[Mick]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

If the alternative is a 2% chance that the whole thing comes crashing down, an 8% chance of a Depression and a 20% chance of another Great Recession, then I think it's time for financial stomach stapling surgery insuring all deposits. Since we've been merrily printing money for a while anyways.

[Mick]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

If the alternative is a 2% chance that the whole thing comes crashing down, an 8% chance of a Depression and a 20% chance of another Great Recession, then I think it's time for financial stomach stapling surgery insuring all deposits. Since we've been merrily printing money for a while anyways.

[chrisk]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

If the alternative is a 2% chance that the whole thing comes crashing down, an 8% chance of a Depression and a 20% chance of another Great Recession, then I think it's time for financial stomach stapling surgery insuring all deposits. Since we've been merrily printing money for a while anyways.

The level of insurance should clearly be raised, say to $1M, but if you go above that, the beneficiaries are mostly VCs and those in their orbit. Venture-funded companies kept all or most of their money at SVB because either the VCs or SVB required them to. Improved regulation would restrict such policies.

[chrisk]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

If the alternative is a 2% chance that the whole thing comes crashing down, an 8% chance of a Depression and a 20% chance of another Great Recession, then I think it's time for financial stomach stapling surgery insuring all deposits. Since we've been merrily printing money for a while anyways.

The level of insurance should clearly be raised, say to $1M, but if you go above that, the beneficiaries are mostly VCs and those in their orbit. Venture-funded companies kept all or most of their money at SVB because either the VCs or SVB required them to. Improved regulation would restrict such policies.

[burger]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks banks' customers will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

Fixed that for you.

But, yes, if there's going to be an unofficial (and probably extra-legal) policy that the FDIC and the Fed will ultimately back up all deposits, then just make that the official policy already.

[burger]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks banks' customers will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

Fixed that for you.

But, yes, if there's going to be an unofficial (and probably extra-legal) policy that the FDIC and the Fed will ultimately back up all deposits, then just make that the official policy already.

[BostonCard]

I would probably raise the limit (if not get rid of it completely) but I think high denomination deposits should be charged at a higher level (since it is riskier for a few large deposits to run for the exits at once than it is for thousands of smaller depositors).

And yes, ultimately, banks customers pay most of the cost of FDIC insurance in the form of lower returns, though some of the cost is borne by banks shareholders (which is why banks always protest when the FDIC wants to raise the insurance rate).

BC

[BostonCard]

I would probably raise the limit (if not get rid of it completely) but I think high denomination deposits should be charged at a higher level (since it is riskier for a few large deposits to run for the exits at once than it is for thousands of smaller depositors).

And yes, ultimately, banks customers pay most of the cost of FDIC insurance in the form of lower returns, though some of the cost is borne by banks shareholders (which is why banks always protest when the FDIC wants to raise the insurance rate).

BC

[rogpodge]

They do disclose the unrealized loss in footnotes.  But you need to do something with that -- that is the purpose of a stress test, which SVB lobbied to be exempt from and was successful in achieving that in 2018.



Before the regulators took action, the bank announced a sale of holdings at a sizable loss and made a failed attempt to raise additional capital.  That was enough fuel for the tech bros to create a $42B bank run through Slack and other channels on Thursday.

---

I'm not convinced that <that is the purpose of a stress test>.  A stress test relies on what would happen in some artificial worst case scenarios ginned up by the Fed.  As I noted above, the 2022 stress test imagined a bad unemployment scenario, but underestimated inflation and the need to raise interest rates.

https://twitter.com/FrogNews/status/1635393591328792576
https://twitter.com/FrogNews/status/1635394572988866560

Bad source?  How about this?
https://www.federalreserve.gov/publicati...220623.pdf

Explanatory tweets here (look at p34 of the pdf - Bank of America, and p40 - Charles Schwab):
https://twitter.com/TeslaLarry/status/16...6708598786
https://twitter.com/snehalantani/status/...4387622913

This was the point I was trying to make earlier.  The Dodd-Frank stress tests didn't contemplate this scenario and that the 10-year treasuries could not be liquidated (even at a loss) sufficient to handle a bank run.  In fact, the scenario was that the Fed would have to drop interest rates because of a recession.

https://michaelwgreen.substack.com/p/the...of-despair

chrisk isn't Chris Kotowski, is he?

Going off today's 10-year price is cherry-picking off an unprecedented trading day (really last few days) in treasuries.

https://twitter.com/johnauthers/status/1...6777195520
https://twitter.com/johnauthers/status/1...7554421761
https://twitter.com/MillStResearch/statu...5176516608

Why?  Because the bond traders have decided that the Fed would rather print money than fight inflation at this point.  And they're right, because devaluing the currency is always the politically easy thing to do.  Buying worthless assets "at par" may make the worthless assets worth something, but the price is going to be paid by everyone through inflation.

[rogpodge]

They do disclose the unrealized loss in footnotes.  But you need to do something with that -- that is the purpose of a stress test, which SVB lobbied to be exempt from and was successful in achieving that in 2018.



Before the regulators took action, the bank announced a sale of holdings at a sizable loss and made a failed attempt to raise additional capital.  That was enough fuel for the tech bros to create a $42B bank run through Slack and other channels on Thursday.

---

I'm not convinced that <that is the purpose of a stress test>.  A stress test relies on what would happen in some artificial worst case scenarios ginned up by the Fed.  As I noted above, the 2022 stress test imagined a bad unemployment scenario, but underestimated inflation and the need to raise interest rates.

https://twitter.com/FrogNews/status/1635393591328792576
https://twitter.com/FrogNews/status/1635394572988866560

Bad source?  How about this?
https://www.federalreserve.gov/publicati...220623.pdf

Explanatory tweets here (look at p34 of the pdf - Bank of America, and p40 - Charles Schwab):
https://twitter.com/TeslaLarry/status/16...6708598786
https://twitter.com/snehalantani/status/...4387622913

This was the point I was trying to make earlier.  The Dodd-Frank stress tests didn't contemplate this scenario and that the 10-year treasuries could not be liquidated (even at a loss) sufficient to handle a bank run.  In fact, the scenario was that the Fed would have to drop interest rates because of a recession.

https://michaelwgreen.substack.com/p/the...of-despair

chrisk isn't Chris Kotowski, is he?

Going off today's 10-year price is cherry-picking off an unprecedented trading day (really last few days) in treasuries.

https://twitter.com/johnauthers/status/1...6777195520
https://twitter.com/johnauthers/status/1...7554421761
https://twitter.com/MillStResearch/statu...5176516608

Why?  Because the bond traders have decided that the Fed would rather print money than fight inflation at this point.  And they're right, because devaluing the currency is always the politically easy thing to do.  Buying worthless assets "at par" may make the worthless assets worth something, but the price is going to be paid by everyone through inflation.

[pefloresjr]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  (Banks aren't simple banks having to cover deposits anymore of course, but that is a different discussion.)  They would have been fine if they were buying long-term bonds to hold until their maturity.  I am part of a very conservative association that has been rolling 10-year bonds for many, many years with steady, modest gains because the funds used were not part of our liquidity.  SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

Cheers,
Pete F.

[pefloresjr]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  (Banks aren't simple banks having to cover deposits anymore of course, but that is a different discussion.)  They would have been fine if they were buying long-term bonds to hold until their maturity.  I am part of a very conservative association that has been rolling 10-year bonds for many, many years with steady, modest gains because the funds used were not part of our liquidity.  SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

Cheers,
Pete F.

[rogpodge]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

[rogpodge]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

[chrisk]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

After the Financial Crisis, the Fed suppressed interest rates because the inflation rate was running below 2% and growth was slow. When the Pandemic hit, they had to drop interest rates to 0. There was no expectation that these historically low interest rates from 2008-2021 were the long-run neutral rates. The board and management of the 16th largest bank knew or should have known that. Of course, SVB had been much smaller two years earlier.

This article alludes to the risk committee turmoil going on at SVB during 2022. They pushed aside the CRO in early 2022 and did not replace her until January 2023. Was the CRO pushed aside because she was incompetent or because she disagreed with management?

https://www.forbes.com/sites/noahbarsky/...d620301e7b

It will be informative to find out what the regulators were doing in 2022. What was the person at the Fed responsible for watching SVB doing?

[chrisk]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

After the Financial Crisis, the Fed suppressed interest rates because the inflation rate was running below 2% and growth was slow. When the Pandemic hit, they had to drop interest rates to 0. There was no expectation that these historically low interest rates from 2008-2021 were the long-run neutral rates. The board and management of the 16th largest bank knew or should have known that. Of course, SVB had been much smaller two years earlier.

This article alludes to the risk committee turmoil going on at SVB during 2022. They pushed aside the CRO in early 2022 and did not replace her until January 2023. Was the CRO pushed aside because she was incompetent or because she disagreed with management?

https://www.forbes.com/sites/noahbarsky/...d620301e7b

It will be informative to find out what the regulators were doing in 2022. What was the person at the Fed responsible for watching SVB doing?

[pefloresjr]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

Sorry, I'm not really clear on your argument.  It seems very much like you are trying to have it both ways.  Disclaiming blaming the Fed while actually blaming the Fed.  To say that the banks were somehow misled by being told to rely on inflation forecasts (and associated potential interest rate increases) in the middle of a worldwide pandemic and a war causing even greater uncertainty is, again, ludicrous.  There were many differing opinions regarding inflation and interest rates.  SVB was hardly dependent on the Fed's often politically influenced projections.  

I'm not part of an investment club (not sure what drew you to that dismissive conclusion). I run an association that does need to manage liquidity but is, admittedly, not subject to depositors making a run on the bank.  

Also, I was pretty clear that my point had nothing to do with stress tests and their effectiveness, but you spend most of your response discussing the stress tests.  As I said, the effectiveness of the stress test at any particular date, to me, is not really relevant to the apparent mismanagement shown by SVB.  It is true that large banks handled this differently, some incurring greater risk, but they had the financial strength to withstand the variance that happened in a very volatile economic environment.  SVB clearly did not.  So, how much fault is the Fed's and how much is SVB's?  It seems to me that with a very sophisticated party like SVB, nearly ALL of the fault is SVB's.  

Cheers,
Pete F.

[pefloresjr]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

Sorry, I'm not really clear on your argument.  It seems very much like you are trying to have it both ways.  Disclaiming blaming the Fed while actually blaming the Fed.  To say that the banks were somehow misled by being told to rely on inflation forecasts (and associated potential interest rate increases) in the middle of a worldwide pandemic and a war causing even greater uncertainty is, again, ludicrous.  There were many differing opinions regarding inflation and interest rates.  SVB was hardly dependent on the Fed's often politically influenced projections.  

I'm not part of an investment club (not sure what drew you to that dismissive conclusion). I run an association that does need to manage liquidity but is, admittedly, not subject to depositors making a run on the bank.  

Also, I was pretty clear that my point had nothing to do with stress tests and their effectiveness, but you spend most of your response discussing the stress tests.  As I said, the effectiveness of the stress test at any particular date, to me, is not really relevant to the apparent mismanagement shown by SVB.  It is true that large banks handled this differently, some incurring greater risk, but they had the financial strength to withstand the variance that happened in a very volatile economic environment.  SVB clearly did not.  So, how much fault is the Fed's and how much is SVB's?  It seems to me that with a very sophisticated party like SVB, nearly ALL of the fault is SVB's.  

Cheers,
Pete F.

[chrisk]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

Sorry, I'm not really clear on your argument.  It seems very much like you are trying to have it both ways.  Disclaiming blaming the Fed while actually blaming the Fed.  To say that the banks were somehow misled by being told to rely on inflation forecasts (and associated potential interest rate increases) in the middle of a worldwide pandemic and a war causing even greater uncertainty is, again, ludicrous.  There were many differing opinions regarding inflation and interest rates.  SVB was hardly dependent on the Fed's often politically influenced projections.  

I'm not part of an investment club (not sure what drew you to that dismissive conclusion). I run an association that does need to manage liquidity but is, admittedly, not subject to depositors making a run on the bank.  

Also, I was pretty clear that my point had nothing to do with stress tests and their effectiveness, but you spend most of your response discussing the stress tests.  As I said, the effectiveness of the stress test at any particular date, to me, is not really relevant to the apparent mismanagement shown by SVB.  It is true that large banks handled this differently, some incurring greater risk, but they had the financial strength to withstand the variance that happened in a very volatile economic environment.  SVB clearly did not.  So, how much fault is the Fed's and how much is SVB's?  It seems to me that with a very sophisticated party like SVB, nearly ALL of the fault is SVB's.  

Cheers,
Pete F.

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

[chrisk]

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  

That is not my argument.  The Fed and the Treasury lied to the American people about inflation.  They told banks they would not raise interest rates because inflation was transitory and would disappear on its own.  They downplayed interest rate risk all the way through 2021 and into 2022.  Then when it became obvious that inflation wasn't going away, they began increasing interest rates at a historic pace.  They didn't make hoodwink Silicon Valley Bank into placing all their eggs in one basket.  But they aren't completely without blame, either, especially because they devalued the 10-year Treasuries very quickly despite their own forecasts that they told banks to rely on (see the links in my previous posts).

To blame a stress test rollback is wrong because the stress test as implemented in 2022 wouldn't have detected this particular issue of unrealized losses in the value of the 10-year Treasuries / the value dropping so much that there aren't buyers or counter-parties willing to take on the interest rate risk.  Between December 2021 and December 2022, unrealized losses ballooned from $8 billion to $620 billion.  Until the last few days, when bond prices began going back up, those losses probably approached $1T.

https://twitter.com/GRDecter/status/1634091448743219201

But in some respects, regulators do make banks hold some bonds.

https://twitter.com/GRDecter/status/1634193076221534208
https://www.reuters.com/business/finance...021-07-15/

Of course it was up to the banks to then hedge the interest rate risk, which most banks did to differing degrees.  In my earlier post, I noted that Bank of America didn't do as good a job at hedging compared to most other big banks, but Silicon Valley Bank's risk management was catastrophic.  Look at the date on the Reuters article.  You can see Chairman Powell's remarks as follows:

The central bank is staying the course, he said, with an inflation target of 2% and some time before it will be in a position to tighten monetary policy. Last month, Fed policy makers on balance projected inflation would climb to 3.4% this year and then fall back to 2.1% next year.

For individual investors or your investment club, laddering is a good way to get a consistent, dollar cost averaged yield.  I'm assuming your investment club isn't leveraged, and doesn't face liquidity crises or runs that require you to sell assets, though.  If the Fed chooses to allow more inflation, as it seems to be signaling, this will be the toughest investing environment in many years.  If the CPI numbers are >5%, as I expect them to be, the Fed's choices will be to allow contagion to spread in the financial sector or allow inflation to continue compounding and stressing individual consumers.  The Fed will choose the financial sector, and the less fortunate will fall further behind.  (But at these levels of inflation, everyone will suffer except the very rich).

Sorry, I'm not really clear on your argument.  It seems very much like you are trying to have it both ways.  Disclaiming blaming the Fed while actually blaming the Fed.  To say that the banks were somehow misled by being told to rely on inflation forecasts (and associated potential interest rate increases) in the middle of a worldwide pandemic and a war causing even greater uncertainty is, again, ludicrous.  There were many differing opinions regarding inflation and interest rates.  SVB was hardly dependent on the Fed's often politically influenced projections.  

I'm not part of an investment club (not sure what drew you to that dismissive conclusion). I run an association that does need to manage liquidity but is, admittedly, not subject to depositors making a run on the bank.  

Also, I was pretty clear that my point had nothing to do with stress tests and their effectiveness, but you spend most of your response discussing the stress tests.  As I said, the effectiveness of the stress test at any particular date, to me, is not really relevant to the apparent mismanagement shown by SVB.  It is true that large banks handled this differently, some incurring greater risk, but they had the financial strength to withstand the variance that happened in a very volatile economic environment.  SVB clearly did not.  So, how much fault is the Fed's and how much is SVB's?  It seems to me that with a very sophisticated party like SVB, nearly ALL of the fault is SVB's.  

Cheers,
Pete F.

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

[rogpodge]

Sorry, I did not mean to be dismissive.  I do really hope that your association isn't facing what many smaller financial institutions are with being whipsawed by the Fed.  

Everybody who relied on the Fed's interest rate forecasts, whether large, small, or otherwise, was being mislead.  As demonstrated by the difference between Bank of America and JPM Chase, some relied more than others.  The Treasury and Fed continued telling people that inflation was under control and to continue buying treasuries for a long time.  Then the Treasury and the Fed had to panic because things got out of control.  As a result, what the Treasury and the Fed encouraged financial institutions to buy and hold as safe, tradeable assets lost a lot of value.  This made some financial institutions vulnerable to bank runs.  IF the Fed had been truly independent, it would have started raising rates earlier and given more accurate forecasts.  I understand that people want to believe that the Treasury (Yellen has lost a ton of credibility since becoming Treasury secretary) and the Fed are the heroes here.  But the fact remains that what should be an extremely liquid and tradeable (and safe) asset is now worth much less than it should, that those assets lost their value at a very fast rate in a relatively short amount of time, and that capitalization and interest rate risk is being borne primarily by smaller financial institutions.

You can say that there were many differing opinions about inflation, the causes, and where interest rates needed to go, but Congress can't spend that much money without consequence.  With the risk of getting political, there were two opinions: one that shifted all the blame for inflation away from bad fiscal policies (both during and after the pandemic), and one that accounted for the natural consequence of dramatically increasing the amount of dollars in circulation.  The law of supply and demand is apparently undefeated.

https://twitter.com/nickgerli1/status/16...7177947136

SVB bears the brunt of the blame.  As Chrisk points out, SVB said the right things, like adopting this management-speak charter. But from what I understand, shortly after adopting the Risk Committee Charter, their chief risk manager left.  Then they were without any risk manager, essentially, for about eight critical months... the eight months that deposits were drying up (fewer IPOs, VC funds drying up etc.), they were continuing to lock into longer term assets, and not making higher yielding loans because demand was drying up.  As others have pointed out, there were plenty of warning signs.  They were asleep at the switch.  When they had to panic sell, they found out what I pointed out above... that what should be an extremely liquid and tradeable (and safe) asset is now worth much less, that those assets lost their value at a very fast rate in a relatively short amount of time, and that there were few buyers willing to take on interest rate risk at any price.

My overall point is not to absolve SVB of blame.  My overall point is that pointing to deregulation as the easy measure that would have prevented this, covers up the Treasury and the Fed's role in this.  AND the Treasury and Fed's actions have left many smaller institutions holding the bag, so there will continue to be risk in the financial system.  If money supply contracts (which it should to combat inflation that continues to be out of control), there will be more banks that go bust.  Yes, SVB was uniquely positioned to be the canary in the coal mine because of the absence of a risk manager, their tsunami of deposits with nowhere to go, and the bank run.  The Fed is now in a bind between continued inflation and more banks failing.  

https://twitter.com/profplum99/status/16...1236609025

I've tried to provide citations and reading material to back up my assertions.  I already linked this, but read  the conclusion.

https://michaelwgreen.substack.com/p/the...of-despair

[rogpodge]

Sorry, I did not mean to be dismissive.  I do really hope that your association isn't facing what many smaller financial institutions are with being whipsawed by the Fed.  

Everybody who relied on the Fed's interest rate forecasts, whether large, small, or otherwise, was being mislead.  As demonstrated by the difference between Bank of America and JPM Chase, some relied more than others.  The Treasury and Fed continued telling people that inflation was under control and to continue buying treasuries for a long time.  Then the Treasury and the Fed had to panic because things got out of control.  As a result, what the Treasury and the Fed encouraged financial institutions to buy and hold as safe, tradeable assets lost a lot of value.  This made some financial institutions vulnerable to bank runs.  IF the Fed had been truly independent, it would have started raising rates earlier and given more accurate forecasts.  I understand that people want to believe that the Treasury (Yellen has lost a ton of credibility since becoming Treasury secretary) and the Fed are the heroes here.  But the fact remains that what should be an extremely liquid and tradeable (and safe) asset is now worth much less than it should, that those assets lost their value at a very fast rate in a relatively short amount of time, and that capitalization and interest rate risk is being borne primarily by smaller financial institutions.

You can say that there were many differing opinions about inflation, the causes, and where interest rates needed to go, but Congress can't spend that much money without consequence.  With the risk of getting political, there were two opinions: one that shifted all the blame for inflation away from bad fiscal policies (both during and after the pandemic), and one that accounted for the natural consequence of dramatically increasing the amount of dollars in circulation.  The law of supply and demand is apparently undefeated.

https://twitter.com/nickgerli1/status/16...7177947136

SVB bears the brunt of the blame.  As Chrisk points out, SVB said the right things, like adopting this management-speak charter. But from what I understand, shortly after adopting the Risk Committee Charter, their chief risk manager left.  Then they were without any risk manager, essentially, for about eight critical months... the eight months that deposits were drying up (fewer IPOs, VC funds drying up etc.), they were continuing to lock into longer term assets, and not making higher yielding loans because demand was drying up.  As others have pointed out, there were plenty of warning signs.  They were asleep at the switch.  When they had to panic sell, they found out what I pointed out above... that what should be an extremely liquid and tradeable (and safe) asset is now worth much less, that those assets lost their value at a very fast rate in a relatively short amount of time, and that there were few buyers willing to take on interest rate risk at any price.

My overall point is not to absolve SVB of blame.  My overall point is that pointing to deregulation as the easy measure that would have prevented this, covers up the Treasury and the Fed's role in this.  AND the Treasury and Fed's actions have left many smaller institutions holding the bag, so there will continue to be risk in the financial system.  If money supply contracts (which it should to combat inflation that continues to be out of control), there will be more banks that go bust.  Yes, SVB was uniquely positioned to be the canary in the coal mine because of the absence of a risk manager, their tsunami of deposits with nowhere to go, and the bank run.  The Fed is now in a bind between continued inflation and more banks failing.  

https://twitter.com/profplum99/status/16...1236609025

I've tried to provide citations and reading material to back up my assertions.  I already linked this, but read  the conclusion.

https://michaelwgreen.substack.com/p/the...of-despair

[Goose]

This is obviously a complex situation and there were many factors involved.

Totally agree.

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  (Banks aren't simple banks having to cover deposits anymore of course, but that is a different discussion.)  They would have been fine if they were buying long-term bonds to hold until their maturity. I am part of a very conservative association that has been rolling 10-year bonds for many, many years with steady, modest gains because the funds used were not part of our liquidity.  SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.

They absolutely were not hoodwinked. However, I think they were buying bonds that they had every intention of holding to maturity (unless by some chance they could make a larger profit selling them sooner). They did not intend to use them as part of their liquidity. The fact they had to do so was not planned. That was the problem.

SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.

IMO they would not be claiming they could take such a risk because "they were not prevented from doing so before". They would claim that for their bank it was not a "significant" risk because they would continually have substantial deposits coming in from IPOs and that these new deposits would mostly remain in the bank for quite a while (years) because the companies wouldn't spend the money that fast. The obvious question would be "What if the IPOs stop?". The very smart people at SVB didn't think they would. That is the second piece of the puzzle that can't be ignored. For a very long time money kept flowing in for reasons that nobody really "understood". There were crazy piles of cash being raised that had to land somewhere, and SVB had it rigged that much of it would land in their bank. Therefore, they just assumed it would continue to do so.

Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.

Agree, and I don't think anybody was "tricked". However, the "stress test" question is IMO very important. It seems their is a significant body of opinion that if SVB had been subject to the "stress test", this problem would have been detected. It seems based on what the OP presented this would not have been the case because the parameters of the "stress test" used in the relevant time intervals did not adequately mirror what actually occurred. It certainly would not have detected it early enough to "undo" lots of one year maturities that were already locked in.

This is an inherent limitation of such tests, in that they test outcomes based on what the "experts" think are "reasonable" predictions about future trends. The experts are essentially always "wrong" to some degree and the exact parameters tested can be critically important. It is also impossible to simulate the effects of human perception. What actually starts a "run" on a bank? There are lots of human factors. If there was a reliable way to "test" what will actually happen, banking regulation would be easy. That doesn't mean "stress tests" are useless, but it does mean they have significant limitations.

[Goose]

This is obviously a complex situation and there were many factors involved.

Totally agree.

However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country.  (Banks aren't simple banks having to cover deposits anymore of course, but that is a different discussion.)  They would have been fine if they were buying long-term bonds to hold until their maturity. I am part of a very conservative association that has been rolling 10-year bonds for many, many years with steady, modest gains because the funds used were not part of our liquidity.  SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.

They absolutely were not hoodwinked. However, I think they were buying bonds that they had every intention of holding to maturity (unless by some chance they could make a larger profit selling them sooner). They did not intend to use them as part of their liquidity. The fact they had to do so was not planned. That was the problem.

SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.

IMO they would not be claiming they could take such a risk because "they were not prevented from doing so before". They would claim that for their bank it was not a "significant" risk because they would continually have substantial deposits coming in from IPOs and that these new deposits would mostly remain in the bank for quite a while (years) because the companies wouldn't spend the money that fast. The obvious question would be "What if the IPOs stop?". The very smart people at SVB didn't think they would. That is the second piece of the puzzle that can't be ignored. For a very long time money kept flowing in for reasons that nobody really "understood". There were crazy piles of cash being raised that had to land somewhere, and SVB had it rigged that much of it would land in their bank. Therefore, they just assumed it would continue to do so.

Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.

Agree, and I don't think anybody was "tricked". However, the "stress test" question is IMO very important. It seems their is a significant body of opinion that if SVB had been subject to the "stress test", this problem would have been detected. It seems based on what the OP presented this would not have been the case because the parameters of the "stress test" used in the relevant time intervals did not adequately mirror what actually occurred. It certainly would not have detected it early enough to "undo" lots of one year maturities that were already locked in.

This is an inherent limitation of such tests, in that they test outcomes based on what the "experts" think are "reasonable" predictions about future trends. The experts are essentially always "wrong" to some degree and the exact parameters tested can be critically important. It is also impossible to simulate the effects of human perception. What actually starts a "run" on a bank? There are lots of human factors. If there was a reliable way to "test" what will actually happen, banking regulation would be easy. That doesn't mean "stress tests" are useless, but it does mean they have significant limitations.

[rogpodge]

https://twitter.com/WallStreetSilv/statu...7106673668

When people are mentioning moral hazard and the guarantee / at par, etc. here is a good explanation with some German thrown in for good measure.

https://twitter.com/astridwilde1/status/...0150035457

[rogpodge]

https://twitter.com/WallStreetSilv/statu...7106673668

When people are mentioning moral hazard and the guarantee / at par, etc. here is a good explanation with some German thrown in for good measure.

https://twitter.com/astridwilde1/status/...0150035457

[Hurlburt88]

INteresting perspective
https://www.ft.com/content/ebba73d9-d319...8435cd42d9

[Hurlburt88]

INteresting perspective
https://www.ft.com/content/ebba73d9-d319...8435cd42d9

[BostonCard]

I think it is weird to have immense personal skepticism of the Federal Reserve but also to claim that it is perfectly reasonable for a sophisticated financial institution to take the Fed's prediction about interest rates at face value.  Sure, one might have looked at the Fed's predictions about interest rates and inflation as a "base case", but come on, in no universe does a bank not scenario plan.  "What if interest rates rise?" seems like such an obvious thing to game-plan... so obvious that asserting that this was unforeseen wouldn't pass the red-faced test.  More likely (and, it turns out, accurately, based on the link I provided earlier) is that this particular scenario was foreseen and communicated to executives but not acted upon, because doing so would have been less profitable in the short term.

It's also inaccurate to assert that the Fed controls the interest rates for long-dated bonds, which are at issue here.  The Federal reserve only sets interest rates for the Federal Funds rate.  While that interest rate influences other rates, sometimes that correlation is paradoxical (increasing short term rates can slow the economy, and 10-year Treasuries largely reflect the medium-term outlook for the economy).

https://www.stlouisfed.org/on-the-econom...rest-rates

Although it is still debatable whether the Fed leads or follows the market, movements in the policy rate are associated with similar movements in short-term interest rates.2

In contrast, the interest rate on a 10-year Treasury bond does not appear to move as closely with the fed funds rate. While there appears to be some co-movement, the 10-year interest rate appears to follow its own declining path.3

https://www.columbiathreadneedleus.com/b...treasuries

The yield on the 10-year Treasury has many drivers. For example, when economic confidence is high, demand for safe-haven assets (like Treasuries) falls. This pushes prices lower and yields higher. Yields are also influenced by uncertainty related to future inflation, growth and geopolitical risk. The 10-year Treasury yield may impact other longer term rates in the economy such as fixed-rate mortgages and corporate borrowing costs.

There is one way in which the Fed does have a more direct impact on long-dated treasuries, and that's through Quantitative Easing (where it buys long-dated bonds to drive down yields). However, the Fed announced it was going to start tapering its bond-buying back in November 2021. To the extent that the Federal Reserve influenced long-term bond yields upwards, I don't think it is fair to claim that the Fed misled people about it. They told us exactly what they were going to do.

Lastly, in every speech I've heard Chair Powell give, including the one in his testimony to congress last week, he says that future deicsions about the direction and magnitude of interest rate changes will be guided by the data. Inflation in late 2021 and early 2022 came in higher than the Fed had expected, and the Fed adjusted accordingly, exactly as it said it would.

BC

[BostonCard]

I think it is weird to have immense personal skepticism of the Federal Reserve but also to claim that it is perfectly reasonable for a sophisticated financial institution to take the Fed's prediction about interest rates at face value.  Sure, one might have looked at the Fed's predictions about interest rates and inflation as a "base case", but come on, in no universe does a bank not scenario plan.  "What if interest rates rise?" seems like such an obvious thing to game-plan... so obvious that asserting that this was unforeseen wouldn't pass the red-faced test.  More likely (and, it turns out, accurately, based on the link I provided earlier) is that this particular scenario was foreseen and communicated to executives but not acted upon, because doing so would have been less profitable in the short term.

It's also inaccurate to assert that the Fed controls the interest rates for long-dated bonds, which are at issue here.  The Federal reserve only sets interest rates for the Federal Funds rate.  While that interest rate influences other rates, sometimes that correlation is paradoxical (increasing short term rates can slow the economy, and 10-year Treasuries largely reflect the medium-term outlook for the economy).

https://www.stlouisfed.org/on-the-econom...rest-rates

Although it is still debatable whether the Fed leads or follows the market, movements in the policy rate are associated with similar movements in short-term interest rates.2

In contrast, the interest rate on a 10-year Treasury bond does not appear to move as closely with the fed funds rate. While there appears to be some co-movement, the 10-year interest rate appears to follow its own declining path.3

https://www.columbiathreadneedleus.com/b...treasuries

The yield on the 10-year Treasury has many drivers. For example, when economic confidence is high, demand for safe-haven assets (like Treasuries) falls. This pushes prices lower and yields higher. Yields are also influenced by uncertainty related to future inflation, growth and geopolitical risk. The 10-year Treasury yield may impact other longer term rates in the economy such as fixed-rate mortgages and corporate borrowing costs.

There is one way in which the Fed does have a more direct impact on long-dated treasuries, and that's through Quantitative Easing (where it buys long-dated bonds to drive down yields). However, the Fed announced it was going to start tapering its bond-buying back in November 2021. To the extent that the Federal Reserve influenced long-term bond yields upwards, I don't think it is fair to claim that the Fed misled people about it. They told us exactly what they were going to do.

Lastly, in every speech I've heard Chair Powell give, including the one in his testimony to congress last week, he says that future deicsions about the direction and magnitude of interest rate changes will be guided by the data. Inflation in late 2021 and early 2022 came in higher than the Fed had expected, and the Fed adjusted accordingly, exactly as it said it would.

BC

[OutsiderFan]

INteresting perspective
https://www.ft.com/content/ebba73d9-d319...8435cd42d9

This also tells it like it is and is AWESOME:
https://www.latimes.com/business/story/2...ust-a-scam

I left the valley because the VC "my shit don't stink, god's gift to the universe, we know better than everyone else, buzzword-filled bullshit" hubris turned me off in a very profound way.

[OutsiderFan]

INteresting perspective
https://www.ft.com/content/ebba73d9-d319...8435cd42d9

This also tells it like it is and is AWESOME:
https://www.latimes.com/business/story/2...ust-a-scam

I left the valley because the VC "my shit don't stink, god's gift to the universe, we know better than everyone else, buzzword-filled bullshit" hubris turned me off in a very profound way.

[Mick]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country...SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

SVB's senior management was certainly sophisticated enough to understand the risk that they were taking. From what I gather, there were a number of voices who loudly counseled against investing too much in government instruments that were disintegrating in value. This cannot have been a surprise to anyone at SVB, although the speed of the collapse may have been a surprise.

Still...the vibe I was getting from former CEO Greg Becker's announcements was that he was caught at least a little bit surprised. Did anyone else get that feeling? When did Becker realize, have the first inkling that their investing strategy was wildly incorrect? I know some people think he was very smart, and a midwestern financial conservative, and certainly he looked the part. He had gravitas. He and SVB got greedy. When did he realize that inflation was rearing its ugly head and would destroy their strategy and the 16th largest bank in the country?

---

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

Interesting process memo. It doesn't commit to a specific risk-averse profile, it just details processes. Reminds me of the old ISO-9000 standards; you could build lead lifejackets as long as you followed the process.

[Mick]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country...SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

SVB's senior management was certainly sophisticated enough to understand the risk that they were taking. From what I gather, there were a number of voices who loudly counseled against investing too much in government instruments that were disintegrating in value. This cannot have been a surprise to anyone at SVB, although the speed of the collapse may have been a surprise.

Still...the vibe I was getting from former CEO Greg Becker's announcements was that he was caught at least a little bit surprised. Did anyone else get that feeling? When did Becker realize, have the first inkling that their investing strategy was wildly incorrect? I know some people think he was very smart, and a midwestern financial conservative, and certainly he looked the part. He had gravitas. He and SVB got greedy. When did he realize that inflation was rearing its ugly head and would destroy their strategy and the 16th largest bank in the country?

---

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

Interesting process memo. It doesn't commit to a specific risk-averse profile, it just details processes. Reminds me of the old ISO-9000 standards; you could build lead lifejackets as long as you followed the process.

[TonyLima]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks banks' customers will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

Fixed that for you.

But, yes, if there's going to be an unofficial (and probably extra-legal) policy that the FDIC and the Fed will ultimately back up all deposits, then just make that the official policy already.

Sorry. Only large banks pose systemic risk because large banks serve as de facto clearing houses for transactions by smaller banks. Letting a big bank go under could create a cascade of small bank failures. Since 1932, no regulator has been willing to take that chance. And therefore big banks get bailed out.

---

Way back in 2021 some of us were predicting inflation. Larry Summers was among them. Fighting inflation always requires higher interest rates. It continues to amaze me that an obscure CA economist could forecast better than the Fed. I blame modern monetary theory. :)

[TonyLima]

Now that the FDIC has guaranteed all uninsured depositors, I wonder if it is time to explicitly gurantee all deposits, regardless of amount.  It will mean that banks banks' customers will have to pay more to the FDIC in insurance, and probably ought to be subject to more supervision, but if there is fundamentally no difference in how the FDIC treats uninsured and insured accounts, then we should probably say it out loud, shouldn't we?

BC

Fixed that for you.

But, yes, if there's going to be an unofficial (and probably extra-legal) policy that the FDIC and the Fed will ultimately back up all deposits, then just make that the official policy already.

Sorry. Only large banks pose systemic risk because large banks serve as de facto clearing houses for transactions by smaller banks. Letting a big bank go under could create a cascade of small bank failures. Since 1932, no regulator has been willing to take that chance. And therefore big banks get bailed out.

---

Way back in 2021 some of us were predicting inflation. Larry Summers was among them. Fighting inflation always requires higher interest rates. It continues to amaze me that an obscure CA economist could forecast better than the Fed. I blame modern monetary theory. :)

[chrisk]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country...SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

SVB's senior management was certainly sophisticated enough to understand the risk that they were taking. From what I gather, there were a number of voices who loudly counseled against investing too much in government instruments that were disintegrating in value. This cannot have been a surprise to anyone at SVB, although the speed of the collapse may have been a surprise.

Still...the vibe I was getting from former CEO Greg Becker's announcements was that he was caught at least a little bit surprised. Did anyone else get that feeling? When did Becker realize, have the first inkling that their investing strategy was wildly incorrect? I know some people think he was very smart, and a midwestern financial conservative, and certainly he looked the part. He had gravitas. He and SVB got greedy. When did he realize that inflation was rearing its ugly head and would destroy their strategy and the 16th largest bank in the country?

---

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

Interesting process memo. It doesn't commit to a specific risk-averse profile, it just details processes. Reminds me of the old ISO-9000 standards; you could build lead lifejackets as long as you followed the process.

Quite true. More telling about the level of concern was the article I posted earlier about the info in the latest proxy that the CRO was pushed out in early 2022 and the board Risk Committee was upsized to 7 members and met an e extraordinary 17 times in 2022.

[chrisk]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country...SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

SVB's senior management was certainly sophisticated enough to understand the risk that they were taking. From what I gather, there were a number of voices who loudly counseled against investing too much in government instruments that were disintegrating in value. This cannot have been a surprise to anyone at SVB, although the speed of the collapse may have been a surprise.

Still...the vibe I was getting from former CEO Greg Becker's announcements was that he was caught at least a little bit surprised. Did anyone else get that feeling? When did Becker realize, have the first inkling that their investing strategy was wildly incorrect? I know some people think he was very smart, and a midwestern financial conservative, and certainly he looked the part. He had gravitas. He and SVB got greedy. When did he realize that inflation was rearing its ugly head and would destroy their strategy and the 16th largest bank in the country?

---

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

Interesting process memo. It doesn't commit to a specific risk-averse profile, it just details processes. Reminds me of the old ISO-9000 standards; you could build lead lifejackets as long as you followed the process.

Quite true. More telling about the level of concern was the article I posted earlier about the info in the latest proxy that the CRO was pushed out in early 2022 and the board Risk Committee was upsized to 7 members and met an e extraordinary 17 times in 2022.

[Mick]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country...SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

SVB's senior management was certainly sophisticated enough to understand the risk that they were taking. From what I gather, there were a number of voices who loudly counseled against investing too much in government instruments that were disintegrating in value. This cannot have been a surprise to anyone at SVB, although the speed of the collapse may have been a surprise.

Still...the vibe I was getting from former CEO Greg Becker's announcements was that he was caught at least a little bit surprised. Did anyone else get that feeling? When did Becker realize, have the first inkling that their investing strategy was wildly incorrect? I know some people think he was very smart, and a midwestern financial conservative, and certainly he looked the part. He had gravitas. He and SVB got greedy. When did he realize that inflation was rearing its ugly head and would destroy their strategy and the 16th largest bank in the country?

---

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

Interesting process memo. It doesn't commit to a specific risk-averse profile, it just details processes. Reminds me of the old ISO-9000 standards; you could build lead lifejackets as long as you followed the process.

Quite true.  More telling about the level of concern was the article I posted earlier about the info in the latest proxy that the CRO was pushed out in early 2022 and the board Risk Committee was upsized to 7 members and met an e extraordinary 17 times in 2022.

Would be very interesting to read the minutes of those meetings...I imagine that they are in the hands of some regulator somewhere. What would be even more interesting would be a level of internal conflict in those meetings that wasn't documented, particularly if some senior banker mandated that it not be documented. The SEC and DoJ investigators are going to have some very interesting conversations with SVB officer, director and employee witnesses over the next few months.

It's interesting to note that a classic asset-liability mismatch, triggered by higher rates and compounded by leverage tanked the bank. It's further interesting to note that insiders clearly felt that there were risk-related issues -- they had 18 meetings in 2022, and just 7 in 2021, more than double the normal number of risk-related meetings after their Chief Risk Officer Laura Izurieta resigned in April, 2022 and left SVB in October, 2022. I'm guessing she complained a little too loudly for senior management.

VC (and other) depositors withdrew $42 billion in 44 hours.  Wow. And insider trades showed that not only did Greg Becker (CEO) sell significant shares in the days prior to the proxy filing and capital disclosure, but the CFO and Michelle Draper (CMO) did as well.

SVB had no risk chief through much of 2022, proxy statement shows | Banking Dive

[Mick]

This is obviously a complex situation and there were many factors involved.  However, it is ludicrous to claim that SVB was hoodwinked by the Fed into buying too many long-term bonds.  This is one of the most sophisticated bank/investment houses in the country...SVB was instead, putting too high of a percentage of their assets in non-liquid investments to cover unexpected withdrawals.  SVB could claim that they expected to be able to take such risks because they were never prevented from doing so before, but they knew they were taking risks.  Whether they would or would not have passed a stress test is a separate question from their culpability for their investment decisions.  Getting away with it is not the same as being tricked into doing it.  

SVB's senior management was certainly sophisticated enough to understand the risk that they were taking. From what I gather, there were a number of voices who loudly counseled against investing too much in government instruments that were disintegrating in value. This cannot have been a surprise to anyone at SVB, although the speed of the collapse may have been a surprise.

Still...the vibe I was getting from former CEO Greg Becker's announcements was that he was caught at least a little bit surprised. Did anyone else get that feeling? When did Becker realize, have the first inkling that their investing strategy was wildly incorrect? I know some people think he was very smart, and a midwestern financial conservative, and certainly he looked the part. He had gravitas. He and SVB got greedy. When did he realize that inflation was rearing its ugly head and would destroy their strategy and the 16th largest bank in the country?

---

SVB was sophisticated enough to have adopted this Risk Committee Charter in April 2022

https://www.svb.com/globalassets/library...-final.pdf

Interesting process memo. It doesn't commit to a specific risk-averse profile, it just details processes. Reminds me of the old ISO-9000 standards; you could build lead lifejackets as long as you followed the process.

Quite true.  More telling about the level of concern was the article I posted earlier about the info in the latest proxy that the CRO was pushed out in early 2022 and the board Risk Committee was upsized to 7 members and met an e extraordinary 17 times in 2022.

Would be very interesting to read the minutes of those meetings...I imagine that they are in the hands of some regulator somewhere. What would be even more interesting would be a level of internal conflict in those meetings that wasn't documented, particularly if some senior banker mandated that it not be documented. The SEC and DoJ investigators are going to have some very interesting conversations with SVB officer, director and employee witnesses over the next few months.

It's interesting to note that a classic asset-liability mismatch, triggered by higher rates and compounded by leverage tanked the bank. It's further interesting to note that insiders clearly felt that there were risk-related issues -- they had 18 meetings in 2022, and just 7 in 2021, more than double the normal number of risk-related meetings after their Chief Risk Officer Laura Izurieta resigned in April, 2022 and left SVB in October, 2022. I'm guessing she complained a little too loudly for senior management.

VC (and other) depositors withdrew $42 billion in 44 hours.  Wow. And insider trades showed that not only did Greg Becker (CEO) sell significant shares in the days prior to the proxy filing and capital disclosure, but the CFO and Michelle Draper (CMO) did as well.

SVB had no risk chief through much of 2022, proxy statement shows | Banking Dive