I found this directionally-accurate, and (more importantly) accessible:DCHawk1 wrote: ↑Tue Mar 14, 2023 11:51 amFair enough.jfish26 wrote: ↑Tue Mar 14, 2023 11:45 amI agree of course. But the point is - this is not remotely the same fact pattern as the 2007-08 crisis.DCHawk1 wrote: ↑Tue Mar 14, 2023 11:40 am
That's not even close to the entire story.
They also got greedy, taking on excess duration risk. They had a ton of spread risk w/a ton of mortgage-backed securities. They were overinvested in venture debt. They didn't hedge their interest risk. And because they kept their treasuries and mortgage-backed securities in held-to-maturity accounts, they weren't marked to market, effectively hiding all of the risk.
This was major risk management failure and a minor regulatory failure.
https://www.theringer.com/2023/3/13/236 ... comes-next
Thompson: I want to ask you a question that sort of lives behind the news headlines, which is the question of blame. Whose fault is this? I first want to look at Silicon Valley Bank leadership. The 2008 financial crisis was caused by the collapse of the housing market, which involved all of these incredibly complicated securities and derivatives that basically no one understood.
Am I wrong, or did SVB basically screw itself because they bought basic Treasury bonds that got smoked by widely telegraphed rate hikes? Hindsight is always 20/20, but it’s kind of astonishing looking back and seeing just how obvious their balance sheet problems were.
Hoffman: You are not wrong. Like, if you had told me six months ago that Silicon Valley Bank would’ve failed, I would’ve said, “Well, sure, they probably did something dumb in Silicon Valley,” but nope, they did something dumb with Treasury bonds. The basic math here is that they got a lot of money in 2020. If you were a start-up and you got a check from Andreessen Horowitz, you walked it over to the Silicon Valley Bank. You said, “Hello, I am a funded start-up founder. Here is my money.”
And what Silicon Valley Bank did with that—what you have to remember is these are deposits, which means that they have to give it back to you anytime you ask for it. So what they should have done is put it in really short-dated things. They could have lent it overnight to another bank. They could have bought one-month or three-month Treasury bills. But nope, they bought long-dated bonds, which means that they cannot access that money for a while.
Now, this is where I’ll bore your listeners for a minute with an accounting diversion. But if you’re going to buy these bonds, you say, “I have no intention of ever selling them; I’m just going to hold them until they mature.” These are five-, 10-, 20-year Treasury bonds. You can put them in a sock drawer, the way your parents gave you savings bonds when you were a baby, and then you found them 20 years later and took them to the Treasury, right?
So you can keep those in a sock drawer, collect the interest, and never have to decide every day what they’re worth based on what’s happening in the market. That’s fine. The other problem is that all those deposits that Silicon Valley Bank had gotten started to dwindle because start-up fundraising dried up, companies couldn’t go public, so they started to spend down that money that they had raised.
And so you’ve heard about a balance sheet. Those are the two sides of the balance sheet, and they got out of balance, which is that deposits started to go away, and they had these assets that they had decided they were never going to sell, so they didn’t need to value them. But then they started to have to sell them. And what had happened in the meantime is that interest rates had gone up very quickly.
And again, there’s some boring bond math, but what happens is that when interest rates go up, the value of bonds that you bought at a fixed rate from a year ago are not worth as much. And so they have this huge hole, and they were functionally insolvent really fast. This was terrible risk management. What they did with the bonds is inexcusable, and they will obviously all be fired because the bank is going out of business, but just inexcusable and utterly boneheaded.
