Good morning & Happy (early) Spring.
Over the last week, seemingly out of nowhere, we had three bank failures here in the U.S. And, based on calls, emails, texts over the last few days, we felt we should send out a brief note to help explain what is going on.
Silvergate Capital (Symbol: SI), holding company for Silvergate Bank. Silvergate Bank has received less publicity but on Friday, March 3rd, the FDIC showed up at this bank near San Diego and, last Wednesday, shut it down. Silvergate is deeply embedded in lending to the ‘institutions’ and major global players in the world of Cryptocurrency. That extremely speculative corner of finance has been decimated over the last 24 months.
SVB Financial Group (SIVB), holding company for Silicon Valley Bank. Located in the heart of the U.S. Tech world, SIVB was the 16th largest bank in United States. They have basically been the ‘go to’ lender for most technology companies, venture capitalists, and biotech firms, among others, for decades. They lend to the companies, founders, executives, etc. And they’ve done that across 100s and 100s of companies. It is no secret the dramatic rise in interest rates have hit Silicon Valley especially hard.
Two other aspects of SIVB are very specific to this bank. First, 87% of SIVB’s assets were invested in securities (think stocks/bonds). The average bank has 24% (JP Morgan Chase = 19%). The US bank with the 2nd highest % is at 42%. Second, unlike most larger, responsible banks, for some reason, SIVB did not hedge interest rate risk. In other words, as the Fed has raised rates, SIVB’s management was asleep at the wheel.
As word got out last week there was a bank run on SIVB as customers yanked $42B on Thursday. The FDIC shut them down Friday. Figures have varied but less than 13% of SIVB’s deposit base was covered by FDIC Insurance ($250k).
SIVB is the 2nd largest bank failure in US History. The largest, Washington Mutual, failed during the 2008 Crisis before ultimately getting taken over by JP Morgan Chase.
Signature Bank (SBNY). Based in New York, Signature Bank is a member of the S&P500. Before 2020 SBNY was a traditional bank. Since late 2020, like Silvergate Bank, SBNY made the unfortunate decision to also go ‘all in’ on Cryptocurrency. They created an exchange to facilitate major transactions amongst institutional players in the Crypto world. There is much speculation that both SBNY & SI helped create one of the largest money-laundering operations on the planet (via Cryptocurrency transactions).
Like Silicon Valley Bank on Thursday, Friday there was a bit of a bank run on SBNY. Accordingly, yesterday, the FDIC stepped in and shut Signature Bank down. Now we have the 3rd largest bank failure in US history.
It’s been a heckuva week in the banking sector, to say the least.
The bad news? The Federal Reserve has raised rates at a record speed over the last year. Their stated goal was to slow down the economy and stem inflation. Along the way, they’ve wrung out some excessive risk and exposed some really horrible banks. Three failed over the last seven days.
The good news? Last night, the Federal Reserve, the FDIC, and the Treasury Department announced a plan to take measures to ensure all depositors at SIVB & SBNY will be made whole, even if accounts held more than $250k (the current FDIC insurance limit).
And please keep in mind this action is VERY different than the bank bailouts in 2008/09. Back then stockholders and most bondholders were also bailed out. That is NOT the case today. Over time, the stock of SIVB & SBNY will go to $0. Most of their bonds will too. But all the customers, corporations, etc. with money in the banks will be made whole.
Should you be worried about YOUR money in your bank? In a word, no. The average bank has 24% of its assets in securities. SIVB had 87%. SIVB also had a VERY concentrated corporate & personal customer base – mostly tied to the technology sector. Silvergate & Signature Bank were the de facto lenders to Cryptocurrency at an institutional level. It is our opinion that over 99% of all cryptocurrency will go to $0. The management of these banks are idiots, frankly, and acted extremely irresponsible.
Will these recent actions shake up the banking/financial sector? Yes. Things have been very volatile and that will likely continue as we collectively work thru this. However, most banks are in very good shape. Most banks are NOT anchored in Silicon Valley and actually hedge their portfolios to a rise in interest rates. Most banks do NOT invest over 85% of their assets in stocks. Most all banks do NOT get in bed with the world of Cryptocurrency.
There are a lot of scared people out there. Especially shareholders, retail customers, and corporate customers of the 3 banks mentioned in this note. When people are scared, they sell what they can, and stocks are easy to sell. Friday was a rough day in the markets. This week will be volatile. All of this should give the Fed pause on future rate hikes – a lot of damage has been done. We’re not scared right here, right now, in this market. The S&P500 is down over 7% since the February highs. We’re looking to take advantage of lower prices, stabilizing interest rates, and better banking regulations.
Please reach out with any questions or concerns.
Your LJI Team