SVB’s collapse exposes the huge carry trade problem

When Silicon Valley Bank slid into a death spiral last week, Peter Thiel, the (in)famous libertarian, shot into the spotlight. The reason? Last week, his Founders Fund reportedly pulled its business accounts from SVB. That led to angry accusations that Thiel and other venture capitalists had sparked a bank run.

This will provoke plenty of political mudslinging. But there is another, little-known, wrinkle that investors should also note. “I had $50mn of my own money stuck in SVB,” Thiel tells me in his defence. Apparently, he failed to flee fast enough — never mind what Founders Fund did — because he did not quite realise or believe that SVB might fail.

He is not the only one feeling disorientated. As finance suffers from what Larry Fink, chief executive of BlackRock, calls “a slow rolling” crisis in confidence, devastating banks from Credit Suisse to First Republic, three crucial points are becoming clear.

The first is that the events around SVB were akin to the blowing up of a gigantic “carry trade”. This is the phrase that financial traders invoke when they borrow cheaply in one asset (say, a currency or short-term bond) to invest in a higher-yielding one (such as a different currency or longer duration instrument).

Bankers rarely describe themselves as rabid carry traders — they prefer to think that banks perform carefully controlled maturity transformations (that is, turning deposits into loans) for their clients, with asset-liability management.

However, maturity transformation is at the heart of banking and SVB did it in such an extreme way that it was very similar to a carry trade. Most notably, the bank had $180bn in deposits, which provided cheap but potentially short-term (and flighty) funding. And since loan demand was weak, it bought long-term bonds that, stupidly, were unhedged.

That produced big profits for a while. Carry trades usually do. But when the yield curve inverted last year, it produced losses. And once depositors eventually realised that, some (though not Thiel) fled — with shocking consequences.

The second key point is that SVB was not the only carry trade around. Far from it. Many other American banks also have big hits to their bond holdings; indeed, total unrealised securities losses for US banks are more than $650bn on paper. US regulators have urged the banks to buy these supposedly “safe” assets in recent years and imposed looser liquidity and asset/liability matching rules than in Europe. That…