[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