[twblalock]

> The cost of the loans should be in the same ballpark as the losses on the long term bonds.

That’s great, that means it’s zero, because there is no loss of principal on bonds held to maturity!

[xorfish]

No, that is not true.

Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes.

The MtM losses are real.

[twblalock]

No matter how many times you say this it's not going to be true. If you hold bonds to maturity you get the principal back. If you sell them at market rates you don't. Those are different outcomes.

Nobody is talking about taking on debt at market rates to float the bonds. The bank died because it couldn't do that and couldn't raise capital in other ways either. Now we are talking about the government backstopping things, which is a whole different ballgame.

[xorfish]

You still have to pay the interest on the loan.

If your bond 10y bond you bought two years ago pays 1.5% and you need to take on a loan at 3.5% for 8 years to be liquid, then you are still around 16% in the red. You will find that this is also roughly what the market will discount the bonds.

[twblalock]

The loans we are talking about are from the government and don't need to stick to market rates if the government doesn't want them to.

[kgwgk]

Having the government give zero-interest loans doesn’t quite satisfy the “won’t cost anything to taxpayers” part, does it?

[twblalock]

Depends on where they get the money. The FDIC doesn't take public money at all. The Fed can create money in various ways.

[jkhdigital]

And where does the government get the money to lend to the bank? Right, it issues Treasury debt for which it pays a market-determined rate of interest. In other words, taxpayers would be subsidizing any below-market rate loans.

[twblalock]

The FDIC also has lots of money, and got none of it from taxpayers.

[RandomLensman]

If you need money now and not in the future, there is cost. The fact that the principal gets paid at maturity is irrelevant - a risky bond does have interest rate sensitivity, too.

[xmcqdpt2]

Of course, that's why SVB failed. But the FDIC doesn't need the money now (well assuming they successfully stop the dominos from falling).

[RandomLensman]

I would have thought that the deposits will leave SVB/what is left of SVB pretty soon, so the FDIC will need to cover that rather now than in the far future.

[ElevenLathe]

The point of doing this is that the deposits hopefully won't feel the need to leave. After all, the BoA account you were planning to move them to doesn't have a public letter from the Treasury Secretary saying it's insured to no limit by the FDIC.

[rvnx]

Also let's not forget that the customers profited from the interests paid by the bonds.

If SVB was paying 4.50% (as they claim on their website), then even if the customer takes a 5% loss, it would be only a 0.50% realised loss.

I genuinely don't understand why the regulator doesn't push for that unless there is some "lobbying" involved.

[DebtDeflation]

>Selling the bonds now at their current valuation or taking on debt and hold them to maturity lead to roughly equivalent outcomes.

Correct. This is literally why bond prices move inversely to changes in interest rates.

The people criticizing you here are ignoring carrying costs (which are fundamental to finance math) and assuming that default risk is the only form of risk (which is obviously false).