@AndySoCal wrote:
@Anonymalous There are many blame points in my opinion. I am of the opinion that the regulators did not do their job correctly. The related problem to the bond market investing is SVB as March of 2023 had over 80% of their deposits were uninsured. A bank needs to have capital to insure those accounts are secure. Second blame point is the Fed's were slow to take action on inflation. Early on when inflation began to rise the adminstration and Feds thought is was supply chain and transitory. At some point in 2021 or 2022 the bond market disagreed with that point of view. You had bond prices falling and bond interest rates rising. The 2 year treasury bond ( I think) had risen to 2% or higher. It was around that time the Feds started raising rates. The Fed was late in acting on inflation.
In anyone in banking knows that interest rates will go up and will go down. The banks need to be prepared to handle either rate of the rate cycles. For SVB to invest their capital in bonds in the manner in which they did was wrong. It is wrong because the bond portfolio should have had leaned much more towards short term securities due where interest rate were. The fluxuation in prices for the bonds they owned would not have been as volitile as the longer term bonds. For management to sell their stocks in the manner in which they did was wrong. If SVB management believed that interest rates would stay at historic lows for a prolonged period time is simply nieve in my opinion.
I find the uninsured discussion somewhat strange. The majority of their deposits were uninsured because of the nature of their client base. Individuals rarely exceed the FDIC limit, while companies often do, and SVB was known for providing banking services to startups, not individuals. Anything above or outside those limits is normally uninsured, beyond the Fed as a backstop. Though this is influenced by the moral hazard created by the mere existence of the FDIC, which has trained people not to bother looking at the stability of the underlying bank, because they know their money is safe whether their bank prefers investing in treasuries or derivatives (or their newer forms, in the wake of the regulation following the 2008 crash). That explains some of the behavior we saw with the relatively few but wealthy individual investors at SVB, who typically just kept their money in a single account instead of using bank sweeps or accounts with different POD designations. They were assuming it was safe because they'd been pavloved into thinking it was safe, instead of doing due diligence. There are similar effects with the moral hazards of the Fed acting as the lender of last resort.
No sane person grounded in basic economic theory thought the inflation was transitory, but nearly every government official, their captured economists, and their media mouthpieces were saying it was. This is another example of malincentives, because a fractional reserve banking system can break if the public panics, so they always say everything is going well even when it's clearly forming a mushroom shape.
The reaction of the market is... weird. The massive intervention and government controls have resulted in an environment where few are concerned with market fundamentals anymore, or even basic things like profitability. The news cycle and online speculation is almost entirely focused on the next cryptic statement from the Fed, and clamour that the market will be destroyed if the Fed doesn't immediately lower interest rates and open the loose money floodgates again.
You're talking from the perspective of someone like an individual buy and hold investor or a financial advisor. Which is a perspective I can appreciate, but the banking industry is insulated from that. They have different resources and incentives, and there's been a dizzying amount of talk about new normals or unprecedented and thus unpredictable interventions.
And if SVB was wrong, so were hundreds of other banks. There have been several analyses that show a lot of banks have a lot of exposure to long term assets. It's all about incentives and short term risks. Low interest rates themselves encourage yield chasing, which means taking greater and greater risks in order to eke out even a marginal positive return, and with the flood of free money and everyone chasing the small limited pool of assets, even the most risky assets had their potential returns eroded.
8/22/24
3/09/25
