https://twitter.com/moorehn/status/1634973901230071809?t=RXV...
Any normal, non-degnerate bond manager would would keep a significant amount of 1-3 year treasuries in their mix of bonds. Feel free to call your 401k provider to verify this.
Thiel may be guilty of various things, but SVB's failure was due to overleveraged yield chasing.
The previous CRO probably saw the writing on the wall, I wonder if she* got shut down and decided to quit and watch the fireworks from outside.
According to the linked article: "Ms. Izurieta departed the Company on October 1, 2022. The Company initiated discussions with Ms. Izurieta about a transition from the Chief Risk Officer position in early 2022. Accordingly, the Company and Ms. Izurieta entered into a separation (without cause) agreement pursuant to which she ceased serving in her role as Chief Risk Officer as of April 29, 2022 and moved into a non-executive role focused on certain transition-related duties until October 1, 2022."
I’d suspect they were already marginal and this was their only way to keep the books sound until they could solve their deeper problems.
This is why bond investors who aren't yield chasing would never overleverage into these.
At the _very_ least the fed announced interest rate rises in March of 2022 (with updates in June, Sept, Nov/Dec) and SVB could've worked out some kind of short-term credit deal with a JP Morgan type last year. Instead they did nothing but sat on assets which they knew would drop over 20% market value in a year while not ensuring short-term liquidity.
If they did do what you said i.e. "spend $80 to buy $100's worth of treasury notes", then they wouldn't be in the conundrum they're in today. Because their cost basis in that case would be $80 and they could simply sell that treasury note for $80 and they wouldn't have a capital loss at all (in fact, they would be up since they earned coupon payments). It's only because:
1. 2021: they purchased low interest treasury notes before interest rates jumped
2. 2022: interest rates jumped faster than expected
This caused SVB incurring capital losses, which meant their assets to be worth less than their deposits.
If you are curious and want to visualize some of the changes on a graph, you can check out VFITX [1], which is a mutual fund that holds a mix of treasury bills, bonds and notes for an average of around 7-year duration.
-2021 Jan 1: $11.63/share
-2022 Jan 1: $11.12/share = 4.4% cap loss (before factoring in coupon payments)
-2023 Jan 1: $10.15/share = 12.7% cap loss (before factoring in coupon payments)
Forget the numbers.
The long term ones are advantageous on their books because they cost less to purchase than short term ones but still record at the full HTM value.
With stable and low demand on withdrawals, using that HTM value isn’t unreasonable since the bills are sure to mature and so the difference of cost between short and long term bills means their books look better for less. There’s predictable risk to the play, but they probably needed the extra bit of wiggle room on their balance sheet and felt it should be fine as long as interest rates stay low and deposits don’t pick up.
But of course neither of those was going to hold. And so (as you noted) their bills grossly devalued and their account holders changed borrowing and withdrawl patterns as the economy shifted. Both factors built into the risk fell through and they went from probably-marginal to downright-damned.
If a company buys low interest bonds (i.e. interest is yield) in a market where interest rates are going up, at some point the cash rate will exceed their bond yield and at that point the bond price drops to match the current interest rate.
Why this happens is when the interest rate is above the bond yield, no one will purchase the bond at the original price, as they can get a much better return in the overnight cash market.
That means the price of the bond falls to a point where the bond yield now matches the cash rate plus some margin for any future risk. That lower price gives the asset it's true value.
So as the cash rate continues to rise the bond price continues to fall and without doing anything, SVG finds itself bleeding hundreds of millions in asset value, with no end in sight.
That then creates the panic and the rest is history.
Yield chasing is equally gross negligence and avarice.
I'm not sure what you mean by "what's the advantage". What's the advantage of going 100% into Tesla stock call options, rather than an SP500 index fund? There is no advantage when Tesla is returning 4x the S&P. There's a rather large disadvantage when it drops 30% in a quarter.
SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do.
Bond portfolios typically hold a mix of maturities from 1, 2, 3, to 10-year+ maturities. The short term ones offer liquidity and protect against interest rate risk. Because if the interest rate increases and new bonds are issued at a higher rate, your maturing bonds become cash to purchase the new, higher-yield notes.
Literally - call your 401k provider and ask to speak with an investment advisor if you don't believe me.
Holding only 10-30 year HTMs is absolutely yield chasing. SVB skipped having the short-term maturities, because they do not offer much yield. It is basically the literal definition of yield chasing.
>SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do.
All cash would've been foolish, but considering the primary purpose of a bank is to provide liquidity for clients, it's a bit of a reach to call it equally irresponsible as assuming your banking clients would be fine waiting 6-10 years for your investments to mature.
If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.
Exactly. the 1-year notes had zero interest rate risk, and almost no yield. The 10-year notes offered very high interest rate risk (remember: rates were almost zero) and barely-more-than-no-yield.
Choosing 1.5% return at high interest rate risk vs. 0.5% return for low rate risk. Either way you are getting almost nothing, but one has the risk of putting you into a liquidity crisis. In a sense you're willing to risk it all to squeeze an extra 1%, It is the absolute definition of yield chasing.
>and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario.
If your $1000 bond is worth $1005 at maturity, and it has dropped to $990 and you want to borrow from me against the bond, I will charge you at least $15 in this scenario. That's slightly oversimplified, but lenders (other than the Fed/QE) will loan at a rate where you're essentially locking in a loss, because they have what you need to offset your risk you failed to hedge against (liquidity).
>If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.
Not that I am aware of, at that scale of money. There's also high-risk lending to borrowers (which SVB did) but companies might borrow $10M, $20M, maybe $100M. When you're talking $50-100B, Bonds are the only game in town.
30 year T notes, for example, seem to have been at double the 10 year notes in return at this time. Why not go for those if we're assuming greed as the driving factor here?
It really does seem like a ludicrous bet to be so invested in long term bonds at a moment of historically low interest rates. That’s why it reads like greed. SVB seemingly did very little to reduce the risk on that absurd bet.
> There are tons of places to put money that are riskier, even billions, that would have yielded better returns
That there were many riskier alternatives doesn’t mean that there were no safer alternatives. (And by the way most of the riskier alternatives wouldn’t have actually yielded better returns in the last couple of years.)
Speculation that interest rates would go down and longer duration bonds would appreciate more?
Avoiding the hassle of managing a short-term portfolio to have more free time?
Taking risk for the sake of thrills?
Your example from other comment with 30y maturities is actually nice example - that would be "way more greedy".
Basically as long as your bet on higher yields and bigger risks does cause your bank to fail, you were too greedy.
I am not an expert, but the explanations given make sense to me.
It sounds like this was the "right decision" in retrospect. If so much startup capital has been deposited into your bank that you can't safely steward it while turning a profit, it seems the only answer is to let that money go elsewhere.
Zeltice started this thread by asking, "why is this greed and not just incompetence?" It sounds like both. The corporate officers were stuck in a mindset of "we must keep growing and turning a profit" (greed) that they took the only option to do so, which led us to today (incompetence).
This would have been "safer", but lost them money.
Instead, they bought 10-, 20-, and 30-year T-Bills which were yielding more like 2-3%. Not much by today's interest-rate standards, but significantly more than 0.25%.
That appetite for long-dated bills could, I think, be described as "yield chasing." It was a decision made for short-term financial gain in ignorance of the risks involved.
There are way better ways to "yield chase" than this, why are we presuming greed here when it seems just as likely to be incompetence?
If a doctor unknowingly took out your heart instead of your gall bladder, it may be incompetence but that's unlikely.
Such as what?
There are not, if you have $50-100B. Your options as a bank are either treasury bonds or mortgage-backed securities.
As a private sector investor (e.g. Warren Buffett) you have the additional option of equity investing, but it will take many years to move that much money.
In a short-term sense, but the point of short-dated maturities is not to produce yield but rather provide liquidity, which allows you to purchase higher-yielding 10+ year notes in the event the interest rate rises.
They would've actually gained money by (1) not being forced to sell assets at a loss, thereby leading to a run and also becoming insolvent and (2) e.g. used the maturing short-dated bonds to purchase 3-year treasuries at today's 4.1% rate, rather than their shitty 1.8% 10-year notes.
Banks make basically all their profit on lending, so they shouldn’t be making risky moves with deposits.
But did Thiel also organize runs on Silvergate Bank and Signature Bank NY? Why did those fail along with SVB in a span of days? His involvement seems to be getting exaggerated here.
If someone calls out that the emperor has no clothes and that is the reality, they have done nothing wrong.
How significant? Is 1/3rd not enough?
clearly it was not enough considering interest rates were zero at the time and the yield curve was inverted.
SVB bet it all on red and the ball landed on black. Everything after that point is not useful information.
"The best response, ie. the dominant strategy, is to betray the other, which aligns with the sure-thing principle.[3] The prisoner's dilemma also illustrates that the decisions made under collective rationality may not necessarily be the same as those made under individual rationality. This conflict is also evident in a situation called the "Tragedy of the Commons".[3]". https://en.wikipedia.org/wiki/Prisoner%27s_dilemma
I'm not giving a tutorial about how no bank will survive a run. The bank became insolvent because of a run spurred on by people like Thiel regardless of their issues with realizing losses on their AFS securities. It became insolvent^ last Friday after 42 billion dollars walked out the door
The bank doesn't deserve a bailout, sure. But depositors certainly do, and people like Thiel will hopefully be black marks for future lenders who know the risks they bring. Here's a good thread explaining where SVB went wrong - https://twitter.com/MacroAlf/status/1634626124260028419 - but in the end, they only became both illiquid (unable to sell shares being the last straw after having exhausted AFS securities and cash/equivalents) and insolvent (unable to cover debt obligations) at the hands of the people who spurred on the bank run.
^edit to correct from "illiquid" to "insolvent"
Regulators should have forced a capital raise last year.
It became illiquid last Friday.
Here is a good thread explaining it: https://twitter.com/MacroAlf/status/1634626124260028419?s=20
True. That was the precipitating event that forced it into the hands of the FDIC. But illiquidity is not insolvency.
Insolvency means it could not pay back its depositors because it assets could not cover withdrawals. This hole did not appear last week due to the $42 billion withdrawals.
He might've done his short term job properly, but there's a social contract he stepped on and the consequence of it is a lesser likelihood that ventures with his name on them (in any capacity. Advisor, investor, founder, whatever) will get favorable terms from lenders.
He and others who pushed for rapid exits are now a high risk for lenders, especially any lenders already evaluating their exposure to startups and VCs.
VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty.
> VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty.
No VC is getting sued for not telling their startups to yank cash during a 48 hour bank run.
Does his fiduciary duty to LPs outweight the insider information? IIRC its actually illegal to encourage or push a bank run.
But an illiquid bank is not necessarily insolvent.
In this case, the bank is both illiquid and insolvent. In which case we should not blame the illiquid event because it is eventual as the bank was insolvent ever since the feds hiked rates.
> the bank was insolvent long before that.
Well, not quite. Insolvency was achieved the moment of the bank run. Until then, the bank was fully solvent based on the value of its liquid assets, including stock, against whatever obligations they had at that point in time.
Once the bank run started, that's when withdrawals outpaced what they could fulfill through the sale of their liquid assets. Hence insolvency, and illiquidity very rapidly thereafter.
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edit:
> as the bank was insolvent ever since the feds hiked rates.
This is less "not quite" and more "not at all" as it misunderstands what insolvency is - the inability to pay debts at maturity.
What is the maturity of deposits?
That's also why CDs exist. Far easier for FIs to actually do something with the money when you lock up with them and drastically reduce the risk of you withdrawing it.
Edit: Fed source.
Are Ponzi schemes solvent until they collapse?
This is redefining insolvency based on the (legally sanctioned) accounting trickery of classifying assets as HTM.
You are assuming that the rates got hiked, and never again will fall.
Had the rates fallen in a year, then they would have no longer been insolvent. And could have recovered. Indeed once they got stuck, they would have had every incentive to hunker down and pray for that outcome.
This will happen eventually in that situation, to blame the catalyst is being disingenuous. The catalyst could've been anyone, and even in the current case it might not be Thiel - it could have been someone who did it first who then told Thiel.
Water can stay liquid below freezing, but it need just one shake to fully freeze over, and it's not the shakes fault that the water is now frozen.
It's true that there's a game theoretic problem here where it's not possible for everyone to take that advice. But... what's the solution being offered? Demand silence on the part of everyone who sees bad financial status?
Honestly, just looking at random facts about what he gets up to, this person sounds like the Devil incarnate. Paying kids to drop out of school. A foundation to understand the world through mimetic theory. Promises to invest in the economy of a small country, gets complimentary citizenship then pulls investment. It goes on and on.
Not suprising he would leave people high and dry.
Classic. https://www.vanityfair.com/news/2016/08/peter-thiel-wants-to...
*includes only super-rich with money to drop on two $50,000 treatments yearly, or a gold plated medical insurance policy.
And glass, and aluminum...
It's hard to imagine a bio-related technology that can't eventually be made inexpensive.
Assuming the FDIC doesn't make everyone whole, then all of his portfolio companies using SVB will see themselves with valuations lessened by whatever amount of money was lost.
i.e his investments would burn.
That said, we may very well see an outcome where everyone's just fine and instead his investments see a more difficult lending environment. There was once a california law about encouraging bank runs, but it was struck down in 2012 apparently. So not sure what else might apply in criminal or civil code.
> Fintech startup Brex received billions of dollars in deposits from Silicon Valley Bank customers on Thursday, CNBC has learned.
>The company, itself a high-flying startup, has benefited after venture capital firms advised their portfolio companies to withdraw funds from Silicon Valley Bank this week.