92 Comments

Maybe the original sin was a decade of "front-end yields" being 0-25bps. Also, clearly, bank supervision is not a priority at the Fed.

Expand full comment

I agree with you that sitting around and calling SVB "idiots" is extremely one-sided. I begin to involuntarily smile every time I think of the Fed's promises and what they have done, and if you take that into account, then SVB is understandable. It was interesting to read your article.

Expand full comment
Mar 12, 2023Liked by Michael W. Green

Don’t forget that the laws requiring banks between $50-250bn in total assets undergo annual stress tests (which stress for all sorts of conditions including interest rate shocks and ramps) reported to the Fed were rolled back….

They really misjudged the duration of their liabilities and that’s the ultimate reason for their sudden death….

Hope you are well, Mike.

Grant

Expand full comment
Mar 12, 2023Liked by Michael W. Green

Well there is probably 4-7 trillion of mark to market losses in the global bond market from rising rates. the question is where it is all distributed, some of it is obviously on bank balancesheets (like we see with SVB), a lot of it is probably sitting in pensions as well.

Expand full comment

One of the best write ups on the SIVB situation. Great forensics! Cheers.

Expand full comment
Mar 12, 2023Liked by Michael W. Green

"Given front-end yields were only 25bps, the management team naturally sought to make a bit more by tapping into longer-dated bonds which offered yields slightly above 1%."

Not so sure I would want them managing my money. Isn't that risking a lot to gain a little?

Expand full comment
Mar 12, 2023·edited Mar 12, 2023

Things are not supposed to be "obvious" before one makes a prudent decision to hedge. If this was all so predictable, and the Fed's fault, all banks would have done something similar and we are on the precipice of the failure of the entire banking system, no? If that is not what is going to happen, then this is SVB's fault. Suggesting that SVB had the right to believe the Fed's favorable statement on interest rate policy and commit to the HTM position and the loss of any opportunity to hedge is really writing them a blank check in the "excuses" department. Unfortunately for them and countless others, that check is going to bounce.

Expand full comment

PwC's viewpoint provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge. Since HTM securities are carried at amortized cost, they are obviously not eligible, but nothing in GAAP precluded $SIVB from swapping their HTM securities from fixed to floating...there is a difference between an economic hedge and an accounting hedge that is missed in this piece (respect MG, but he got this one wrong)...

Expand full comment
Mar 12, 2023Liked by Michael W. Green

Excellent.

Thank you Mike.

Accounting policy (non hedging of HTM)

at the fore again. A commonality of all crashes is they nearly all stem from behaviours driven by the non linearity of accounting rules.

Expand full comment

Fantastic piece - how’s this for a summary:

Once a bank chooses HTM for underwater positions, they’re locked in for the hiking cycle like Major Kong riding the bomb in Dr. Strangelove.

https://youtu.be/3edi2Wkr5YI

Expand full comment
Mar 13, 2023Liked by Michael W. Green

Prof Plum, your analysis raises many good points, and I’d like to offer some others given SVB’s massive 2nd, 3rd, 4th order statistical sensitivities unique to their biz model.

For example, take your relationship between the IPO-deal data leading deposit flows. A key C-Suite job is understanding the balance sheet stock and flows and their dynamics. The 1st and 2nd deriv of IPO-deal volume suggested deposits may be at risk of not rising in the future. This was beginning in Q1 2021, a good 3-6 month lead. Additionally, if an outflow scenario were the case and the CEO wanted assets to be able to cover inevitable outflows...would I want to choose to be short a great deal of negative convexity with an MBS for an additional few basis points of a fixed yield? That’s called a Texas hedge.

Although the borrow short, lend long metaphor is generally true, SVBs highly idiosyncratic client base (invest for growth at all costs = negative cash outflows) adds some complication. These correlated liabilities mean their risk for withdrawals is highly non-linear relative to other diverse deposit cohorts. Coupled with 5x deposit growth and leading indicators suggesting increasing odds of withdrawals, how is the C-Suite managing their exposure to withdrawals? Therefore consideration of asset-mix that includes some offsetting non-linear payoffs and diversifying the correlated deposit base is critical. Perhaps, this was considered, unmanageable in the time available, or unknown entirely. Unfortunately, we do not know.

As to your point of the Fed’s actions being unprecedented, if I recall Volcker moved rates several hundred basis points in a much shorter timeframe? Or similarly, what happened to SVB deposits during dot com burst or GFC? It’s a fair point that the zeitgeist accepted the “transitory” or that gradual increases narratives were consensus. Nonetheless, I’m not sure ignoring other contingencies is a recipe for survival.

I don’t see how we can jump to conclude fault with the Fed when we haven’t ruled other possibilities given your evidence.

Expand full comment
Mar 12, 2023Liked by Michael W. Green

Sigma move from Jay Powell here - literally

Expand full comment
Mar 12, 2023Liked by Michael W. Green

This period of time really reminds me of the late '80's Savings & Loan crisis (remember the Keating 5?).

For most of the 80's, banks and s&l's paid very low rates on deposits, then money market funds were created, offering much higher deposit rates, and as money fled for higher returns, the banks and s&l's were forced to compete for deposits at higher rates, leading to the collapse of many s&l's.

Expand full comment

Thank you for a great article. I'm more familiar with IFRS, but my understanding is that they could have still hedged properly although as you noted the hedge accounting option would not have been available. So the hedge would have been recorded on a different balance sheet line with gains/losses hitting the P&L as fair value changed. Overall though, they would've still be able to obtain the same cash flow profile and risk management outcome.

Needless to say I would have a problem with Management if they made hedging decisions based on accounting presentation instead of business need.

Expand full comment

Goddamn Michael, you’re fantastic. While this bromance with your work won’t offer you productive push back, I had to say something. Keep up the incredible work you do. So so many appreciate your perspective and your willingness to share.

Expand full comment

Excellent analysis. My Twitter feed is filled with hot takes just as everyone else's, and I've yet to see a single person blame the Fed. The only outlier is Chris Whalen who has laid this squarely at the Fed's doorstep. So you two are in agreement full agreement.

Expand full comment