Bonds 101: investors expect higher rates on longer term bonds due to higher risk exposure and effects of inflation.
Inversion: when the market expects interest rates to rise in the near future, long term return ls can be lower than shorter term bonds.
From investopedia: As of Dec. 2, 2022, Treasury yields were as follows, the most recent flip to an inverted curve:
Three-month Treasury yield: 4.22%
Two-year Treasury yield: 4.28%
10-year Treasury yield: 3.51%
30-year Treasury yield: 3.56%
So, since at least early December last year, the market has been on alert that interest rates would likely be rising. The Fed has been clear with its plan to hike rates since at least early 2022.
And yet, here was SVB, apparently sitting on a massive number of treasury securities with low rates originating from the insane quantitative easing of post-covid Fed policy with no plans on how to hedge knowing full well their bonds would lose significant value.
But why did this happen now if the rest of the world has known about rate hikes since early/mid 2022? Surely the professionals and seasoned finance executives are well attuned to market risks and fluctuations.
Seasonal liquidity crunches. It was the nail in the coffin for SVB. And they are not a new phenomena. Consider that talk of rate hikes and recession began towards the end of Q3 2022, and SVBs collapse occurred in corresponding the two-week period before the end of Q1. What other notable crises happened around these periods?
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March 16th, 2008: Bear Sterns announces sale to Chase
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September 15th, 2008: Lehman brothers declares bankruptcy
–September 16, 2008: AIG received $85bn bailout by the Fed. We all know how that went.
- Black Monday, March 9-22, 2020: when the market saw its worst days during the beginning of the Covid crisis.
These quarter closes are not perfect indicators, there is nothing magical about the weeks leading up to quarter close that indicates a crisis will occur, but they suggest something about our global monetary system that in inherently unstable leading up to these periods, and has been since at least 2007-08.
But, this was a black swan event, you say, bank runs are impossible to predict and we had no way of knowing this would happen. Let me give you an idea of who led SVB into this crisis:
- CEO: Director at San Francisco Fed
- CFO: Former analyst at Freddie Mac
- Chief Admin Officer: Former CFO of Lehman Brothers
- Chief Risk Officer: Led credit ratings in 2007
- Chief Legal Officer: General Counsel at Citibank in 2008
These are the same people who oversaw the 2008 recession. I don’t want to pretend like all of these individuals arent criminals, they are. They just also happen to be incompetent.
The warning signs were there in 2022 but just like in 07-08, those in charge refused to do anything that would jeopardize corporate profits.
But they did see something. The SVB c-suite sold large portions of stock in the run up, this is not a coincidence:
- Gregory Becker, CEO, sold 11% on Feb 27, 2023.
- Michael Zucker, General Counsel, 19% on Feb 5.
- Daniel Beck, CFO, sold 32% on Feb 27.
- Michelle Draper, CMO, sold 25% on Feb 1.
The bottom line: CEOs and their firms treat the monetary system like a casino. But the system is sick. It can’t sustain the level of greed and growth that those at the top demand of it. It’s unsustainable and everyone knows it now. We could see more collapse in six months, or we could continue to limp along for another decade or so like after 2008. Regardless of the result, I guarantee nothing will change.
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