Hindsight is obviously 20/20, which is why it’s kind of interesting how much this truth is seemingly lost on the pundit class with regard to Silicon Valley Bank (SVB). Seemingly everyone who comments on matters commercial or economic knows now what they strangely didn’t know roughly 7 days ago.
Pundits on the left and right are confidently pointing to “regulatory failure” as a major driver of the bank’s decline, but good luck finding any commentary from those same individuals pre-March 10th in which they were alerting regulators to problems at SVB. Which is the point. If pundits or regulators were capable of seeing around the proverbial corner in order to detect trouble ahead of time, they most certainly wouldn’t be pundits or regulators.
More popular on the right is the notion that ESG, DEI, and other lefty notions had distracted the bank on the way to failure. Up front, ESG, DEI and the rest are obnoxious concepts that likely DO distract businesses (whether they’re a good way to recruit quality employees is another subject, and one worth debating), but it’s useful to stress for now that no serious person would tie what happened to SVB to those clownish lefty notions. Furthermore, no serious or unserious right-of-center pundit was singling out SVB twelve days ago for being too wedded to what is absurd.
It all raises a basic question with last week’s run on SVB top of mind: what should it have done? SVB largely bought Treasuries with all the money put in its care, at which point what regulator (or for that matter, investor) was going to be kept up at night worrying about a bank that was so very conservative with money it was renting? Don’t worry, pundits have answers for everything, in hindsight.
Take Cornerstone Research senior adviser William Silber. In an op-ed penned for the Wall Street Journal, Silber noted that while Treasuries are widely viewed as safe investments, they’re only “riskless” if they’re “held to maturity. If you have to sell before then, you can easily lose money if market rates have risen since you first purchased the bond.” Ok, blinding glimpse of the obvious, but also indicative of what Silber and other critics of SVB’s asset mix don’t seem to be acknowledging: short of holding cash in warehouse fashion (and the devaluation risk that comes with the latter), all assets carry with them risky qualities that can cause a bank to “lose money if market rates have risen.” Ok, another blinding glimpse of the obvious, but one perhaps not stated enough. No matter what SVB had on its books, a changing rate environment was going to compromise the value of those assets unless held to maturity.
The obvious response is that SVB could have exited its longer-maturity Treasuries in order to purchase shorter-dated ones, and that it should have done just that since the Fed was so loudly telegraphing its intent to raise rates. It’s all so clear, right? Not really. It cannot be stressed enough how easy this is to say once again in hindsight. Lest readers forget, we’re talking about a central bank that naively thinks going to zero or near zero is the answer for most any bit of economic uncertainty, at which point it’s no easy feat to put money to work with major certitude about what the Fed will do. That there’s so much trading that takes place daily based on speculation of what’s next from the Fed confirms this basic truth. No one really knows, which means SVB could have just as easily been correct in staying in longer-maturity Treasuries if, as has happened in the past, the Fed paused earlier than expected with its rate hiking.
To which some are criticizing SVB for having failed to hedge its interest-rate exposure. Which gives the impression that they don’t understand a simple truth about a hedge: someone, somewhere has to take the other side of the hedge. Translated, in order for SVB to have hedged its assets against rising rates of interest, some investor or investors would have had to take the opposite of that hedge on the expectation of falling rates. This is useful to think about with all the all-knowing commentary about how the Fed was shouting loudly about its intent to raise rates. It’s a signal that if SVB had in fact hedged its rate exposure, doing so would have cost a lot of money. Say it over and over again that there’s two sides to every trade.
So, without knowing what the true reason was for SVB’s action or inaction, it’s not unreasonable to suggest that there were no obvious actions to take. The previous statement is hardly outre in consideration once again of how conservatively positioned SVB was. In other words, maybe inaction was the correct answer at which point it’s worth asking if the all-knowing pundits are not asking the right questions or question. In particular, why did Peter Thiel yell “fire” in the first place?