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Comment by throwaway81523 | Hacker News Reader

I leave it to others to judge the validity, but I found Brad DeLong's epithet for Thiel amusing (https://braddelong.substack.com/p/saturday-night-thoughts-on...):

> Even so, SVB knew it had gotten itself into trouble—that it had put too large a share of its assets into long-term Treasuries that it intended to hold-to-maturity, and that while it was notionally hedged against interest-rate duration risk by this hold-to-maturity strategy, that strategy put those assets outside the circle of those available to meet unexpected withdrawals, and so caused liquidity problems. SVB was, I am told by sources who really should know, because they talked to people talking to people doing the deal, that SVB came within twenty minutes of getting enough additional cash to fix likely problems.

> Then chaos monkey Peter Thiel showed up: advising companies to pull their money out of SVB.

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Hoping interest rates won’t go up is hardly “notionally hedged”.

Insightful writing but that man needs an editor in a bad way.

> notionally hedged against interest-rate duration risk

WTF does that mean?

Breaking down the full context of the sentence makes it easier to parse

>notionally hedged against

on paper, SVB had protection from...

>...interest-rate duration risk

the danger that rising interest rates would mean it lost money on long term bonds at the historic (low) rate...

>...by this hold-to-maturity strategy,

using a common financial technique that valued the assets in question at their final value, not their current market value...

>that strategy put those assets outside the circle of those available to meet unexpected withdrawals

however, doing so meant those bonds weren't available if they needed immediate cash

Excellent explanation; I think understand the whole situation better thanks to you.

Getting a little more specific, notionally hedged means that Assets (the banks investments, originated loans) > Liabilities (deposits). But as you said, on paper.

It means that your bonds having a low interest rate is only a problem if you plan on selling the bonds instead of holding them until maturity.

No? If you hold a 1.5% bond to maturity when the cash rate is 4.5% and projected to rise further you lose money in a very literal sense. Also they had to sell some at loss to just keep going before any gossip of trouble.

You lose earnings. You don’t lose the stake. But when you are forced to sell early, you do lose the stake.

Money is money, lost earnings are just as lossy as lost anything else. You could say they'd lose less if they "wait and hold"-ed, but they couldn't afford that, again, even before any hint of a bank run, and the risk exposure was increasing.

yeah in that regard SVB also lost hundreds of billions on trades it could have made optimally in the market with those funds (looking with hindsight).

Should you look at the opportunity costs for lost potential gains in this scenario -- yeah. Does it "lose money" -- no, not unless you are forced to sell before maturity.

lost earnings are a wish for what could have been, not lost in reality.

When you own a 1.5% 10-year and balance it against a 3% deposit your losses are very real and amount to 15%. If you don't offer 3% deposits you lose clients and your problem just got worse.

The 30Y bond was "declared" to be held-to-maturity, meaning you didn't have to book the paper-losses from the Fed Interest rate hikes / change in interest rates over the past year.

But of course, that ended up not being true, now was it? So it was only 'notionally' hedged, not truly hedged.

Right, if hedging isn't necessary for those bonds then I guess one way of saying it is that they're "notionally hedged". Another is that they weren't hedged.

Be that what it may, declaring some bonds to be "held to maturity" is common practice in banking.

However, for _these_ bonds, and so much of it, to be declared "held to maturity" is a mistake. There's always wiggleroom in how accountants add up the numbers. They messed up on this part.

I think it's fair to think of "notionally" as "not actually".

Coming within 20 minutes is "too little too late".

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