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Comment by polygamous_bat | Hacker News Reader

> Like I don’t want to defend the execs too much as they are the responsible people. But the gov and Fed did this. Erratic economic policy did this. It’s sad so many people think it’s a greedy bank. Being named Silicon Valley Bank doesn’t help.

Classic libertarian chant assigning the success to the private individual and blame to the government. Everyone is dealing with the same macroeconomic environment. SVB execs don't get a pass for poor risk management and not understanding their customer base.

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SVB clearly got greedy. They looked at their models and decided that they should use long-term vehicles with higher interest rather than short-term vehicles. The core problem they had was that interest rate risk prices have changed a lot over the last year and a half, largely due to the fed, and they severely underpriced that risk.

Long-term fixed-income investments lose a LOT of value when rates go up and gain a lot when rates go down, and the relationship is nonlinear and kind of hard to model since it's so dependent on people.

I wouldn’t say they were greedy exactly. They made the wrong assessment that QE would last forever. In which case a 10/30 year treasury yield @ 200 bps is still a good deal, at that time. If they were really greedy they would have gone all in on riskier assets.

The irony is, eventually they will be vindicated, when the Fed is forced to start QE all over again.

>I wouldn’t say they were greedy exactly. They made the wrong assessment that QE would last forever.

Ie. they got greedy.

40% of the spending in the US economy is directly from government, substantially more is directed based on regulations by the US government and the leadership in that government is generally recognised as poor.

The odds of any given crisis being caused by government are good enough to justify it being the base-case assumption before any real evidence comes to light. Although in this case, the long stretch of time at near 0% interest rates and a culture of bailouts encouraging reckless financial decisions are probably going to turn out to be major factors.

SVB got unlucky due to some unique structural problems (massive inflow of cash resulting in high proportion of portfolio with low rate assets backing the deposits and a client base that was shifting to withdrawals all at the same time due to difficulty raising capital).

The fed could have done a better job giving long term guidance and honestly should set up a facility to exchange debt when the interest rate risk couldn’t have been reasonably know.

> SVB got unlucky due to some unique structural problems

"Getting unlucky" in banking is making a few risky loans, getting defaulted on, and coming below projected growth for the quarter. The bank's revenue gets a hit, the shareholders takes a haircut, all part of the playbook, happens every now and then. What "getting unlucky" is not is not understanding interest rate risk so much that you blow your entire bank up. It's like calling someone who drove drunk and killed 16 pedestrian "little unlucky while turning a corner", absolutely not in the same ballpark.

You’re missing the point. They had to do something with the deposits. There were so many deposits because of gov and Fed policy. There was no demand for loans because there was free money everywhere.

SBN isn’t the only bank in this position. I read a NYT article from 2021 describing this situation and like every bank is in this position.

Interest rates whipsawed from record lows to 20 year highs in 12 months. No one was ready for that. This is all because of gov and fed policy.

We will see a lot of banks failing in the coming weeks and months.

> They had to do something with the deposits. There were so many deposits because of gov and Fed policy. There was no demand for loans because there was free money everywhere.

Easy, buy treasury bills. What? They don't pay interest through the nose? Guess SVB is not getting double digit revenue growth this year, and you're not getting that big bonus. So sad. Anyway.

> SBN isn’t the only bank in this position. I read a NYT article from 2021 describing this situation and like every bank is in this position.

Link? Also I am quite sure most other banks had the good sense to understand that they need to hedge against interest rate risk.

> Interest rates whipsawed from record lows to 20 year highs in 12 months. No one was ready for that. This is all because of gov and fed policy.

Yes, and gov and fed policy was there to address acts of God (aka COVID) and Putin (aka the Russia-Ukraine war). Should we send a list of demands to them?

1. They did buy treasury bills. Those lost value.

2. It’s literally impossible that other banks did a better job as the asset class for treasury and MBS is the same for every bank. The difference is that SVBs customers were more negatively affected by rising rates after also being more positively affected by low rates than other banks. So I don’t expect a systemic problem here but SVB was structurally unlucky.

3. The fed could have acted sooner to raise rates, that would have allowed a more gradual process. They could also have set up an exchange program as they are doing now. Plenty of banks bought long term treasuries that are underwater now but will recover in the long run. So if a member bank is facing liquidity problems it should be able to access the discount window or some similar facility to smooth the timing risk.

Let’s all remember it’s in everyone’s interest to have safe banks and a functioning financial system. When macro policy has unintended consequence there is nothing wrong with supporting the system.

Making sure you don’t fail catastrophically if you get unlucky is the entire purpose of risk management, which SVB failed to do.

> The fed could have done a better job giving long term guidance

the fed can't give long term guidance, because they can't possibly predict shocks that would happen that require them to change the interest rate.

It's like asking mother earth to give a warning before an earthquake.

And, humorously, there were months of clamor for increased rates and months of warning from the US government before Russia invaded Ukraine. Bank risk managers can't pretend there wasn't lots of warning for both developments, starting at least ~15 months ago.

Or more literally, asking mother earth to give a warning before a global pandemic and Putin to give a warning before an invasion.

Of course they should be fired and not hired as executive leaders ever again. But the gov and the fed’s erratic policy and failure to change course early enough leading to the level of inflation we have and whipsaw interest rates need to shoulder some too.

Something like 50% of mortgages were written between 2020 and 2022. So many of these are about to be underwater due to the whipsaw.

There’s going to be a lot of failures in the coming months.

Totally agree it’s the speed of the reversal in rates. Whipsaw is a great term.

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