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Comment by Ilverin | Hacker News Reader

Stylized example of how the game works:

Bet on every number but 0 on a roulette wheel

Not 0: you and your investors make 3 billion this year

0: you and your investors lose your 20 billion you have invested, and the government bails out your depositors who kept 200 billion with you

This stylized bet is a good deal for the investors and management and bad for the government. Sometimes investors lose everything but it's still a very good bet in expectation. This stylized example is a case of "privatized gains, socialized losses".

Then the question is: was SVB reckless? They could have been less reckless by covering their interest rate exposure, but the fed has an equity to deposits ratio requirement, and getting any equity to invest requires a return. IMO they should have either diversified their business or stopped opening new accounts for tech companies because when depositors are uninsured and concentrated in the same industry, that is risky.

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No.

First SVB was bailed out by FDIC funds which all banks pay into.

Second, to say 'privatized gains, socialized losses', you are assuming that banking is like gambling, with no value being created through the banking process.

Even if banks were being very very safe, they would still make money by lending out deposits. (Whether that is good or bad for society, is another question, which I would argue the answer to would be bad).

These are great points and show that the system worked as designed. There will always be bank failures. We want depositors to have confidence that their deposits are safe, not altruistically, but to prevent bank runs since those serve no one and re totally avoidable. Management and Shareholders were wiped out.

Honestly, it looks like in a year or two, the Government will make money off of this because as soon as interest rates come down the securities will go back to book value.

The real winner here is Goldman, since they bought the bond portfolio from SVB that triggered all of this at a discount and can hold to maturity and interest rates may need to come down or a broader asset exchange program implemented to stop any contagion, so those bonds will return to book value sooner than expected.

That is what insurance was supposed to be for and it was up to 250000. Anything above that was supposed to be returned from sold assets. When assets are not enough, those money would be lost.

There are literal products to insure money in excess of 250000. But people who are getting bailout now were not using those products. They were not paying for insurance in excess of that.

The system did not worked purely as designed. The system socialized loses of well connected rich people.

> Honestly, it looks like in a year or two, the Government will make money off of this because as soon as interest rates come down the securities will go back to book value.

Government will get back the number of dollars equal to the par value of those bonds. Inflation between now and then, however, will mean that in real terms there will have been losses.

> First SVB was bailed out by FDIC funds which all banks pay into.

And from where this money is coming from you think? From you and me and everyone else because costs of doing business are transferred to clients, so to the whole society because almost everyone have a bank account.

>> They could have been less reckless by covering their interest rate exposure, but the fed has an equity to deposits ratio requirement, and getting any equity to invest requires a return.

Great point. To rephrase a bit, they lost money...and then kept doubling down by not cutting their losses (?hoping things would turn?) They finally tried to do something about it, but it was too late to matter.

What bet should management have made instead of buying US treasuries and Grade A MBS? Should they have held all deposits in cash? How should they have funded operations because eventually, holding $180 billion in cash with no interest and thus no profit while running a large operation will start to eat into shareholder equity and eventually depositor capital. I think a thought experiment about what should have been done is important if we are going to assign blame for anyone. When I do that, its not clear that SVB management made some profound mistake as there were structural challenges they faced that were unique to them (large capital inflows that were a majority of deposits during a very low rate interest rate environment, client mix that kept balances that were much higher than FDIC limits, client mix that was highly concentrated in one industry with much greater sensitivity to interest rates than most companies since fundraising is now clearly seen as tightly coupled to rates) and forces outside of their control in that the Fed raised rates very quickly without providing any mechanism for member banks to exchange long term low rate securities.

So Management has to invest in something and it has to have some interest. I would love to hear an investment thesis that would have been able to deploy over $100 billion in new capital during the low interest rate 2018-2021 time period that wouldnt have been ill prepared when rates drastically increased in 2022-2023.

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...

When interest rates began rising about 13 months ago, SVB should have taken a small haircut on the long term bonds and moved to shorter terms and T-bills. They held their losers until last week when they finally sold for a larger loss.

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