What THIS Bank Did Will Shock You: Should YOU Make These Moves??

Silicon Valley Bank, with assets of nearly 210 billion dollars, was taken over by federal regulators on Friday, March 10th. Now, this is the largest U.S. bank failure since the global crisis in 2008, and it's the second largest in U.S. history. The bank's stock price fell some 80 percent last week before trading was halted.

Now, last year I said the Fed will tighten until something breaks, and it looks like we're getting the first glimpse of something breaking. Is this failure portending something more ominous? How can you protect yourself? I'll answer those questions and more. Stay tuned.

Welcome to We're Talking Money, a special edition to bring you what we know about the saga of Silicon Valley Bank. This is a striking example of how the surge in interest rates has changed the landscape. In other words, the Fed's steepest interest rate hiking campaign since the early 80s has changed everything.

So what caused the world's 16th largest bank to fail suddenly? First, Silicon Valley Bank operated in a narrow space, too narrow as far as I'm concerned. They specialized in tech, with a lot of deposits resulting from strategic relationships with venture capital companies. Now, they banked many of the executives sitting atop these firms, as well as a lot of wineries in California, believe it or not.

Silicon Valley Bank attracted big money from cash-heavy firms and very wealthy investors by paying relatively higher rates on their deposits. This form of buying business proved to be very expensive. To help fund these higher rates, Silicon Valley Bank invested large deposits in treasury bonds and mortgage-backed securities. In fact, of their 209 billion dollars of assets, a staggering 120 billion dollars was invested in fixed income securities.

Now, treasury-issued securities are generally very safe. However, this way of investing, unlike most banks who invest by making loans, this exposed Silicon Valley Bank to a lot of interest rate risk. Making matters worse, more than 90 percent of their deposits were uninsured by FDIC standards. In short, this was a terribly run bank. Horrible.

All of this was occurring while interest rates were at all-time lows, and inflation, it was percolating beneath the surface. No one inside this bank seemed concerned at all about interest rates and the possibility of them changing. It's like they were expecting interest rates to stay low forever. Then the Fed, they began their aggressive mission to bring inflation under control with rate hikes like we haven't seen. At the same time, the venture capital market began to slow because of high interest rates, which meant fewer deposits for Silicon Valley Bank.

Now, as rates were rising, many of the bonds purchased by Silicon Valley Bank were falling like rocks, on paper, that is. In other words, if they held the bonds to maturity, none of this would be in the headlines today. But in this case, slowing deposits, investment losses and depositors demanding their money, the bank had liquidity concerns. Now, let me translate those words: we need some cash and we need it now.

This paper loss turned to a realized loss as the bank was forced to create liquidity. Silicon Valley Bank sold a 21 billion dollar slug of government bonds, but because interest rates were much higher, and remember, bond values generally decrease as interest rates increase, Silicon Valley Bank lost billions in assets as it sold part of what was a safe haven, the bond portfolio. Now, attempting to patch the gaping hole, the bank tried a last-ditch effort to sell shares of their stock. That's a common thing, by the way. Despite every effort, their best efforts, regulators had to step in.

Just a month ago, the famous loudmouth Jim Cramer on CNBC, who gets paid five million dollars a year, he was imploring you to buy this stock, telling you what a great position it is. The Motley Fool, they did the same thing.

"Hey, by the way, long-term private equity, venture capital, they're not going away. Being the banker to these immense pools of capital has always been a very good business. Stock's still cheap. Now, you have to remember that a stock that falls 66 percent like SVB Financial did last year, oh, it takes a lot more to recover. After losing two-thirds of your value, you need a 200 gain to get back to even. This is arithmetic. Some people call it geometry. So you could argue SVB's nearly 40 rally this year is barely a drop in the bucket, and that's how I want you to think about it. I think it's also a good example of why these bounce-back moves might be far from over."

I hope you did not take their advice.

Now, adding fuel to this fire is the brutal sell-off that we've experienced in tech stocks since 2022 and the severe downturn in tech startups. Remember, tech startups funded Silicon Bank, or Silicon Valley Bank. More casualties of rising interest rates, in my opinion. As the money-losing tech companies were burning through cash to survive, their deposits at Silicon Valley Bank quickly turned to withdrawals.

So what does this mean for Silicon Valley Bank depositors? Well, as I said, the FDIC took over, and they planned on opening this morning, Monday, March 13 2023. Now, as a reminder, the standard insurance amount under FDIC is 250 000 per depositor, per insured bank, for each account ownership category. This insurance is not something you purchase; rather, it is something that is provided so long as your bank participates in the Federal Deposit Insurance Corp. According to the latest statements from regulators, the Fed will step in, but the details are murky at this point. We'll keep you updated.

What does this mean for investors? Obviously, investors in Silicon Valley Bank have sustained a precipitous fall in value, and regional bank stock prices were noticeably lower on the morning after this story broke. Some of those banks tumbled more than 20 percent in value. As of this video, Monday, March 13th, the banking sector continues to be in a sell-off. Rightfully, everyone wants to know if this is foretelling of what's to come for other financial companies or markets or the general economy. It's too early to tell. Plenty of so-called experts are opining this is an isolated incident.

However, the good news is many banks are actually overfunded at this point. To put it in perspective, Silicon Valley Bank had assets of 209 billion dollars. JP Morgan, which is the United States' largest bank, they have assets of approximately three and a half trillion dollars. So you can get an idea of how much smaller Silicon Valley is versus JP Morgan, and they were the 16th largest bank in the country.

Nevertheless, markets will likely remain nervous until unequivocal evidence proves this is an isolated incident. Let's hope this is not the beginning of another crisis like the subprime mortgage collapse in 2007. Even worse, and I know you might be thinking, what could be worse, but even worse would be consumers losing confidence in the banking industry, which could incite widespread withdrawals that could create a lot of damage to the banking industry.

What should you do to better protect yourself and your money? Having FDIC insurance means that your money, up to a certain amount, two hundred fifty thousand dollars per account, is safe if your bank fails. The U.S. government is moving quickly on this Silicon Valley Bank issue to find a buyer for this bank, in hopes of preventing further loss, further loss of confidence that could affect other banks.

If you are like most Americans, I imagine you are concerned and you want to know what moves you should make right now. Bank failures don't happen that often, but they are much more numerous during and after recessions. Now, since 2001 there's been about 560 bank failures. The majority of these happened during 2007 to 2009, which was the Great Recession. To keep this in perspective, there's about 5 000 FDIC insured banks as of the end of 2022.

Let's consider your options. First, I want to give you a list of what FDIC insurance covers when issued by an insured bank: checking, savings, money market accounts, certificates of deposit, cashier's checks and money orders, negotiable order of withdrawal accounts, those are also referred to as a NOW account. Plenty of accounts or categories that are insured.

But just as important as what's insured, here's what they don't protect: annuities. Banks sell annuities; be careful. Investments in stocks and bonds or mutual funds, also things that can be sold by a bank, and losses incurred in those types of investments are not covered, just as the principal is not covered. Life insurance policies sold by banks. Contents of your safety deposit box that are housed at your bank. And municipal securities. U.S. treasury bills and bonds and notes, those are not covered, but they are backed by the full faith and credit of the federal government.

So how can you use all of this information to your advantage and better protect yourself? Let's go through a couple of examples. Number one, you can open an account at a different bank, which is very easy and straightforward. Opening an account at another bank simply means that you get new FDIC insurance with that member bank. Don't forget that interest is also covered, so if your account plus interest is reaching two hundred fifty thousand dollars, it might be time to think about opening a new account at another institution.

Number two, add a joint owner. Joint accounts, that is two or more owners, are insured up to five hundred thousand dollars.

Number three, get an account that's in a different ownership category. Remember we talked about the categories. You can have an account at the same bank in different categories, and you get two hundred fifty thousand dollars of coverage for every account.

Number four, join a credit union. Here's one that people often miss. Similar to the FDIC, the National Credit Union share, which is another similar to the FDIC insurance program, it gives up to 250 000 per person, per institution, per ownership category. The credit union must be a member of the National Credit Union Administration, and if it is, you're home free to open an account at a credit union. Keep in mind you need to be a member, but in today's world that's rarely a problem.

Number five, open a cash management account, and believe it or not, you might already have one of these. A cash management account is offered through non-bank financial providers. For example, our firm, OmniStar, uses Fidelity as a primary custodian. The Fidelity cash management account is a brokerage account that is more of an alternative for individuals who are hoping to get FDIC insurance for your everyday spending and, say, short-term investing needs, with the benefits of a traditional checking account. If you want to learn more about these, contact one of our advisors; they'd be more than happy to answer questions. This is a great way to keep your investments and checking under one roof with unlimited diversification possibilities.

In closing, here's what we're going to be watching closely: whether this is a one-off situation stemming from Silicon Valley Bank's unique role as the banker of choice to venture-funded startups, or if there are broader issues at play for the banking system as a whole. Janet Yellen has already stated this will not be a government-funded bailout, and President Joe Biden reiterated that on Monday morning. All of this puts our radar on high alert. Obviously, she and others are worried that systemic risk is possible.

We hope this special edition of We're Talking Money provided you with some useful information about Silicon Valley Bank and practical ways to protect yourself should this kind of catastrophe visit your bank. If you like the content, we hope that you will share it, like us, consider subscribing to our channel. We'll see you next time when We're Talking Money.

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