolvent because the rates reached ~5% when history has had far greater rates is in fact an issue for SVB. https://tradingeconomics.com/united-states/interest-rate

The federal reserve has dual mandates for both full employment and to have stable inflation. These mandates are in many ways opposed to each other. Putting the blame on the fed in hindsight is always easy, but unlike an institution with such a mandate SVB failed at one of the most fundamental parts of being a bank.

So I would say it's safe in one way (if you hold it to the end, you'll get your money back plus interest), unsafe in another (its value on the market before then is not guaranteed).

I disagree that the Fed set an expectation for indeterminate 0% interest. I'm sure that's what sugar addicts in the market told themselves, but I think the Fed was clearly, if gingerly, trying to dig themselves out of a 0% hole, having started to raise rates again in 2015. As they should have been!

You get back your money plus a garbage interest rate relative to what you could've gotten if your money were available now though. That is why it is cheaper, it's not like it's an irrational market dip due to a panic, where the time-value will eventually recover. Unless interest rates go back down very soon the time-value on this thing is definitely a loss.

And yeah as a bank it's an extremely stupid move to put 40% of your money into an entirely unhedged bet that interest rates will not go up for 10 straight years. Maybe the Fed didn't handle things as well as they could, and similarly maybe VCs exacerbated the problem unnecessarily, but I don't see how the lion's share of the blame doesn't go to SVB here.

I agree the blame lies with SVB. I'm getting the sense some would like to lay this at the feet of the Fed instead, which...

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