[Octokiddie]

More context from another article:

> The big losses experienced by the bank are directly related to the surge in interest rates over the past year, as the company's US Treasury holdings were bought at a time when interest rates were still relatively low. Bond prices fall as yields rise.

https://markets.businessinsider.com/news/stocks/silicon-vall...

More general context:

- Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC.

- UST prices fall as interest rates rise

- the fall of UST prices in the last year is abnormally abrupt and deep

- banks are not required to "mark-to-market" their UST holdings if they plan to hold to maturity

- cash crunches can cause banks to sell UST before maturity, turning unrealized losses into real losses

- SVB joins Silvergate as a previously high-flying tech-related bank suffering a cash crunch and forced to liquidate bond holdings at a loss

It's hard to judge the scope of the problem that Silvergate and SVB might point to. What's clear is that unrealized UST losses on bank balance sheets can surface very quickly and lead to very ugly outcomes.

[nostrademons]

Unpopular and pretty far-out opinion: 2023-2024 is going to be a bigger financial crisis than 2008-2009, and is potentially a civilization-ending event.

The brewing crisis is that the Fed needs to trigger a recession (with job loss) to bring down inflation, because the root cause of the inflation is that there are too few workers for the available roles in the current structure of the economy, and so the economy needs to be refactored to drop non-critical industries and inefficient firms. But that's going to cause a cash crunch, since laid-off workers start pulling cash out of banks instead of making it at their jobs. Plus many consumers are drawing down on their savings and going into debt now because of inflation. And it's going to happen right at the greatest velocity of interest rate increases, when Treasuries are at their lowest. So we're going to see bank failures on top of job losses, right as interest rates hit their highest.

IMHO we're already off the cliff, we just haven't realized it yet. It was going to hit in ~2024-2025 anyway as demographics started creating a labor shortage, but COVID accelerated it with a bunch of early retirements and supply chain snags.

[JohnFen]

> is potentially a civilization-ending event.

Civilization-ending? How is that even remotely in the realm of possibility?

[nostrademons]

These banking failures and mass unemployment would come right as interest rates are spiking. They also go hand in hand with banks dumping Treasury Bills for liquidity, which would cause a sharp decline in T-bill prices and a rise in T-bill rates.

The government finances its operations by issuing T-bills. If nobody is willing to buy T-bills, the government can't get cash to pay government employees, including the FBI, CIA, military, etc. It's unlikely that people are going to continue working if they don't get paid. Historically, governments that don't pay their soldiers, police, intelligence forces don't remain governments for long.

[JohnFen]

Perhaps we have different definitions of "civilization-ending". Even if what you describe here actually happened, I wouldn't characterize that as a civilization-ending event. it would just be the passing of another nation. Civilization would continue, just as it has when nations have fallen in history.

Although, I do need to add, while your scenario is technically possible, I do think it's vanishingly unlikely. The US has been down that road before and survived, as have many others.

[nostrademons]

I was torn on what to call it - debated using the term "state failure", which I think is more accurate but few people truly know what that means. Basically, I'm referring to an event that breaks our conceptions of what it means to be "civilized" - basically, that you follow laws, adhere to contracts, respect government authority, have a well-defined political process, pay with a stable currency, can count on your personal property rights and past savings being respected, etc.

You can have civilization-ending events that don't involve everyone dying - the fall of the Soviet Union in 1991 was one. It was still hugely disruptive to everyone who lived in the Eastern Bloc. The U.S. Civil War is another one, though plenty of people died then too. It's not the end of all civilization, just the civilization we're in.

[JohnFen]

OK, I understand better now. We do define "civilization-ending" (and perhaps even "civilization") very, very differently. Fair enough! I appreciate your explanation, thank you.

[athinggoingon]

> The government finances its operations by issuing T-bills. If nobody is willing to buy T-bills, the government can't get cash to pay government employees, including the FBI, CIA, military, etc.

If nobody is willing to buy T-bills, the Fed will just monetize the debt, which is something they have been doing since 2008.

There's a reason the Fed's balance sheet is now around 8 trillion dollars.

[p10_user]

Will banks dump that many short term t bills to cause a problem? Short term t bills are very popular- I’m sure some b2b loans could be settled with a t bill as payment. As long as the us govt is still good for the interest payments I think plenty will be happy with that arrangement, reducing need to convert so much into cash.

[nradov]

There have been plenty of recessions and depressions so far and none of them have ended civilization. Another recession is certainly possible this year, but some people are always predicting those. Do you have a record of making accurate recession predictions without false positives?

[nostrademons]

Predicted 2000, 2008-09, and 2020. Predicted growth from 2003-2007. Falsely predicted a double-dip in 2011. Predicted growth from 2012-2020. Correctly predicted that 2015 and 2017-2018 would not result in recessions at a time that media and some friends were saying they would. Incorrectly predicted that 2020 recession would last longer than it did - I reversed opinion in early 2021, which was a little late to capture much of the upside. Correctly predicted the 2020+ inflation.

In general I've got close to 100% success at avoiding major disasters, but also tend to be a little bit jumpy on the trigger and sometimes forecast disasters that do not happen. ("A little bit" meaning about a 30-40% false-positive rate, not a perma-bear.) I also usually predict a higher severity and longer duration than actually occurs.

[rlonn]

It’s like they say: bears have predicted all 25 of the last 5 recessions

[selimthegrim]

Civilization ending because it affects ability to respond to climate change?

[nostrademons]

I explain a bit more what I mean here:

https://news.ycombinator.com/item?id=35087159

I consider climate-change to be another potential civilization ending event in that it's going to create ripple effects that will likely lead to present-day governments falling. But I'm not referring to it as an effect here - TBH, I think the consequences of climate change are already locked in at this point and we're going to face them regardless of what we do.

I mean "civilization ending" as in "the rules are unknown or non-existent". As in, our civilization ends, not civilization for all time ends. There will be new forms of cooperation and political organization - I suspect they'll grow out of local governments.

[GreenPlastic]

We've been in one long cycle since 1998, continuing with the .com bubble and the GFC and finally Covid. With each one we've had to print more and do more to get out of it. Where it ends is anybodies guess...but each crisis requires a larger response

[resters]

FWIW I think it's an amazing time to be a debtor.

[patch_cable]

> pulling cash out of banks

In practice, the cash still probably ends up at a bank, just in a different account. I don't think anyone is going to pull it out and start burying it in their back yard.

[nostrademons]

It still can trigger bank failures like the article is describing, though. Consumer pulls it out of one bank, creating a cash crunch there, and forces them to liquidate treasuries and realize large losses that had previously only been on paper. That bank is now insolvent. The bank that the recipient deposits them into now has more cash in hand, but they weren't facing a cash crunch in the first place. Some (bigger and more conservative) banks are going to end up doing great, but the financially weaker ones are going to get flushed out.

Think of it like a pot of superheated water. As long as it remains undisturbed it continues to be un-boiled, even though the temperature is above the boiling point. As soon as you jostle it, though, everything erupts. The movement was just a catalyst - the problem was that the underlying state existed in an unstable equilibrium.

[CapstanRoller]

Why would it get pulled out of the bank? Where would it go? I don't believe we'll see an epidemic of folks suddenly wanting to store their life savings under the mattress.

[nostrebored]

My family has withdrawn ~95% of our bank holdings after looking into the health of banks and the broader financial system. Not going to say too much, but the funds didn’t reenter the banking system.

[credit_guy]

Also fairly unpopular opinion: it's not going to be a financial crisis because of GPT. Yes, the Fed needs to keep rates high to fight inflation, and this would normally trigger a recession. But GPT bots will increase productivity tremendously in the next few years, so we'll be able to weather the Fed high rates without dipping into recession.

[JumpCrisscross]

> Banks are required by law to buy US Treasuries (UST)

Yes. But they’re not required to buy long-dated, high-yielding, high-duration Treasuries (or MBS). Silvergate and SVB, out of incompetence or greed, optimised for yield, not liquidity, despite banking flighty depositors.

[beezle]

Nor are they required to leave those same positions unhedged.

[hn_throwaway_99]

Excellent summary. The interesting thing to me comparing Silvergate and SVB is that they both got hit by a fall in value of their long-duration bonds, but they had pretty different reasons for the "run on the bank". That is, in Silvergate's case, depositors wanted their money out because people were so fearful after FTX for anything with even a hint of crypto exposure (and Silvergate had more than a hint), and in SVB's case it's because a lot of their tech startups that hold deposits at the bank actually need their money out to spend.

[jldugger]

> UST prices fall as interest rates rise

Just to underscore the point here, in the past year, the fed has raised rates a ton, and counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years[1].

You might naively assume a bond fund values would reflect interest rates but there is a lag as you wait to roll over old bonds into new debt at the new high interest rate, and until that happens you don't collect any of the extra interest. Even if you sold the old bonds to buy new good ones, nobody will buy them without a discount to make up for the low interest rate.

This is why you have the weird mark to market rules. A US bond _will_ mature at 100 dollars, but can rationally sell on the market below 100 dollars.

[1]: https://yhoo.it/3Js4bl6

[hn_throwaway_99]

> counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years.

Is that counterintuitive? "Existing bond prices fall when interest rates rise" is pretty common knowledge I thought, and it seems quite intuitive to me. If I have a bond that matures in 2 years that only pays 5%, and I can buy a new bond, with the exact same characteristics, but which pays 10%, then if I sold my bond now I'd have to do it at a discount in order to give it an effective 10% yield.

[jldugger]

For financiers no, for random engineers on HN, maybe.

Anyways, I intended my main point to be that bonds are down 15 percent, but maybe obscured that in my haste to press send before bouncing for a meeting.

[CPLX]

There's absolutely nothing counterintuitive about that at all. It's one of the most core principals of finance that as interest rates go up bonds go down.

In fact it's so direct that they are quite literally the same thing. The difference between the face value of the bond and the actual amount you have to pay to buy the bond is how you define what the interest rate is.*

* Yes I know subject to time to maturity and coupon and all that.

[beezle]

There are also negative tax problems for those who continue to hold the ETF or mutual fund after others have sold and the redemptions cause the sale of actual bond holdings most likely at a loss.

Personally I always advise friends/family who are considering bond funds to instead consider using Treasury Direct to create their own bond portfolio if their intent is to hold to maturity. Similar can be done with liquid corporate bonds through brokers like IB.

[londons_explore]

This means that anyone who has a lot of deposits at a US bank can potentially:

* Withdraw all their holdings, forcing the bank to realise losses in their holdings

* Buy shorts in the stock of the bank

* When the losses are announced, make lots of money from their short position.

[WJW]

Step 4: receive your complementary court summons for market manipulation.

As a more practical matter, you would need a very large sum to do this for even mid-sized banks. SV bank alone had over 200 billion in assets, so you would need at least ~10 in cash to make a significant dent in that. If you have that much cash in any bank, there are probably many options you could go for that promise bigger profits at less risk.

[xur17]

So a new target for /r/wallstreetbets?

[WJW]

Perhaps, but probably not. Just doing some napkin math, to get to ten billion in withdrawals (ie only 5% of total assets of SV bank) you would need a million wall street bets subscribers to withdraw 10k each. Not a million to deposit it first and then retract it, a million retail subscribers who already had at least 10k deposited in this bank that mainly serves startups. I don't think it's very likely.

Also, it would still be extremely illegal to arrange this with the express purpose of causing a bank run. The excuse of "yes but it was on r/wallstreetbets" is not probably very impressive to the SEC.

[toomuchtodo]

While it’s unlikely we’re going to see a meme stock moment, a bank run by a collection of risk adverse founders already facing a challenging macro pulling their deposits is entirely possible. And those cash balances are likely much more than 10k assuming runway liquidity.

https://news.ycombinator.com/item?id=35086853

https://news.ycombinator.com/item?id=35086888

[WJW]

Yes but people rationally pulling money from a failing bank is very different than a subreddit banding together to kill the bank on purpose.

[hef19898]

When someone holds as much cash deposits in a bank to single handily cause that, that party doesn't need that level of petty market manipulation to make a profit so.

[airstrike]

Reading the tea leaves in comments and general reaction elsewhere, I think this tale will have the unfortunate side-effect of people jumping to the wrong conclusion that SVB is getting slaughtered because of defaults in VC debt when in reality this appears to be attributable to poor asset management on the bank's fault by buying into mortgage-backed securities and being long duration in a rising interest rate environment

It's like everyone reads "tech layoffs" in one news article an then "VC bank default", conclude everything one is directly causing the other and there's a new dotcom crash

[pphysch]

> Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC.

Can you expand on this? What is this regulation titled?

[nostromo]

Banks are required to have reserves. Reserves are mostly held as US Treasuries.

[lxgr]

Aren't bank reserves normally cash (or equivalently central bank deposits)?

[pphysch]

Gotcha.

[mikeyouse]

Post GFC, regulators started assigning risk weightings to bank assets — cash and treasury bills are “riskless” by this metric, most other things aren’t. So if you need $100 of reserves, that can be $100 of treasuries or $200 of car loans or $400 of mortgage backed securities. For obvious reasons, their balance sheets are heavily invested in treasuries now.

https://www.investopedia.com/terms/t/tier-1-capital-ratio.as...

[tikkun]

Can you send me an email? Email in profile. I have more thoughts on the UST situation

[WJW]

Why not just post them here in the comments?