Full article Alt link: https://telegra.ph/SVB-Couldnt-Ignore-Its-Losses-But-the-Fed-Can-03-14

It borrowed very short to lend very long. Specifically, it is funded mostly by deposits, largely from tech companies and venture capitalists who got a lot of money over the last couple of years, and who put that money into SVB deposits that were much bigger than the US deposit insurance cap of $250,000. It plowed that money disproportionately into bonds, quite safe bonds — US Treasuries and agency mortgage-backed securities — but bonds with long duration. It did not do much to hedge its interest-rate risk. Basically it was as reckless as it is possible to be with a business model of “take deposits and invest them in US Treasury bonds.” Which, until recently, might not have seemed that reckless!

But then rates went up a lot, pretty fast.

This caused the market value of SVB’s bonds to decline by some $15 billion, to the point that it was more or less insolvent: Its losses on the bonds were enough to wipe out almost all of its equity capital and leave it with assets, at market value, worth only very slightly more than its liabilities. It mentioned this fact in footnotes to its financial statements.People noticed.

SVB’s depositors, who again are largely tech firms and venture capitalists, are all on Twitter a lot and move in herds; when they noticed that SVB was insolvent-ish they all pulled their money out at once. (“It turned out that one of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities,” an SVB executive told the Financial Times.) Depositors tried to withdraw $42 billion on Thursday.

SVB tried to pay them. It used its cash. It sold stuff that was easy to sell. It tried to borrow from the Fed, but “despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve.” It was declared insolvent and seized by the Federal Deposit Insurance Corp. on Friday.

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So from reading the article, I think the situation is bad but not as bad as 2008. Back then bonds failed because people couldn't pay the mortgages. In this case the bonds do pay the interest (as its backed by the Government). Just that the money is stuck and can't be taken out right now without incurring losses.

Fed is just allowing the banks to borrow against these long term bonds at what they bought it for rather than the market price.