Today, thanks to the quick action of my Administration.
Over the past few days, Americans can have confidence
that the banking system is safe. Your deposits will be there.
When you need them. Small businesses across the
country, the deposit Accounts at these Banks can breathe easier
knowing, they'll be able to pay their workers and pay their
bills. This was the message that
President Biden gave just this morning, trying to reassure the
general public that the banking system is okay.
But not everyone seems to be buying this.
Message a number of Bank stocks are currently, in freefall,
First Republic Bank is down 77 percent on the day.
The exchange halted trading on this company.
Western Alliance is down. 78% key, Corpus down. 26% Pac West
Bank has fallen 47%. Zions Bank is down, 27%, even
Ally Financial is down 13 percent on the day and Charles
Schwab is down Seventeen percent.
So even after a joint statement, from the Department of Treasury
Federal Reserve and FDIC, and a direct addressing from the Isn't
the banking system is still under pressure and Bank stocks
are getting clobbered. So in this episode, we're going
to do an update of the entire situation.
Try to break down what's going on and the possible
ramifications of it, how it will impact our portfolios.
And what this means for the future.
We have a lot to get into. Let's go ahead and get started.
So first of all, let's do a quick 30, second recap of
everything that's happened. So far up until three days ago.
There used to be a bank called Silicon Valley Bank that catered
to Silicon Valley from 2017 to 2020, as the Texting started to
grow rapidly because of cheap. Money low interest rates,
Silicon Valley Bank, had an influx in deposits as Silicon
Valley, Bank was receiving this influx of deposits and fresh
cash. They decided to invest the
money. They invested it at very low
interest rates, at the time of the interest rate on average was
between 1% and 2%. So they were investing in this
area right here. Much lower than the current 5%
interest rates. The problem wasn't that they
only invested At low interest rates, but they invested in long
duration assets, Silicon Valley Bank was buying mortgage-backed
Securities and 10-year, treasuries at one-and-a-half
percent interest rates locking in that rate for the next five
to ten years. So their entire Bond portfolio
is right here in this area and the interest rates of course
went up to 5% making their entire Bond portfolio
underwater, all of it being unrealized losses and this was a
particularly poor decision because of how concentrated the
clientele this bank had, it was all Silicon Valley startups.
All companies that had the same risk factors.
This graphic shows how concentrated, Silicon Valley
Banks portfolio has into long-dated assets and how many
losses they had in that portfolio.
The impact of unrealised security losses on Capital
ratios. It has two bars here.
The blue one is the common Equity Tier 1, Capital.
The brown bar is adjusted for unrealized losses on securities.
So basically, when you make the adjustment, for how much this
Bank actually has, when you factor in their losses, this is
what it looks like. Notice how most banks like
JPMorgan have slightly less when you adjust for unrealized
losses. It's about 80%.
That's a pretty decent ratio. They're not down much when you
adjust for unrealized losses, we have Citibank doing the same
thing. Pretty reasonable ratio there.
And then next we have Silicon Valley Bank third, from the left
DC, the problem there when we adjust for unrealized losses,
Has their ratio goes from being around, 12% to being around
point two percent, it's virtually nothing.
And this is unlike any other bank, Silicon Valley Bank is
orders of magnitude worse than even the next worst bank.
So, this highlights how uniquely bad their portfolio was and how
it led to this devastating consequence.
Not to make a long story short. This entire Bank runs started
with Moody's, Corporation threatening to downgrade the
rating of the bank and they threatened to downgrade it
precisely because Of the capital ratios Moody said that you need
to increase your Capital ratios, or we're going to downgrade the
stock Silicon Valley Bank quickly responded to Moody's
downgraded thread. They issued a note saying that
they're going to bolster their cash reserves and they're going
to raise their Capital ratios by doing a little dilution to raise
some cash. And that is precisely what?
Spooked the customers of this Bank word, got around very
quickly and Silicon Valley as it often does with everybody on
smartphones. Everybody in slack groups,
everybody in Discord channels, word spread Quick that this Bank
may not be able to get your money out as quick as you want.
And once that happened, everybody wanted their money
out. That's the bank run, not only
did the stock price drops 66 percent in a single day and was
halted, but this Bank received a staggering 42 billion dollars of
withdraws. In one day, this was a bank run
by cell phone. Every single Venture capitalists
every single startup company that had money in this Bank
logged into their Silicon Valley Bank app on their smartphone.
And issued a withdraw request, all of them doing that at the
same time is the bank run and this create a bigger liquidity
problems for the bank on Friday. It was announced that the FDIC
had taken over the bank, it no longer exists as Silicon Valley
Bank. That bank is shut down.
It exists. No more.
It is a remnant of history, but the question remains, what
happens to the depositors? What is the insurance?
What happens with everything going forward?
And what does this mean for all these other Banks today?
Her one day of FDIC having control over the bank.
There was a joint statement released by the Department of
Treasury Federal Reserve and FDIC.
Now with this statement, they had two major goals with it.
One was they wanted to make it clear that the taxpayer was not
bailing out. All the people that profited
from Silicon Valley Bank. They didn't want to make it look
like the taxpayer was paying out.
The CEO, the executive team, the equity holders, or the bond
holders, they wanted to make it clear to the public that that's
not the situation, and it's not a Pete of the bailouts that
happened in 2008. The second goal is to retrieve
depositors money and renew confidence in the banking
system. And I think the statement
adequately accomplish both of those goals, depositors will
have access to all of their money.
Starting Monday March 13th, no losses associated with the
resolution of Silicon Valley, Bank will be borne by the
taxpayer. This is the sentence repeated
over and over again. In the statement multiple times
that no losses associated with, this bank will be Burned by the
taxpayer. Now if the losses are not being
paid by the taxpayer, who is paying for the losses, FDIC
Insurance FDIC is going to raise premiums on every other bank, to
cover any losses of the banks that go under or need additional
security. This is basically a way of
saying that the premiums that Banks pay an insurance is going
to go up a little bit if they have to cover additional losses.
And then of course, the next thing they highlight is that
Senior Management has been removed.
From the company, they have been fired, their reputations have
been And any shareholders and debt holders of the company will
not be protected. They've lost one hundred percent
of their investment, so Silicon Valley Bank exists.
No more, the executive teams have been fired, the equity
holders, and bondholders have been wiped out.
And there's a new playbook, a roadmap for how to deal with
this type of situation in the future.
Now, you'd think logically looking at the measures that
government has taken that, this would stem all the problems in
the banking sector that investors and depositors would
have renewed confidence. The combined government came out
and said that they're basically ensuring deposits up to any
amount. They'll take any steps necessary
to make depositors whole, but like most of History, one panic
sets in logic, goes out the window, the route and Bank stock
deepens, despite emergency measures in 2020.
Did we have a lack of toilet paper?
Did we have less toilet paper than we did before?
No. But when fear sets in and people
think that they may not be able to get something they rushed it.
As much of it as they can, they rush to get it before anyone
else? This is a herd mentality and
it's a part of human nature and we're seeing the exact same
thing with the banking system. Right now, the government has
said that they're backing these deposits that they have measures
in place to get everybody. Their deposits as they want
them. But regardless, people are
acting scared. They're still taking their money
out and selling these stocks. If we look at the bank's mapped
out on, just their recent daily performance.
This is what it looks like we have First Republic Bank.
Pac, West Bank Corp. Being the two that have dropped
the most but even Zions Bank, which is a much larger bank has
also dropped over 30% in price then Regions Financial has also
dropped 15% in price so across the board.
It's mostly Regional banks that are getting hit.
So there's still a lot of pressure and selling and anxiety
around these Regional Banks. They're still under pressure and
the CEOs. Like, Fifth.
Third Co are coming on to CNBC trying to just share the message
that they have deposits. They have your money.
They are insured and that things are fine.
That's the message. They're trying to share the
executives of these companies are trying to reduce panic and
contagion as they should be. Now, there has been some second
level effects to this. The treasury rates have dropped.
As these banks have been selling off the u.s. 2-year treasury is
down to four point one percent just a couple days ago, it was
at five percent so that is a substantial drop in treasury
rates. The 10-year treasury is also
dropping rapidly. It's down from four percent.
Now 23.5 percent Sent mortgage rates are also tumbling in the
wake of bank failures. There are down about a half a
percent on the day. And then most shockingly Goldman
analyst no longer expect the FED to give that point two.
Five percent interest rate hike in their next meeting.
They think they're going to keep it the same because of the
considerable uncertainty in the environment.
Now I understand the logic care. The FED will keep raising
interest rates until something cracks or something breaks.
But I think in this situation, the FED has made it abundantly
clear that they're going to raise interest rates and
Inflation comes down. That is their mandate, it's not
to raise interest rates until Things become uncertain.
It's to raise interest rates until inflation comes down.
So, I disagree with golden hair, I think we're going to see
another 25 basis point increase, but I also think a lot of this
will come down to the next CPI reading.
So, overall, this past couple of days and even this past week has
been crazy, it's been event. Filled non-stop news, breaking
news all the time, and I think it's good for investors in these
situations. To just take a breath, take a
step back and not be so consumed.
By every little bit of breaking news, I know it's fun to consume
all of it and to read all of it. But I think that can have a
negative impact on your view of the market and how you manage
your investments in reality, the companies that you're investing
in. If they're high quality
companies, have been through many crises before most of the
companies that I'm investing in have been in existence for
50-plus years. These are companies with long
franchises Of durability. They've been through different
interest rates and different market conditions.
And so, a little volatility, a little uncertainty is nothing
new to these companies. They've been here and done this
before. And if the companies that you're
investing in are really high quality, any sell-off in them,
as a result of temporary Market, Panic can be viewed as an
opportunity. I've had a recent sell-off in Sp
Global this company's down about 10% that's around four thousand
six hundred dollars. This is a brand-new holding that
I built up to a very significant holding so I'm not concerned
Earned at all, at seeing this company in the read every single
company that I've ever invested in.
At one point has entered in the red, I never time the absolute
bottom of buying into a new company, so this one's down a
little bit and if it continues to trade down, I'm going to be
adding more to this position. SP Global's business has never
been stronger before than it is today.
Vici was another stock that got hit with a sell-off on Friday in
a general related Market Panic. This one traded down around 4%
on the day. About 7 percent on the week when
I look at Vici and their fundamentals in their business,
nothing that happened this week, materially impacts this company
to any degree, but even just being in the General market, and
being subject to the volatility can create opportunities with
Vici trading down. I've added a little bit more to
this, holding both Canadian Pacific and Union Pacific have
also traded down with the general panic over the past
couple of days. And these are two companies that
again as far as I can tell, fundamentally have not changed
at all. So any Time these companies
trade down significantly below my buying price.
I'll be adding to these positions.
I still view them as the long-term Compounders where
their intrinsic value is going to continue to climb year after
year. So, just to summarize, I'm not
concerned about the situation, I don't think you should be
concerned about the situation. And if you're listening to, lots
of people tweeting and all caps putting fire and thumbnails
creating and spreading panic, I think that's a good indication
of the type of commentator or investor you're paying attention
to. So that's all for this episode.
I have more updates following this week as the situation plays
out and I'll see you in the next one.
I have more updates following this week as the situation plays
out and I'll see you in the next one.