Matt Levine reports that the reason they had to buy those low-yield investments that plummeted is because it’s tech-sector customers had too much money in the boom times. Too much deposits means they need to buy a lot of something, and in the boom times that was low-yield stuff.
Sort of the other way to handle it would be to say “we can’t find risk-free yield for the volume of cash we just had deposited, so deposits now get 0.8% instead of 1.0%”
Which is kinda fine? Means you might lose some business as others chase yield. But I feel like most startups don’t actually have that much cash in the bank so they shouldn’t really be chasing yield anyway.
It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
> It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
Everyone is a genius in hindsight. You could have made millions out of a few thousands if you were able to predict an interest rate regime change. But where are your millions?
I locked in a 30yr fixed mortgage at 2.49% right before the spike because it seemed obvious? Not sure if that counts, but that should be enough cred that I made a large bet on my prediction when it mattered.
Yeah plenty of folks I know felt similar, myself included. I bought a home during the pandemic. Prices had increased a fair amount in my area which worried me, but the ability to lock in such a low rate for 30 years more than offset that concern.
you don't need a to be a genius to have known that the 2.4% interest rate won't last for ever. Everyone in america with a mortgage knew that and rushed to re-finance. So why did bank managers not know. i think its more like, they had no other good options to park their cash. So they took the best of a bunch of bad options
They would've had to go to 0%. As cormacrelf mentions, short-term treasuries in 2021 were yielding < 0.1%. That's a pretty hard sell when inflation is running 8-9%.
Some banks did exactly that. Even now, when SVB is advertising 4.5% rates on business checking [1], First Republic Bank is offering 0.01% on Business Interest Checking [2]. But note that SVB's failure impacts all sorts of household names like Roku, Roblox, Coinbase, Stripe, while FRB reports that tech is only 4% of their business. Companies that don't offer yield lose out to companies that do in the yield-chasing competitive marketplace.
We're observing some form of anti-survivorship bias, where risky behavior was incentivized by the market, so market participants had to engage or get pushed out of the market, and so now we hear about the risky behavior because that's what failed. We're not talking about banks like FRB or Wells Fargo that offer 0% on their bank accounts.
That’s a sign of mismanagement if true. Commercial/retail banks (as opposed to investment banks) usually make basically all their money on lending. Deposits (as liabilities) need to be so low risk that they basically don’t do much more than break even.
Back in 2021 short term T-bills gave you less than 0.1% yield, hitting an all time low of 0.04% for some timeframes. The bonds they bought gave them 1.5% annual return. The banking regulations didn’t prevent them buying the ones they did. So yeah. That’s why.
I'd rather have a bank do that, than go and invest in subprime packaged mortgage loans. Except SVB got punished for investing in long-term maturation US Treasury
I'd also like to point out that VCs were telling all their portfolio companies "Pack it in and conserve cash as you're not getting another round." That caused a lot of companies that would otherwise have put their cash into an investment vehicle to instead hold it in their accounts.
It will also be interesting to see if someone is going to wind up in jail for initiating the bank run. Someone shared confidential info that started this whole thing.
Was it confidential info? The public earnings call was three days ago, investors didn’t like what they saw and the stock went into free fall, then the run started yesterday.
I think insiders might not even have realized how bad their balance sheet looked. On the earnings call the CEO was talking about how much he likes cycling to de stress, etc
