I’ve been reading a New York Times article on SIVB this morning. The original version came out yesterday and was amended today to state that SIVB had gotten a call from the ratings service Moody’s was going to downgrade SIVB’s bonds to junk (the earlier version had mentioned other securities).
What I take from this is that the bond community knew clearly what a risky mess SIVB was.
The article also cites a Janney Montgomery Scott report on the stock that 75% of SIVB’s investment of depositors’ money in Treasury bonds (a category that made up the majority of the bank’s investments) was classified as “held to maturity.” This classification means that the bank would carry them on its financial statements at their purchase price, rather than marking them to market and recognizing the resulting gains or losses on the income statement. And the categorization would normally be used only for bonds that would mature at least several years in the future. This compares with the typical bank, which classified 6% of its debt portfolio this way.
Why the enormous difference? Two possibilities come to mind: either most banks used hedging techniques that have been common since at least the 1980s to protect them from rising rates or they chose not to make the huge bet that SIVB did that interest rates would stay at pandemic lows for years.
The fact of this brokerage report outlining SIVB’s unusual and aggressive bond bet suggests that professional equity investors also knew what about SIVB’s ill-fated bet.
Who didn’t know the very worrisome data in SIVB’s financial statements and in bond and stock reports? Apparently lots of Silicon Valley startups, affluent California individuals, Roku, actors playing the role of investment professionals on shows like CNBC’s.