With the sudden shut down of Silicon Valley Bank over the weekend, Zacc and Laura are here to explain how this happened, what is being done to help the situation and if this can have an affect on you as a listener. Tune in now!
Welcome to the Financial call. We are financial advisors on a mission to guide you through the financial planning everyone should have. Whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome to the Financial call, this is a special episode. This is a bonus episode. We do this every once in a while when things get a little bit crazy in markets, and in particular in the news. So we spent all weekend reading about Silicon Valley Bank, and I think a lot of people are trying to figure out what is going on. They're trying to figure out how could this happen? How could anyone let this happen? How did it happen so fast? So we're going to cover three main things and hopefully catch anyone up to speed who might still be a little bit confused about everything going on? And I think one of the biggest concerns people have is how does this affect me? You know, is this gonna cause issues for me? So we'll talk about that as well. But I think just starting off giving a little bit of background of what happened. Yeah. So it's Monday, the 13th. And the news changes so fast. So if you're listening to this, it's March 13. On a Monday in the afternoon, markets about to close today. I'm hoping we can get this recorded, edited, sent out uploaded in a fast enough window that this information is still valuable to you. Yeah, we just got an update 10 minutes ago of new things that are happening. So we'll give you what we have now. And yeah, there might be some updates. Okay, here's our outline. What happened? Why did Silicon Valley Bank collapse? And then how does it affect you? Those are the three main things we want to cover today. All right. So first of all, you have to first understand a few basic investment concepts. And then this will become so much more smooth and clean for you to understand, let's first talk about bonds. We've had other episodes on bonds in the past. So if you're a regular listener, this will make sense to you. If not, we're going to do it really, really quickly. Imagine that you decided to hold money for 10 of your friends. And each friend gave you $1,000. And you take that $1,000, and you have 10,000. Now, to just hold on to it, right? But you're trying to make money out of this deal by holding on to their money. So in the meantime, you're going to invest it, you're not going to buy anything too crazy, you don't want to be buying volatile stocks or anything like that, or locking it up. Because who knows when your friends are gonna want their money, right. So you take that $10,000, and you go buy bonds, and these bonds have a pretty steady interest rate. So you take that 10,000, you buy these bonds, and one of your friends comes back and says, Hey, I need my $1,000 I need it to go buy this or that whatever. And in the meantime, your bonds, you bought these bonds, this $10,000 worth of bonds, they were paying you 1% interest. But interest rates changed during that window, maybe the new bonds are now paying 5% interest rates. So your bond at 1% interest is just not as attractive to people out there. But you're now in the position where you need to sell it. So you have to sell it because you need to give the $1,000 back to your friend. But your bond isn't as attractive to the new buyers out there in the marketplace. So instead of it being $1,000 worth of bonds, it's now worth $850 worth of bonds. So the bank takes $150 loss on you take $150 loss on this $1,000. You sell enough bonds to cover that, and you give it to your friend and your other nine friends start asking you questions about it because they know interest rates have changed. They know your bonds aren't worth as much. He said, Yeah, I had to sell some at a loss. And I paid out friend one. And friend two says, Oh, I didn't realize that was going on. Yes, I want my money to friend to asks for their 1000. And then after that, you're kind of scrambling because now now you're down to maybe it's only $5,000 left, or five or $6,000 left, and you still owe, you know, seven or eight people money. And so it's now just a race to get the money out as quickly as possible. That is the simplified version of what happened to Silicon Valley Bank. That's it. We're gonna go into a little bit more detail as to why that helps you that Sounds simple, right? That sounds simple enough that everybody would say, well, didn't anybody see that coming? It's not quite that simple. And one of the reasons it's not as simple as because on a bond, especially like a long term bond that matures in a certain time. So you're this example that we're working off of Laura, this bond that matures in a long time, the $10,000 that you bought worth, you can tell everybody that it's worth $10,000 Right? Because if you hold it till maturity, you're gonna get that $10,000 back, but if you have to sell it before then then you have to sell it for less so but on my paper, you know, on my balance sheet, it looks like I still have $10,000 worth of bonds, right? Because you will if you hold them if you hold them right not if someone forces your hand to sell Yeah, so you'll see that acronym H TM hold till maturity. So the hold till mature The value is 10,000. But the actual current value is not, they don't make you mark to market, you're gonna see that term as well. They don't make you mark to market that in your accounting the same way you have to with other assets that don't have a maturity, meaning if I sold it early, what is it really worth? Exactly? Exactly. Okay. So we got through a lot of that pretty quick. I mean, that's the basic difference of what's going on here. Now, understanding this bank, in particular, this bank had customers that were quite concentrated and high risk, this was all the tech companies they funded, I think it was somewhere around half of all of the tech startups out there. So basically, if you know of a tech startup, they're familiar with Silicon Valley Bank, and they probably had money there. So they also help organize a lot of venture capital funds, and help with the money transactions and money movement for venture capital funds. So that's just a lot of really wealthy people pooling money together to be able to fund startups. And then they use Silicon Valley Bank for a lot of them. So I have friends that work there, I have friends that have money there. And we have friends that have been involved with all of that this episode is really to help our clients understand what's going on, I'm gonna get right out and explain a couple of things. We looked through all of our client portfolios, all of our managers, all of our recommendations, we don't have any direct exposure, in terms of owning their stock, having cash at the bank, or buying their bonds. Now, naturally, with an index fund, index funds do exist in our portfolio, there may be this tiny little exposure through an index fund that's diversified out to into 1000s of positions. Even if one position went under, that would be less of a move in that funds value than a typical hours worth of stock market movement on that fund. So the bottom line is we want our clients to understand what's going on. And we want to talk about how that could affect other investments. But the direct exposure has been basically nothing or near nothing. Okay, what else to add, before we go on in terms of maybe the timeline, should we go through some of the timeline? Laura? Yeah, yeah, let's do it. So Silicon Valley Bank, Moody's is I don't know what rating agencies rating agency. And so they'll kind of give, you know, a credit score rating to these different banks. And they decided to downgrade the Silicon Valley Bank. And this is all within a really short window. Yes, this happened on March or window eight, march 8, or ninth somewhere in there.
Yeah. So let's see this. The rating agency, Moody's first said they called SVB. That's the acronym that we're using here. But they called on the first of March. So they reached out so SBB, flew to Moody's, to meet with them talk with Goldman Sachs. And they're scrambling, they're trying to say like, Well, no, no, we shouldn't be downgraded. And trying to plead their case a little bit here, right. And then by the eighth, Moody's decided to go ahead with a downgrade. And then a couple of these venture capital fund managers and others basically said, they're not going to be solvent, you should pull your money out, which then led to other people wanting to pull money out, there was also an event in between here where so they had some initial withdrawals needed, then they had to sell a bunch of long term bonds, the longer the term the bond, the more it moves when interest rates move. So it is really hard because you have two things happening at once to this bank. With the Fed increasing interest rates, it made their bond portfolio worth less like what we talked about in the example, on the flip side, all of these tech companies and venture capital funds, it became harder for them to borrow money in just the general locations and institutions from which they would borrow. So they had to pay higher interest rates. So instead of going and borrowing money for growth, they decided to use their cash. So at the same time that the bond values go down, the customers of Silicon Valley Bank decided to use their cash because the borrowing costs for them, were now too expensive. So those two things hit at once, and a bunch of money goes out, they sell a bunch of bonds at a loss. And the bank says we're going to raise $2.25 billion in fresh capital, we're going to sell a bunch of new shares are going to be fine. The CEO says, don't panic, stay calm, everything's gonna be fine. And then this chart says spoiler, they do not stay calm. And then by March 10, shares had been halted. And then California state regulators took possession of the bank and appointed the FDIC as receivers. So at this time, throughout the weekend, we're watching the news really, really carefully. And we know that anyone that has under $250,000 will be covered by the FDIC insurance. Now the tricky part is the customer base for this institution was really, really big money. Yeah, more than 250,000 et Cie was one of the biggest and Roku and they had what was it 284 million somewhere around so
I had that up there was a Yahoo Finance article that showed it but yeah, Etsy was in there and Roku was the biggest it was in the 400 million range. And then Roblox the you We don't have kids old enough for this, but it's a video game thing. But anyway, they, there it is 487 million for Roku, et Cie doesn't disclose how much but they did talk about how they were trying to figure out how to pay their sellers, because they just had no access to capital, or cash, I should say, rocket labs have 38 million. But let's talk about roku. I have all the Roku devices at my house. So $487 million is 26% of all of Roku cash. Now that that's good and bad, it's good that they didn't have it all in one place, they probably still were able to make payroll. But there are other companies that probably didn't have it spread across multiple institutions, and are trying to figure out how to pay their employees at this time. Right? That 250,000 is not going to be enough, right, you know, if $487 million. So we're waiting and waiting. And we're learning that about I can't remember the number, it's somewhere in the range of 80 something percent of deposits at the bank, were not FDIC insured, want to
say 87%? It's pretty high. So the majority of people's money is not covered by the government insurance. And so the question is, are they going to have their money? Are they going to get the money that they thought was secure putting in the bank? Are they going to have it back? And it came out? Was it Saturday's act that the government came out on said Sunday? So it was yesterday? Yeah, we saw that. The government put out a statement, it was about like 5pm ish yesterday saying that they would give all the depositors so people that had deposited money into the bank, they would be given access to that today. Yeah. So FDIC was available as of today, and then they called it an additional dividend. But it's basically, the additional money for any deposits are available. sometime within the next week, like for example, Roku should have all $487 million worth available to them. Now, this is because the government decided to step in and take special action. Now, there's a concept called moral hazard, which is really, really difficult. So before we learned about this, it was hard to know, you don't want to just bail out every institution, especially an institution that may take excess risk, and then not have to pay the penalties of that excess risk. However, it's not Roku 's fault, necessarily. And there are a lot of employees at Roku, that still need to get paid. And it's not their fault that Silicon Valley Bank had a concentrated customer base, had too long of maturity on their bonds, and maybe overextended and not held quite enough cash available. So those things are really hard to know, from both like what is right and wrong. That's that's a matter of opinion. But what is effective and not effective. That's a different story, like what's actually going to create impact in the future, and what's going to help right now. And basically, the legislators and Congress said, we are not going to bail out the owners of the bank and the shareholders. So So that's happened. So what they're saying is, depositors the people who had their money with the bank will get their money back. But those who have bought the stock, meaning those that own portions of the bank, or have purchased their bonds are not going to be made whole, which is again, that seems right. I mean, they're the ones that have taken the risk on this protect, if it went up like crazy. They benefited from that, which it did for several years prior. Right. So this is a really delicate situation. Now the question at first, I had a really hard time conceptualizing, how is it that the FDIC insurance is going to step in and pay way more than 250,000 per account, and I'm not going to be stuck with the bill as a taxpayer. So I was really confused about that originally, but they've explained that in further detail, so every bank has to pay in to the FDIC insurance. And what they're going to do is they're going to pay out all these extra funds to cover above 250,000 from the FDIC funds that are available, then they're going to do a special assessment on all these financial institutions who participate in FDIC, which would be all the banks and they have to then it'd be kind of like being in an HOA, and the clubhouse has a particular issue or Bernstein. I guess that's a better a better example, in this case. Yeah. So the clubhouse burns down. And they're not going to necessarily I mean, they're going to try to figure out who's to blame, but at some point, it may just fall on everybody to help shore up that HOA and replace the clubhouse. And I think the bank's total assets at the end of last year was 209 billion. That's a lot of money. It's right a second biggest banks. Washington Mutual in 2008 was number one. And then Signature Bank is number three, and Signature Bank is lock and step here with Silicon Valley. So Signature Bank is more catered toward cryptocurrency companies, and that's been a tumultuous market for them. And so their assets have definitely been very volatile and they're in a similar situation. They have long term bonds, and they're a New York based company versus a West Coast company, but they basically said, people said this bank has a similar situation, to long term of bonds too concentrated have a customer base in a high risk industry and feel like it's going to be a similar situation. And that can be somewhat of a self fulfilling prophecy, meaning if everybody feels like the bank is gonna go under, and they all pull their money out at once, the pooling of the money is what causes a bank to go under. Right? The run of the banks. Yeah, that's a tricky, a tricky aspect. So Zack, what do people need to know? Or what do people need to do? How does this affect them? Yeah, it's a good question. The reality is, we don't know perfectly. I hope that it's okay for me to say that nobody knows anything for the future. But the reality is, it is not likely to impact most of us that much. Make sure you know what you're invested in, make sure you understand how much coverage you have in different areas. Banks do FDIC insurance brokerage firms do SIPC insurance, it's a little bit different different levels. A lot of our investments, I say our like not like capital, but us as a public a lot of our investments in like brokerage firms are just book entry of the fact that you own a certain amount of stock versus at a bank, they're taking that money re lending it, and then putting it back out in mortgages or buying investments or bonds and things like that. So it can be a little bit tricky. But what what should people know, if I had more than $250,000 sitting at a bank, the first thing I would think is, I'm actually really surprised that the government I mean, it makes sense now that they had to, but I never would have is the first time I'd ever even considered them paying out more than the 250. Really surprising to me that that happened, you might feel a little bit more comfort in that but but if I'm sitting with $2 million in the bank, I'm probably looking at other investments, maybe those that are affiliated with the government, I can't say like treasury bonds are not FDIC insurance. But they are backed by the same entity, ultimately, both the government so that's another option, you could take multiple millions of dollars and buy treasury bonds, but then you have to deal with the price movement a little bit, which is what the banks did. But if you buy really short term treasury bonds, you won't have to experience as much of that price movement. Yeah. And something interesting that we just found out to help avoid this in the future, they came out with a new regulation or rule. So the biggest issue with Silicon Valley big they were trying to liquidate their treasuries that they had, and they had to liquidate at a lower value than the bond was worth or well than the par value, what they would be paid at at the end that $1,000. For example, they just came out with the rule. If they had bought the security within 12 months, then they could get it back. They could liquidate that for the amount they paid for it to help avoid this issue. So they didn't have to sell it at a discount, I think I saw. So the assessment that they have to make to Tyson long in our office is one of the advisors just sent this over. This just came out. But they are establishing a program where they have to pay back the FDIC insurance for for this right, that assessment we talked about, I think they would be able to swap those bonds at par value so that they don't have to sell them at meaning they can pay that assessment with Treasury bonds, rather than having to sell them at a loss and then pay with cash. So so that would be nice. That'll be helpful for them. The other thing Moody's, which is the rating agency that originally started all this, we talked about that at the beginning of this episode, their chief economist, Mark Zandi said, the banks that are now in trouble are much too small to be a meaningful threat to the broader system. He says the system is as well capitalized and liquid as it has ever been. So that's interesting to see, I think the same company that was concerned about Silicon Valley Bank appears to be less concerned about contagion. So then you say, like, what does this mean, for me? What's next, I would be aware of deposits over 250,000 And look at various options that are available to you. I wouldn't panic, it doesn't seem like from what the experts are saying. And those that are looking deeply into the bank balance sheets. They're not saying every bank should be withdrawn from right. So that's good. And while wider contagion is unlikely, this article also says smaller banks that are disproportionately tied to cash strapped industries like tech and crypto may be in for a rough ride. So that's also the lesson is understanding your bank a little bit better. If your bank is heavily concentrated into a very volatile and cash strapped industry, then that could be problematic for that particular bank.
super interesting. So we had the question come in about Charles Schwab and TD Ameritrade. We have investors that use both of those locations. Basically, the CEO, what did we find here? I'm gonna see if I can pull that back up. I know something that was interesting. We talked about how 87% of the SVB was not federally insured, meaning it was above that $250,000 limit, whereas Schwab has 80% that is under that FDIC limit or the Si Si P. SIPC? Yeah, it sounds confusing. securities investor tection Corp, there you go is exploring the acronyms. Cash Flow wife tells me I'm not good at remembering many things and act infuriates her that I can remember stuff like that, but not the more important things for our life. Yeah, but I feel like that's helpful to know, we're not dealing with these crazy high amounts that aren't over that insurance limit. So let's talk about Schwab and TD for a second. So Schwab's stock price came down 11%, I think it was today, and they do have a decent bond portfolio. And the concern was, are they in the same boat as Silicon Valley Bank? And would they need to sell those positions early at a loss, and basically, they're saying, focusing the attention on unrealized losses in that htm are held to maturity has two logical flaws. This is Schwab talking here, they said, first, those securities will mature at par. And given our significant access to other sources of liquidity, there is very little chance that will need to sell them prior to maturity. So they're fine with that. They're saying as well as you also have to understand that there's TD Bank, and TD brokerage. They're different institutions. And so they're affected slightly differently. And then it says Second, by looking at unrealized losses among htm securities, but not doing the same for traditional banks loan portfolios, the analysis penalizes firms like Schwab that, in fact have a higher quality, more liquid and more transparent balance sheets. So overall, it talks about 80%, you mentioned this, of their bank deposits being within the FDIC insured limits. And they seem to be positioned well is what they're saying there, it's business continues to perform exceptionally well, and they have access to significant liquidity is the way they put it. So they're not really in a similar situation to SVB. Not a huge concern there well, and the customer base is way different to right. So they're not concentrated into one particular tech sector or crypto sector, like Silicon Valley Bank, and Signature Bank where they're all of us. But also it's even different than that this goes back to it's not like they've taken all of our investments, and re lent them out. They've logged the fact book entry is what they call it, the fact that we all own a certain number of shares of things. And so I take some comfort in that. But don't mistake that for like security, right? Because investments go up and down. So there's a difference there, right? The cash doesn't go up and down, but may have some guarantees from the government, the investments that we buy stocks and bonds, it may not need as much of a guarantee, because it's just a log of the fact that we own those, but they will go up and down. And so you have to match the right investment to your time horizon. This always goes back to that what we're talking about in planning all the time. But the bottom line is that Silicon Valley Bank, I hope this is helpful. We're going to keep watching this, I would say call us if you're still trying to figure out more about what's going on. The bottom line is this doesn't change the plan doesn't change your retirement plan. I bet we forget about this before too long, just like people aren't talking that much about Greece and the debt crisis that they went through not too many years ago. It's so far behind us. The Eurozone crisis. We're just not talking about that as much as we were before. These things come and go, but they're definitely stressful. kept us reading the news all weekend. Yep, that's for sure. All right. Thank you. This podcast is intended for informational purposes only and is not a substitute for personal advice from capita. This is not a recommendation, offer or solicitation to buy or sell any security, past performance is not indicative or for of future results, there can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of risk including the loss of money invested. 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