Author Topic: You Can Bank on it: A Cheat Sheet on the SVB Collapse.. Clarice Feldman  (Read 52 times)

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Offline mystery-ak

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March 19, 2023
You Can Bank on it: A Cheat Sheet on the SVB Collapse
By Clarice Feldman

This week, a lot of attention has been focused on the collapse of the Silicon Valley Bank.  It is, in fact, a story of faulty accounting practices, poor government oversight, and the effects of government micromanaging markets at the same time that it fails in its oversight responsibilities. And you will be paying for it.

Accounting Shenanigans

Over at the Wall Street Journal, William L. Silber explains this better than anyone, and in terms anyone who ever purchased a government bond can understand. They are safe. The problem is liquidity:

SVB held tens of billions of dollars in long-term government bonds. On its face, this may seem like a prudent investment for a bank, but Treasury securities are riskless only when 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. For example, buying a 10-year U.S. Treasury bond with a 2% coupon at par and holding it for 10 years earns you 2% per annum. But if you sell early and rates have jumped -- say, 4% since you bought the bond -- then the price will have declined to about $838 per $1,000 face value, meaning you incur a loss of $162 per $1,000 bond.

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