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Comment by jjoonathan | Hacker News Reader

Yeah, people are flailing.

The only party that made out like bandits is the SVB management that piled on the risk in the first place -- but investors are ultimately responsible for letting them do that and investors have been punished.

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I'm unclear how SVB management "made out like bandits". I assume they had a couple good years of nice salaries and bonuses, but now their equity is zero'd and they're out of a job. I presume they would have preferred to continue managing the bank as a going concern.

It’s probably a reference to reports of some SVB execs selling their stocks in the weeks before the failure.

Ah, likely. Though it doesn't seem like there's any evidence yet on insider trading or execs fully cashing out. They got lucky liquidating some single-digit % of their holdings, but still likely lost most. A 95% loss is better than a 100% loss, but still not "making out like a bandit".

They chose to invest in those 10 year securities, proverbial pennies in front of the steamroller. I'm sure this was framed as a smart move at the time and they gave themselves big bonuses while investors were out to lunch. Ultimate responsibility does lie with investors, but management definitely hustled them and got away with it.

I guess my point is that they still got hit by the steamroller: they lost their jobs and future earnings, they lost any equity (which certainly was part of aforementioned bonus), etc.

Earning a nice bonus last year is a reasonable consolation prize, but I'd wager most execs would rather have had a lower bonus and the ability to continue to manage an operational bank through 2023.

They cashed in millions in stock just before they announced they needed to raise $2B in capital to offset losses on their bond sales, which led to a crash, on top of their bonuses. If that's getting hit with a steamroller, sign me up.

So far as I have seen, every equity sale was part of standard, pre-cleared and disclosed plans. And all those executives had significantly more equity they probably would have loved to sell but couldn't.

Interestingly, that second part appears to be true only for the CEO, who's lost ~$30m. Other executives (at least the ones on NASDAQ's insider transactions list) were holding only a few thousand shares at most.

> every equity sale was part of standard, pre-cleared and disclosed plans

Not really. They were sold 1 month after the 10-Qs were filed, which is shorter than the holding period most reputable banks require for their executives, and the 1O-Qs had only that one sale in them.

My point in all this is that the FDIC's actions to guarantee the deposits did not benefit bank management.

They may have "made out like bandits" in taking advantage of equity holders, and perhaps without duty of care to depositors... but all that is true regardless of the subsequent actions. They did not "make out like bandits" because of the Government's actions. And I think that's important, given the criticism levied against the "bailout".

No, the investors got hit by the steamroller. Management, who knew exactly what they were doing, did not lose their earnings. Future earnings? Some of these were Lehman execs -- their ability to land a position in SVB is proof that they probably did not sacrifice future earnings.

> Earning a nice bonus last year

Why do you think this was limited to last year? I suspect they made risky moves again and again and again and got paid out again and again and again.

This is so out of touch with the reality of people. No one is knowingly taking risk that will bankrupt their company for a few million dollars in bonus when they can instead have a 10 or 20 year career where even 25% of that bonus with accrue to much more value. Further, their bonus were stock, and every single executive at SVB lost most of their equity which was paid over years and locked up as options.

Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).

https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

They didn’t even pile on the risk, at least not in the 2007/2008 sense. They bought long-dated 10yr US Treasuries (or was it MBS’s? I’ve heard both), since that was one of the lowest risk assets they could invest in and still get enough spread vs their deposits to remain a viable business. It’s strange days when that is considered piling on risk.

While there wasn’t counterparty risk with those assets, there was duration risk. And their mistake seems to have been not selling those the instant the Fed publicly committed to killing inflation with higher interest rates. It should have been clear to them that their exposure to duration risk was rising, and they needed to restructure back in 2021 or early 2022 to mitigate that.

The rumor I read is that SVB booked those treasuries in some weird way that prevented them from being sold but also prevented them from having to pay taxes on the treasures.

Otherwise you are totally right that it should have been no problem to cover the shortfall by selling off some of the treasuries, even though they would have had to take a haircut on them thanks to the Fed jacking the rates so fast.

Their a&l committee told them to change their asset mix in 2020 and they didn’t to preserve their profits[0].

All bank risk assessment regimes measure both credit and interest rate risk. Measuring 1 in isolation is idiotic for now obvious reasons.

[0] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

2008 is an extremely low bar. They still piled on risk.

> that was one of the lowest risk assets they could invest in and still get enough

Was it? They had enormous deposit inflows and were struggling to scale, so their costs should have been undersized by default. They really ought to have been able to survive off the pennies that weren't in front of the steamroller.

It's well known that long-dated treasuries are highly volatile. I think the lesson we've all learned here is that they didn't have a viable business. It seems like they were offering a product that was not profitable given their competition and reasonable risk management.

They're volatile if you trade them, right? But they're not volatile in the sense that there's uncertainty that they'll pay back. Do banks normally actively trade their long-dated bonds?

I guess that's what you normally do when you're overweighted that asset class and you must cover withdrawals!

No, and that's the point. I understand that banks mark long-term bonds as hold-to-maturity (and only then can list them at par on their balance sheet). But they actually have to hold them. Otherwise, they have to mark them to market, and any sales of HTM bonds flip the entire tranche over to MTM.

So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet.

E.g., a simple balance sheet:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     10k    $1k   $0.8k    $8Mn
  Hold To Maturity Bonds   1M     $1k   $0.8k    $1Bn
  Total                                          $1.08Bn

But then let's say I have $16M of withdrawals. I sell all of my short-term bonds for $8M, but have to cover another $8M, so I sell another 10k bonds at market price.

But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this:

  Assets                   Qty.   Par   Market   Total
  -----
  Mark To Market Bonds     990k   $1k   $0.8k    $792Mn
  Total                                          $792Mn

$16M of outflows have reduced the assets on my balance sheet by two hundred and sixteen million.

To allow the bond sale before they had a cash infusion basically flushed the business. I wonder if board of directors had an understanding of how it would detonate the balance sheet. After that, the regulators took the obvious necessary action.

And people saw this is what they were doing and were tweeting about it in advance of all their “problems”.

Sure, though in all fairness, I understand it's standard GAAP accounting for all banks, and your balance sheet has to have a footnote explaining the market value as well. I.e., this particular play or accounting standard is extremely common.

It seems like SVB was perhaps a little more exposed to interest rate risk than others, and had a pool of depositors that were more likely to withdraw significant funds in lockstep.

It's been reported [1] (no paywall [2]) that executives were aware of the risk and continued to purchase higher yielding assets in spite of internal protests.

The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement.

From the article:

     In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there. 

     Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings. 

     Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.

[1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...

[2] https://archive.is/HqVWn

Thank you for posting. This actually changes my view entirely and makes many of my other posts invalid.

Yeah I feel this point isn't well known, but likely will be soon.

I love HN because many of us actually listen to each other and debate in good faith, helping each other sharpen our views.

Glad you found it helpful.

Yes, same here, thanks. It’s crazy they were so forewarned and yet did nothing, even having lived through the GFC and knowing how quickly things can go sideways. Just 15yrs and they already forgot, /smh.

I went back and edited a few of my posts specifically mentioning your post and the article you cited to clarify the record of discussion.

I agree that it is important to argue I good faith and help each other sharpen our views. Thank you for providing an important resource in the discussion.

While I still feel the instinct for vengeance or rage at SVB is counterproductive given that you showed evidence that the leadership of SVB knowingly, willfully, and with reckless disregard for the consequences, decided to invest in more long term securities than they were advised by their own team does justify some of that instinct.

That being said I still feel the system worked as expected. I think, given human nature as on display with SVB, the regulatory environment should go back to the stronger standard but I also think getting bank failures to 0 isn’t a laudable goal. Some failures will happen and as long as we eliminate the motivation for a run on the bank the system should allow for a degree of risk and failure.

There are also the people who were able to buy USDC or DAI at a discount when there was worry that SVB's collapse would cascade to those stablecoins.

Disclaimer: was one of them, though not nearly as aggressive as I should have been.

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