Btw, I just noticed that $9.3bi of these $15.2 are MBS—yeah, the same type of security associated w the great crisis of 2007-2008. And the HTM total more than U$90 bi, $72bi of which are MBS and CMBS—so dwarfing their investments in bonds, and their $17.6bi in AFS.
This is technically true but much, much less interesting than it sounds.
The “subprime CDO-squared mortgage-backed securities” associated with the 2008 crisis were:
based on mortgages of “subprime” credit rating (which is, like most terms invented by credit bankers, a gross euphemism)...
...which were(, because of the above,) not backed by the pseudo-governmental agencies that insure mortgages
“securitized” in a way that splits the existing risk between three different classes of investors, with the bank selling the riskiest two to someone else
had their middle tranches subsequently repackaged into second-order financial derivatives...
...some of which were safe to an arbitrary number of 9s if and only if you believed that defaults on the backing mortgages were independent random events...
...and which were regulated as if that condition were true...
...with the consequence that banks were allowed to take almost literally infinite leverage on them (and in relevant cases, did).
The “agency mortgage-backed securities” on SVB’s balance sheet were:
based on “conforming” mortgages insured by the pseudo-governmental “agencies”...
...the credit of which is not material to the bank, because of the insurance.
“securitized” in a way that splits the existing risk between three different classes of investors, with the bank selling the riskiest (and maybe also the second-riskiest) to someone else
definitely not repackaged using the same trick
require a ~10% capital buffer for every dollar of assets, truly regardless of riskiness (yes, even Federal Reserve deposits need this), just in case there’s some other trick that makes them bad credit
The problem in 2008 is that these theoretically-perfect-credit, infinite-leverage-allowed instruments were in fact bad credits because the independence assumption was violated. The failure couldn’t have happened within the regular system if the banks were restricted to directly owning mortgages.
The problem in 2023 has nothing to do with creditworthiness, has everything to do with the effect of interest rates on asset prices, and could have happened exactly the same way if the bank had directly owned insured mortgages.
The only facts about Agency MBS that are relevant to the SVB story are:
their credit is insured by the US government...
...so they’re basically just an interest-rate play...
...so SVB bought long-term exposures to earn interest...
...which were put underwater by rising rates, just like every other long-term debt
just like direct mortgage exposures, they have slightly super linear losses in the case of rising interest rates (which, I admit, makes them more effective at causing the problem than I present in the simple model here).
in a nutshell (I don’t have the time to write a treatise on this, every word I write is 20w i could have read instead): I’m pretty confident (status: ~ .6) that if SVB had 90bi in gov bonds HTM instead of MBS and the like, it wouldn’t have failed. You can say it would have had losses (especially in 2022), it would likely have been bought, but not failed.
I know of no bank that has suffered a run because they had too much gov long term bonds (from the corresponding government, and unless the gov defaulted, ofc) in the last century (if you have an example, please enlighten me); not only there’s a very liquid market for them, but, in the last century (perhaps since Badgehot) central banks will let banks convert them into money easily—because tax payers will suffer no losses. On the other hand, MBS (and other similar derivatives) may be linked to credit risks (even Agency MBS) and it’s quite unsure how your liquidity line will work, and the market is not so liquid; and that’s why they offer higher yields—which is why they dominated SVB’s HTM.
Thanks for the memory refreshing lecture on the crisis of 2008. But I still remember almost everything
This is technically true but much, much less interesting than it sounds.
The “subprime CDO-squared mortgage-backed securities” associated with the 2008 crisis were:
based on mortgages of “subprime” credit rating (which is, like most terms invented by credit bankers, a gross euphemism)...
...which were(, because of the above,) not backed by the pseudo-governmental agencies that insure mortgages
“securitized” in a way that splits the existing risk between three different classes of investors, with the bank selling the riskiest two to someone else
had their middle tranches subsequently repackaged into second-order financial derivatives...
...some of which were safe to an arbitrary number of 9s if and only if you believed that defaults on the backing mortgages were independent random events...
...and which were regulated as if that condition were true...
...with the consequence that banks were allowed to take almost literally infinite leverage on them (and in relevant cases, did).
The “agency mortgage-backed securities” on SVB’s balance sheet were:
based on “conforming” mortgages insured by the pseudo-governmental “agencies”...
...the credit of which is not material to the bank, because of the insurance.
“securitized” in a way that splits the existing risk between three different classes of investors, with the bank selling the riskiest (and maybe also the second-riskiest) to someone else
definitely not repackaged using the same trick
require a ~10% capital buffer for every dollar of assets, truly regardless of riskiness (yes, even Federal Reserve deposits need this), just in case there’s some other trick that makes them bad credit
The problem in 2008 is that these theoretically-perfect-credit, infinite-leverage-allowed instruments were in fact bad credits because the independence assumption was violated. The failure couldn’t have happened within the regular system if the banks were restricted to directly owning mortgages.
The problem in 2023 has nothing to do with creditworthiness, has everything to do with the effect of interest rates on asset prices, and could have happened exactly the same way if the bank had directly owned insured mortgages.
The only facts about Agency MBS that are relevant to the SVB story are:
their credit is insured by the US government...
...so they’re basically just an interest-rate play...
...so SVB bought long-term exposures to earn interest...
...which were put underwater by rising rates, just like every other long-term debt
just like direct mortgage exposures, they have slightly super linear losses in the case of rising interest rates (which, I admit, makes them more effective at causing the problem than I present in the simple model here).
in a nutshell (I don’t have the time to write a treatise on this, every word I write is 20w i could have read instead): I’m pretty confident (status: ~ .6) that if SVB had 90bi in gov bonds HTM instead of MBS and the like, it wouldn’t have failed. You can say it would have had losses (especially in 2022), it would likely have been bought, but not failed. I know of no bank that has suffered a run because they had too much gov long term bonds (from the corresponding government, and unless the gov defaulted, ofc) in the last century (if you have an example, please enlighten me); not only there’s a very liquid market for them, but, in the last century (perhaps since Badgehot) central banks will let banks convert them into money easily—because tax payers will suffer no losses. On the other hand, MBS (and other similar derivatives) may be linked to credit risks (even Agency MBS) and it’s quite unsure how your liquidity line will work, and the market is not so liquid; and that’s why they offer higher yields—which is why they dominated SVB’s HTM. Thanks for the memory refreshing lecture on the crisis of 2008. But I still remember almost everything