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.