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Comment by InTheArena | Hacker News Reader

This seems pretty knee-jerk, especially given, that the current glances that the business was probably too conservatively managed. The problem here was not holding safe assets - but the value of the government bonds depreciating dramatically because of the rising interest rates and a flush supply of higher interest rates due to massive government deficit spending. It’s also a reflection of the extremely aggressive mark to market rules that have been put in place.

You can make a very solid argument at the risk here is actually risk that was forced into these companies by the government.

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I'd not consider that argument solid at all, considering that SVIB and Silvergate are the only ones bankrupt, while the other banks are solvent.

Instead, I'd look at the concentration of depositors within narrow geographic and professional areas and their connections to one another, which allows panic to spread faster and enables a bank run; other banks have a much broader and diverse set of depositors. I'd also look at the foolishness of some of those depositors who deposited far too much in one bank instead of distributing funds across many banks. Both are errors of over-concentration. Retail banking only made up 7% of deposits at SVIB; the rest was VC/tech money. That's not by any stretch of the imagination like other banks, and that's what caused this unique failure, not the same interest rate hikes that all banks are exposed to (and which they all account for regularly in internal exercises and stress tests like responsible banks do).

> You can make a very solid argument at the risk here is actually risk that was forced into these companies by the government.

I don't think so, this is a failure of proper risk management, specifically interest rate risk.

Banks, with a proper risk management system, routinely do stress tests to assess their exposure to different scenarios and hedge accordingly.

I wouldn’t consider over-investing in assets that are extremely volatile from a short-term liquidity perspective “conservatively managed”. The timeline liquidity of your assets is one of many forms of risk that needs to be managed by a bank.

The overinvestment into US debt put them at extreme risk for interest rate related devaluation, which is exactly what happened.

Even if they were going to go heavy with US debt, investment professionals normally use bond laddering for with fixed income funds to reduce that interest rate risk to the portfolio. They did not even do basic laddering!

Can anyone provide a link that carefully outlines this? Eg did they just recently buy a ton of ten year bonds? That would sound nuts as everyone knows rates are rising right now. Would love to see details.

It wouldn't matter even if they weren't of the same maturities, since you'd have to buy bonds with better interest rates, and you'd want the capital outflow to be spaced out.

The mitigation to interest rate risk is by buying them spaced out so principal returns are being re-invested at changing rates, and you are never tied to a specific rate. https://www.investopedia.com/terms/b/bondladder.asp

Here you see https://www.cnn.com/2023/03/11/business/svb-bank-collapse-ex... their average yield at 1.79%

Thanks that makes sense. What I was hoping to see was links to what specifically they did that was not smart. Eg did they really just buy a lot of bonds, not spacing it out?

Bonds are normally priced at the current interest rate, then modified based on type e.g. higher yield for longterm bonds, and less yield for short term bonds.

Recently we've been in an inverted yield curve where short term yield was superior to longterm yield.

The way I see it they did a few things wrong:

1 - bought too much of the same instrument (diversity)

2 - did not bond ladder (put themselves into a high risk situation)

3 - Moved unrealized risks into realized losses by fireselling bonds (bad timing which provoked liquidity crisis)

If you think about it, #1 & #2 were easily manageable. It is the colossal screwup of #3 on top of #1 & #2 that proved to be the coup de grace.

Whether the interest rates were going to increase or decrease was completely up in the air. No one knows after a few rate increases.

This is equivalent to selling at a loss a stock because it has a 3 - 6 month downtrend when the stock is still fundamentally sound, nothing has changed in the thesis instead of riding it out longer with the recognition you may not receive primo returns or even decent returns, but you won't be taking a big hit either.

I don’t think you can make that argument. Buying longed dated bonds is done in the pursuit of profit. Nothing stopped SVB from buying shorted dated bills with less interest rate risk instead.

Or don't buy so many long-dated bonds.

> the business was probably too conservatively managed. The problem here was not holding safe assets

Duration, duration, duration.

Their failure to recognize this as a risk even with “safe” assets is the problem. Hedging interest rate risk is not uncommon or difficult.

Not managing your interest rate is amateurish for any large bank. Every bank treasury has a whole team which only purpose is to monitor and manage that risk. They had volatile corporate / institutional investor deposits, and took an interest risk that assumed their deposits where super stable (i.e. they wouldn't have to sell those assets).

The business got in trouble with long term mortgage backed securities, not government bonds. "The government did it" is a bad take on this one. It was the business that chose excessive long term illiquid mortgage backed securities vs short to mid term government bonds which would have been a better choice.

This does not appear to be the case with the numbers coming out this morning. It’s really the government bonds that have the dramatic drop in value, relatively. The write down of the government bond assets are significantly higher than the write down of the MBS assets.

It was 0% interest rates before then that actually caused problems. Raising rates should have happened sooner but trump threatened to fire Powell if he did.

Janet Yellen during Obama's second term didn't want to raise interest rates to protect Democrats. However, she wanted to raise interest rates during Trump. That's why Trump didn't renominate her. Why blame Powell here? Blame Janet Yellen, when she should have started raising rates under Obama.

Not true. Powell raised rates, and then Trump threatened to fire him. Powell continued to raise rates anyway. The Fed takes no shit from the president or congress.

edit: HN is rate limiting me, but to see why the commenter below is wrong, just zoom out the chart he linked to 5 years view.

See here for clarification: https://tradingeconomics.com/united-states/interest-rate Trump was out of office for a long time before fed rates started to rise.

Fed was late, should have stomped on inflation early.

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