Click here to listen to our Coaches Corner segment where we weigh in on what’s going on with the Banking Situation.
Click here for the full Untucked Episode 81 or listen on Spotify.
Meghan Tait: [00:00:00] All right. So we’re gonna talk about Silicon Valley Bank. Yeah. Um, what happened and maybe what investors should understand or think about as far as protection moving forward.
Mike Traynor: Yeah. So Silicon Valley Bank is a, a smallish kind of bank that was, it’s been around for a while, but it’s been kind of catering really to a clientele of, um, sort of startup techy.
Silicon Valley type companies, it’s in the name. Um, and. So what they had done was, and the way the banks work generally is, you know, the deposits are there, the bank pays some small amount of interest on that to the customers, and then all that money, not all of it, but most of it gets, is available to lend out as in the form of loans or to invest in the form of higher yielding securities, whatever the case may be.
There are regulations that [00:01:00] apply to the big giant banks, you know, the JP Morgans and the cities and the, um, the, the mega banks that are much more strict than those that applied as smaller and regional banks. And that’s part of the issue. But, um, and that, that whole thing came out of the financial crisis of oh 8, 0 9.
So the big banks that were the. Systemically risky to the, the overall economy and world. Um, we’re subject to much more strict requirements. That’s one aspect. Secondly, requirements, meaning, sorry to
Jeff Mastronardo: interrupt. Like they, like how much have a
Mike Traynor: certain amount of money, how much you have to reserve against what you’re, what you have and restrictions on what you can do with your, with your reserves, um, that sort of stuff.
So, Within the past several weeks or so, the bank started to realize that we didn’t do a good job of, um, investing our, our reserves. They invested it in longer. Maturity, treasury. They didn’t invest in anything [00:02:00] risky or fraudulent or exotic at all. It was just pure incompetence because what banks normally do is if they’re investing in say, longer dated bonds to get higher yields than what they’re paying their depositors, that’s the spread they earn.
That’s their profit. Um, but typically you want to. Hedge against interest rate moves and to avoid what happened here. But when you hedge against it, you’re, you’re minimizing or you’re reducing profit. So this was a, a case a a lot of ways of greed. This is a publicly traded company. The stock was doing really well, the executives.
Primary form of compensation is the stock. And so they were, you know, there were incentives for them to not hedge and to mismanage the, the risk of what they were doing. And, and, and I’ll say it again, like running a bank is as simple as that. Like you have deposits, you invest them in higher yielding things like loans or.[00:03:00]
Or bonds and you keep the spread and then you go on to the next day and do it again. Well, they, they forgot the risk management part of that. The other problem of, of, of this bank in particular is that its customers were largely companies, tech companies, and, and their, um, Their founders and their investors are this predominantly community of Silicon Valley venture capital firms, private equity, what have you, well connected, all know each other.
Um, and when the, the kind of the. I’ll say news came out because the bank realized they had to raise some equity. So they, they filed a, um, with the s e C to sell some stock, raise some eyebrows. People looked at their actual balance sheet and said, huh, this, this bank is, um, is, is, has to raise equity. Like they’re, they’re, they’re kind of, they’re kind of screwed unless they do that and they wouldn’t have been.
[00:04:00] Had the bank run not happen. So I guess what I’m saying in that is it’s a unique situation in that unlike Wells Fargo or some bank that we all bank at, where it’s a whole bunch of millions and millions of little mom and pop depositors, this was a bank that was comprised mostly of corporations, companies that had lots and lots of cash on deposit with it.
So the $250,000 F D I C limit, That almost no mom and pop investors would ever breach. Um, And, and, and so that’s known as uninsured deposits. Those deposits that are over that level, um, are not, are not covered by f d insurance. There’s a ton of that at this bank. So the run on the bank was all these people talking with one another like, Hey, did you hear that?
Uh, s sv uh, SVB is, is, is gone. Take your money out. And so they’re within a couple of days, they’re. Doing their best to get their money out of the bank. And no matter whether it would be [00:05:00] JP Morgan Chase or this bank, when everybody shows up on the same day, the bank is over, it’s over. Right? So the run on the bank is, was caused kind of by the makeup of their customers.
Um, mismanagement of the bank itself by the executives and the fact that, um, Well, well, that’s the run on the bank part. The controversy comes in as it relates to the excess F D I C insurance because the government decide to come in and, and bail out all of the depositors and some individual who had $20 million on deposit with the bank that normally would be on the hook for all.
But two 50 of that was made whole. And so that, of course, is now, uh, turned into a, a political, uh, issue and a lot of debate on both sides as to. Bailout and using air quotes was appropriate or not. I will say. That the equity is zero. It’s wiped out. So all the stockholders, including the executives, their, their equity in the, in the bank is [00:06:00] zero Bond holders in, in the bank probably get cents on the dollar for theirs.
The only ones made whole were the actual customers of the bank, made whole by hoops, the government.
Jeff Mastronardo: By who? Like they, that, that
Mike Traynor: comes from where it ultimately comes from. Taxpayers, no matter what they’re gonna tell you, because when they’re, they’re trying to spin it a as well, we’re going to impose some tighter regulations in the future on all banks.
That will include fees that they’re not paying today. Those fees are going to be, The, you know, the source of the funds for this bailout, quote unquote. Well, we all know what happens when a, a business has more fees imposed on it. It passes them onto it’s customers. So to me, that’s silly for anyone to say that this is not a taxpayer funded bailout.
It is, but at the same time, remember, it’s, it’s a pretty small situation this. F the failure of JP Morgan. Right. Um, this is a relatively minor bank. The issue [00:07:00] too, though, it’s a spreading, there’s other regional, there’s a whole network of regional and community banks that do this, and they’re very profitable because, like I said earlier, the regulations are, are more lax so that they can.
Do things to, to make money that the bigger banks can’t. Well, that’s over. Uh, and so that I think explains why the regional banks as a whole have been just absolutely decimated. So they’re down 50, 60%, whatever the numbers are. Um, I don’t think that’s so much because people worry that they’re gonna fail.
I think it’s because people realize that they ain’t making the money they used to, so Right. They’re not as profitable.
Jeff Mastronardo: So, I mean, this, if, if the first Bank of Malvern mm-hmm. Has 3000 clients, people that have deposits there. Mm-hmm. I mean, if 2,999 of them walked into the bank and said, we won all of our money, like they’d go outta business.
Right. I mean, it’s, it’s
Mike Traynor: not. They in theory would go out of business. The question though now is the precedent has been set. So when and if that happens next, what happens? [00:08:00] The other thing I’ll say is that in the vast majority of those kinds of banks, it’s, that’s, no one has over $250,000 in there. Right.
And I don’t, I don’t mean no one, but very, very small fraction of the dollars are that, so the, the insured deposits are still insured, so you should not, if you’re. Um, a customer of a bank that has less than two 50 in the bank, you should not be worried about your bank failing because you’re gonna get your money back.
Jeff Mastronardo: the person who has 200 or 20 million in svb, I mean pretty smart person, person, right? They have a lot of wealth.
Mike Traynor: Now, now you’re getting into another, another subject. Is the community of VCs and and private equity people who think they’re so smart because of you moron money. They
Jeff Mastronardo: make only two 50 s insured.
Like, why would you have it there? Why would you have 20 million in one bank? Like, you should lose it. I’m
Mike Traynor: sorry. That’s one of the arguments that a lot of people [00:09:00] are making, and I, I gotta say it like, I don’t feel
Jeff Mastronardo: bad for the, for the a hundred millionaire who lost 20 million because they kept 20 million in one stupid regional bank.
Yeah. The other
Mike Traynor: argument against you though, is that’s, Some of these deposits are businesses that employ hundreds of people, let’s say, and they’re, um, the business account is way more than 250,000 in order to meet payroll and overhead and all that. Um, and so that business would be subject to potentially going out of business, and then people lose jobs and yada, yada yada.
So, oh, well,
Jeff Mastronardo: maybe that person can take the other 80 million that they have somewhere else and keep their business. And, and, and keep their employees afloat. I just like, just total, these people are supposed to be so smart and they’re so stupid. I hate when people equate wealth to like intelligence. Well, you’re, there is no, there is no correlation.
Mike Traynor: I, I, you’re dead. Right? And I think that this is just another item that has happened in the news [00:10:00] that is exposing incompetence and mistaking wealth for, for brains. And the fact that, you know, you. How many years of zero interest rates where you could borrow for nothing and invest in anything and make money.
And that happened in a grand scale across the landscape of private equity, VC and, and a lot of others. And then the result is you get people who think they’re. They’re so smart and it, and it extends even to these people who ran this bank and didn’t think that interest rates could go up and we could be, and, and the second part of that’s really important, which is that our customers all talk to one another.
This isn’t scattered amongst a bunch of mom and pops that have five grand in their bank account that don’t know what’s going on. These people here that we are potentially under capitalized or we have losses on our, our, on our investment portfolio. Cause everybody to just run on your bank. And that was [00:11:00] like maybe the biggest risk for this particular bank that they ignored.
And they, they deserve everything they got the. The executives that is, it’s,
Jeff Mastronardo: it’s funny. It’s like the story is always the same and it’s greed. Right? It’s great. Yeah. Yeah. It’s like in, in oh 7, 0 8 when they started, uh, lending money, like they, like you said, banking is very simple and once you start to deviate from the simplicity of the business model and start to do things that you really probably shouldn’t just to earn a little bit more because you possibly see an opportunity, it usually.
Poorly, like oh 7, 0 8, we started lending money to people that could not qualify for mortgages, but we just kept doing it and doing it and doing it until it collapsed. And it’s the same storyline. And I, and we were talking about this earlier, and Mike, you and I may have a different opinion on it. I’m very curious to get yours.
Like we’ve received some, some communications from clients like, Hey, should I be concerned about my money market funds at Vanguard that have [00:12:00] X amount of dollars in it or, My deposits in, in, in my bank at TD Bank, and my response is, Is it possible that those things can lose value? Y Yeah, it’s possible, but I, I mean, I think it’s highly unlikely.
Mike Traynor: Well, they’re two different things. The bank deposits are what we’re d what we were talking about. That’s F D I C. Insurance on bank deposits. Yep. Money market funds
Jeff Mastronardo: are not, they’re actually, you have no concern over F D I C as long as you keep it at two 50. Per registration. Yeah, you’re totally fine. Yep.
It’s, it’s, it’s federally backed and we’re, we’re all, we’re all cool with that.
Mike Traynor: Yeah. And it’s actually 500 grand if you have it jointly. Right. So I mean, that’s even better. And
Meghan Tait: it’s per institution, so if you own it, if you have 200, if you happen to have that much money in bank accounts, you can diversify your like, Your risk if you
Jeff Mastronardo: choose to.
Right. I just hate that I have to go to 10 different banks all the time.
Meghan Tait: Oh, yeah. You have that much money in cash.
Mike Traynor: But money market funds are real because they, um, they’re, talk to me about that. They’re, they’re mutual funds. We’re a little dis They’re not, they’re not bank [00:13:00] deposit. They’re, they’re actually mutual funds and they’re.
The accounting structure of money market funds is that they’re invested, well, first of all, they’re invested in short term assets, like overnight loans and things like that. Treasuries, Jewish treasuries. Yeah. And corporate and, and overnight corporate loans. So, Um, they’re very short term in nature and they pay rates that, or they pay interest.
That’s comp’s usually better than banks, obviously, but it’s comparable to, you know, treasury bills or something along those lines. Um, or maybe slightly better. The problem or the issue is that it’s not, none of it’s guaranteed and the accounting. The way that the accounting works for money market funds is that it’s, it’s a $1 net asset value all the time.
It’s stable. It doesn’t fluctuate, and you, the only way they’ve made that happen is just by an accounting method that operationally makes it a dollar per share. And then every month they pay you your, your interest slash dividends and oh, where you go. [00:14:00] There’s the breaking the buck term means that when a money market funds assets, Don’t add up to the dollar per share.
Um, and maybe it’s 99 cents or 95 cents or whatever, and that’s happened before, but that’s happened because of, um, not a. Not a run on money market funds. It’s happened because of a counterparty failure. Like so back to, I think maybe the last time it happened was, you know, 7 0 8 time and Lehman Brothers was a counterparty, I believe, to the one fund who had a lot of short term loans, overnight loans to it.
Lehman Brothers goes, disappears in the middle of the night and there’s a portion of the assets that are worth zero and it breaks the buck. I. Um, and honestly, I can’t remember what the government, if, if they did anything to step in, I, I, I think the government would step in and do something in the event of a major like money market fund that broke the buck
Jeff Mastronardo: and it would be temporary sound like it’s gonna, it’s gonna go to 95 [00:15:00] cents a share and you’re never gonna get that back to a dollar a share.
Mike Traynor: No. In that case, it’s not temporary. If you have a counterparty that defaults and, and your money’s. That you’re getting it back, that’s where you’re
Meghan Tait: saying the government would have to step in. Yeah,
Mike Traynor: because think about it. It’s, it’s an investment. It’s a mutual fund, an ultra short term mutual fund that only invests in like, and, and forget about the T-bills stuff cuz that’s, that’s different.
Cause that is not going to zero. But it’s, if, if you lend money to a corporation overnight and then they disappear, then you’re not getting it back. So that’s a permanent
Jeff Mastronardo: impairment. So I hold a money market mutual fund. Mm-hmm. And it drops to 95 cents.
Mike Traynor: Well, that
Jeff Mastronardo: be like 90, 99 cents a share. Yeah.
Sorry, I’m, I lost money and I’m never getting that money back. It’s never gonna go back to
Mike Traynor: $1 a. Not unless they recover in like some sort of bankrupt, like not never, but it doesn’t, there’s no, I mean overnight, but there’s no reason it has to get back. It’s basically like you invested, you lent to a counterparty that’s not there anymore.
It’s [00:16:00] not like the gov, the SVB is so different cuz they owned treasuries. Right? It’s not like that was just a time issue. If they waited until the bonds matured, everything had been fine, but people wanted their money. Like today.
Jeff Mastronardo: So if a client calls me and says, Hey, should I be taking my money market funds and putting them in the various banks to get F D I C insurance?
I mean, I, I feel like that’s an unnecessary move. I
Mike Traynor: agree. I a hundred
Jeff Mastronardo: percent agree with you. And what would, what, when, when would, when would your tune change? When would you say, yep. You should definitely be thinking
Mike Traynor: about doing that? Um, If my tune changed on that question, I think we have way bigger problems than a money market fund breaking the buck or like a major one or a series of big ones.
Cuz then it’s a, then it’s like some form of financial Armageddon going on, right? That’s way worse than we had before. So I’m, and I don’t live my life planning for that or worrying about it. Okay. So I don’t know. Good
Jeff Mastronardo: explanation man. Yeah, you did good. That’s like complicated. He almost [00:17:00] lost me a few times, but I, I stuck with it.
When you said, when you use the term counterparty, kind of threw me off a little bit.
Meghan Tait: Yeah. Are there, are there considerations, I mean, we’ve talked about the F D I C level of insurance. Are there other things people should be thinking about when they do their banking in light of, of what we learned? Or is SVB small enough and unique enough and.
Really only applicable to such a small group of people that it’s like a, that’ll very likely never be the
Mike Traynor: masses. When you say when people do their banking, are you talking about people that have nowhere near two 50 in cash that they’re holding?
Meghan Tait: Let’s assume that two 50 stays in place and everybody banking in in that world is comfortable with it.
But if there’s a ultra, ultra-conservative right person who doesn’t wanna own stocks or bonds, and they, all they keep is their money. Cash. Right. And it’s not two 50, it’s a million bucks. Is it [00:18:00] spread your risk among four different banks?
Mike Traynor: Is is I would, yeah. Yeah, I would. And I think we’ve said that to people in the past.
Yeah. Like it, yeah, it’s a little bit more of a hassle, but I mean, F D I C can be important and yeah, it’s been marketed to be important. Um, in this case it wasn’t, but, right. This is a unique case. I think so. I would say, yeah, that would be my advice is just, just spread it around. Use different registrations, max out your, like keep it all under, keep it all under the insurance umbrella and, and yeah.
And then, then you’ll be fine. Yeah, I agree. And then we mentioned earlier, I don’t know if this is, it’s it’s related, but S I P C insurance, and that covers your investments that sit inside of a brokerage account at a broker dealer. That’s everyone you can think of. It’s Schwab, fidelity, Vanguard, Merrill Lynch, whatever.
So investments, not cash at a bank. They’ve been forever, um, subject to [00:19:00] similar insurance, but up to $500,000. The thing that’s a little different there is that virtually every brokerage firm. Buys private insurance and for amounts of, of I think 25 50, even over over a hundred million dollars. Um, so for anyone who’s worried about what about my investments that are sitting in a, um, you know, a brokerage account somewhere and that broker dealer fails, well, that’s happened many, many times.
And all you do is you, they transfer your accounts to another brokerage. Nothing changes. You still hold the same stuff. Nobody ran off in the middle of the night with it. Um, but that insurance is in place in the event that there’s a, um, like a failure. I mean, I know when Madoff, when Madoff failed or went under, um, S I P C insurance did play a role in the recovery of some of those people’s assets.
Obviously it wasn’t all of it, but, um, there’s that. Mm-hmm.
Jeff Mastronardo: Good stuff, man. Cool.
Mike Traynor: Wow. Pretty technical coaches quarter.[00:20:00]