The collapse of SVB exposes the largest crack in the economy

SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion.<p>Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable.<p>European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leveraged this loophole.<p>For those interested, FT Alphaville describes this in ample detail:<p>Silicon Valley Bank is a very American mess <a href="https:&#x2F;&#x2F;on.ft.com&#x2F;3ywMURD" rel="nofollow">https:&#x2F;&#x2F;on.ft.com&#x2F;3ywMURD</a>

This whole discussion around bonds makes me feel like I&#x27;m either too stupid or too smart, because it does not make sense to me that SVB would not have any sort of hedging around government bonds?<p>I don&#x27;t know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It&#x27;s common sense between investors you need to hold a mix of the 3 to hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it&#x27;s likely the government will increase interest rates to compensate, and so on.<p>Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?

The author myopically tries to extrapolate this incident to &quot;the economy&quot; and &quot;other industries&quot;. SVB&#x27;s customers panicked. But who are SVB&#x27;s customers. For the most part, VC, PE and non-profitable &quot;tech&quot; startups. Not surprising they would panic. They produce nothing themselves, conduct surveillance, sell advertising services, pay employees from funding rounds and call this a &quot;business model&quot;.<p>This is not &quot;the economy&quot;. This is a giant sucking leech attached to it. A parasitic fungus that has attacked the minds of an alarming number of susceptible people. But not everyone is a mindless zombie.<p>Among other things, the parasite needs &quot;zero&quot; interest rate borrowing to survive.<p>&quot;The economy&quot; is not synonymous with Silicon Valley nor the SV mind virus.

In the short term, it is interesting to see if this problem grows[0]...if Fed keeps rates at high levels for longer, there is going to be a gravitational pull into treasuries which will cause more banks to fail.<p>It would be very prudent to not have more than the FDIC insured amount in especially smaller regional banks that may have made same errors as SIVB while avoiding Basel III regulations [1]<p>[0] <a href="https:&#x2F;&#x2F;twitter.com&#x2F;TOzgokmen&#x2F;status&#x2F;1634329176554520576" rel="nofollow">https:&#x2F;&#x2F;twitter.com&#x2F;TOzgokmen&#x2F;status&#x2F;1634329176554520576</a><p>[1] <a href="https:&#x2F;&#x2F;archive.ph&#x2F;Fx1is" rel="nofollow">https:&#x2F;&#x2F;archive.ph&#x2F;Fx1is</a>

So between the tech angle and the housing-related investment vehicles, are we remixing 2000 with 2008 now?

Everyone says SVB had bad investment and they deserv it etc. However, I am worried about this being the first of many similar financial instutation failing. After all, bonds are supposed to be safe on paper. Increasintg interest rate fast can break many people who are not able to adjust.

I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed created expectations that interest rates had a reasonable chance of staying 0 for the next decade. This blame falls squarely with Powell. He lowered rates in 2019, well before the pandemic. Who can blame someone for seeing near-0 rates in 2019 and believing they would stay that way well into the 2020s?<p>Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.

There are LOTS of financial players looking for low credit risk long-term assets who can tolerate the associated interest rate risk. Pension funds and life insurance companies have highly predictable long-term cash outflows and often happily buy long-term bonds to match up inflows. They do not care that the market value of their holdings has been hammered by interest rate increases because the assets were selected to fund a future liquidity need.<p>Just because the tech community is just now discovering interest rate risk and maturity matching problems doesn&#x27;t mean any of this is new to the rest of us.

&gt; In the 2008 crisis, a major lesson was that you can’t effectively reduce risk by bundling together lots of risky assets into one major asset.<p>That was the first domino to fall, but that was survivable. The real problem was that the banking system had a suicide pact in the form of credit default swaps on each other that they couldn&#x27;t cover. The MBS stuff was bad, but that wasn&#x27;t what caused 2008.<p>Now I&#x27;m just waiting to find out if some other bank is going to need to pay out credit default swaps for SVB in excess of their market cap...

I dunno. Fucking duh, a government bond that pays you a fixed amount of interest is going to lose value when inflation is higher than the loan rate.

As someone that is not following this as closely as I would like, does the collapse of this bank have nothing to do with FTX and Crypto?

I thought Bear Stearns going under was exposing a crack. Same for New Century Financial Corp. declaring bancrupcy.<p>Is this going to end with similar results as 2018 by affecting the whole financial system? If yes I hope there will be no bailouts using public money and the financial system will start to be properly regulated and supervised.

In 2008 we learned “cartolarization”.<p>In 2022-23: “Bond convexity”.<p>This word is still not on headlines yet, so maybe more loses has to come.

It only takes one bank to default, and an infinite amount of articles like this are instantly published. Urgh.

this is a response to the title: the crack that just appeared must be the largest!

&gt; A 10Y T-Bill purchased on the first trading day of 2021 is now worth less than $0.80 on the dollar<p>Just one note for those that aren&#x27;t fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.

<a href="https:&#x2F;&#x2F;twitter.com&#x2F;DavidSacks&#x2F;status&#x2F;1634292056821764099" rel="nofollow">https:&#x2F;&#x2F;twitter.com&#x2F;DavidSacks&#x2F;status&#x2F;1634292056821764099</a><p>Looking at the comments here, it&#x27;s possible that this may trigger a run on banks.

Interest rates were going to go up at some point anyway.