DC ENQUIRER
COMMENTARY Sterling Mosley March 12, 2023
Note: This article may contain commentary reflecting the author's opinion.
On Friday, Twitter CEO and billionaire Elon Musk said that he would be open to purchasing Silicon Valley Bank after the institution collapsed
Razer CEO Min-Liang Tan wrote on Friday, “I think Twitter should buy SVB and become a digital bank.”
In response to this, Musk tweeted, “I’m open to the idea.”
Following this interaction, some users proposed the idea of turning Twitter into a digital bank with Miles Ian Cheong writing, “It would certainly kickstart Twitter as a financial institution. Perhaps?”
While the idea of the billionaire purchasing Silicon Valley Bank could potentially bail out the bank, the institution has a host of underlying issues that Musk would have to face.
“What SVB did with their portfolio is either a signal of enormous incompetence or of outright moral hazard at play – gamble away billions as policymakers will rescue you,” wrote Founder and CEO of The Macro Compass Alfonso Peccatiello. “I can’t believe incompetence reaches these levels, & there are some clear hints moral hazard was at play.”
“As a result of regulation, banks have flushed their balance sheets with trillions of bonds,” he continued. “Such a large amount of bonds on the balance sheet also comes with risks though, right? Interest rate risk comes to mind: if you purchase Treasuries and yields rise, you lose money.”
“Now, what were the problems with SVB? SVB had a gigantic investment portfolio as a % of total assets at 57% (average US bank: 24%) and 78% was in Mortgage-Backed Securities (Citi or JPM: around 30%),” he wrote. “But most importantly they DID NOT hedge interest rate risk at all! The duration of their huge portfolio before and after interest rate hedges was…the same?! Effectively, there were NO hedges. This means SVB was not applying basic risk management practices, and exposing its investors and depositors to a gigantic amount of risk.”
“A $120 bn bond portfolio with a 5.6y duration means that every 10 bps move higher in 5-year rate lost the bank almost $700 million,” the CEO explained. “200 bps? $14 billion economic loss. Basically, the entire bank’s capital was wiped out.”
http://dcenquirer.com/elon-musk-to-the-rescue-billionaire-says-hes-open-to-buying-silicon-valley-bank-following-collapse-could-make-twitter-a-digital-bank/
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