We are discussing the hot news about the bank run of Silicon Valley Bank and also touching upon Silvergate and Credit Suisse.
“I do not think you can trust bankers to control themselves. They are like heroin addicts.”
Charlie Munger, vice chairman of Berkshire Hathaway
First, what we had written originally for our March 5 episode:
On this date history, 252 years ago to be exact, British troops opened fire killing Crispus Attucks and four others in Boston Massacre. this was a prelude to the American revolution.
Also born on this date, Bernard Arnault, the sometimes richest man on the world.
Jim Bianco, a great Macro analyst who if you aren’t following you should, wrote that two banks are
making the news but for very different reasons. Silvergate Bank got itself caught up with Crypto and
now it delayed producing its 10-k, meaning it couldn’t put together reliable audited numbers for its
investors and was punished for it. This stock, which was trading for $25 a share just last year, traded
below five bucks a share, and shed 47% of its value on last Thursday (As of this Thursday, it is out of business).
It was a bank that you could put in dollars and purchase cryptocurrency and was everybody’s darling not so long ago. I wish I could tell you that this will be the last crypto institution to fail, but I won’t because it isn’t. I don’t think it will survive because of trust, a broken trust. Of all the industries that investors can invest in, the one that trust matters most to is banking. If everyone goes to the bank and asks for their money back at the same time, the bank will go under. We have discussed bank runs before and how they are the most dangerous thing in the financial arena. There is a crypto run going on right now in many jurisdictions, but a link to the real economy was Silvergate and they got caught up in the musical chairs of foolishness and that will be their demise.
The other institution that Jim Bianco mentioned was Credit Suisse. They are not a niche crypto bank,
they are a huge bank and from Jim’ twitter “ made a new all-time (32 year) low Thursday. It had to
boost deposit rates to stop an exodus of assets (aka, a bank run). Bianco makes the point that this was
met with a shrug of the shoulders. Folks, this isn’t shrugging your shoulders. According to the NY Post,
customers withdrew $120 billion from the bank just last month, this is clutch your pearls time. To make
matters worse they announced this week that a rogue employee had accessed personal data of some of
its high net worth clients. The high net worth clients were offered free enrolment in Identity Works, an
identity theft protection service. Ha! In 2021, a lack of oversight cost them dearly in the Greensill
capital debacle that saw the bank forced to repay investors $5b due to a lack of oversight and again
another $5b with the Bill Hwang family office trading meltdown. This is a bank that deserves to go due
to casino-like behavior folks. Their compliance obligations not only didn’t do their job, they were
flagging down a waitress and having her deliver drinks to the craps table. Some of their best employees
are leaving and this feels like the end of Switzerland’s second biggest bank. A few months ago, George
Gammon broke down that the Federal Reserve swap lines had gotten some activity in Switzerland, and I
wonder if the Fed isn’t quietly backstopping some of this activity. I kind of buried the lead, but they are
trying to stop money from leaving the bank, a bank run. We just talked about gated real estate funds
and how the gate was the only thing keeping the redemption scenario from becoming a bank run. There
is one going on across the pond, it is a very big global bank and the market was up 1%. The market
doesn’t care. People don’t care. But we do (This did not age well, considering I wrote this a week ago).
Liquidity is very important to individuals as well as companies. The behaviors of people are quite
unpredictable, but people’s tastes and preferences change quickly. Remember how fast Tiger King was
famous, and how quickly he was forgotten? Do you remember how famous the cast on the Jersey Shore
were? Do you remember how quickly people started to dislike Meghan Markle? The same thing
applies to money, I’m not worried about my bank, I’m not worried about my bank, oops I want my
money now- what do you mean I can’t get my money out? Quick, right?
What does this mean for you? Think that you have all your money in one checking account. You get
your paycheck and it’s directly deposited and you automatically pay your bills out of it. Your life is
simple, but what if one of these banks was your bank? You say, well my money is backed by the FDIC
and the government. That is true, but when? Governments and bureaucracies move very slowly. Do
you think your credit card company isn’t going to hit you with a big fee for missing your payment date,
what about your landlord? I am sure he will let you slide on not paying the rent or maybe you have a
mortgage at another bank. Non-payment has started the process toward foreclosure, and although
your frozen bank keeps telling you that any day now, your money will be accessible, it isn’t. Your power
has gotten turned off, your car got repoed, and your pet didn’t get his tummy medicine so every time
they walk through the living room it smells like you visited elephants at the zoo on a hot July day. But I
digress.
Our goal has long been to get rich slowly but never go broke. We don’t care about living in the
penthouse, but what we really want is to not live in the outhouse, which is homeless in the cities right
now, actually most outhouses are better than that. Just about every financial advisor recommends
diversification and are not financial advisors but we recommend the same just differently than their SEC
regulated jurisdiction. Get another bank account with a different bank and have some of your
emergency funds over there, add a little gold and silver to that silver coin that we bought with the
financial tip a while back, have some cash in an accessible place. What this does is buy you some time.
The government will likely make you whole again, but if you have lost everything by then, what good
does that do you? If you have to trade in some gold to make a couple payments or to keep the lights on,
well that is what it can be used for. It is the same with having another bank. If one has a reputational
problem, maybe it doesn’t spill over to the competition. We want options at all times folks. We don’t
want to look back and say that we should have been ready for this or done this differently. We study
our history, this did happen in the 1930s, this has happened in Cyprus in 2008, when they just took the
depositor’s money in what was effectively a bail-in. Be prepared, people.
There are strains in the system that are not being reported by the mainstream press. If there is one
takeaway from Covid, it’s that the government will not give it to you straight. The propaganda will flow,
the data will be suppressed, and they will fire up the excuse meter for why this couldn’t be helped or
known. This is happening today if you are paying attention, if you know where to look. Very few people
are looking, so let’s be among the few that are prepared for whatever the failing banks are trying to tell
us, whatever, the inverted 2/10 yield curve is trying to tell us, or whatever our leaders won’t tell us. Be
prepared. Fiscal winter is coming.
This was what I wrote last week. I had no idea that it was gonna end up like this. I don’t think anybody did. On Tuesday, Forbes came out with their list of most trusted banks in America, Silicon Valley Bank, the 16th largest bank in the country made the list on Tuesday. On Tuesday its stock was trading at 260-265 range. Then on Thursday it was down 66%, then it was down another 66% and the bank closed goodness and was worth zero at Friday at 10 o’clock. In 36 hours, the 16th largest bank in the country went broke.
When I said it goes fast, not in my wildest dreams did I think it was gonna go this fast this week. I wrote that thinking, hmm, bank runs are a problem. They take time. But in the age of social media, in the age of Twitter, this was something that absolutely frightened people. There is FDIC regulators probably gonna be all weekend long trying to decipher what they’re going to do with this bank. The amount of crypto people that have funds and stable coins tied to these assets is in the billions. There is start-ups that this is their sole source of funding. We talked about the SDIC and when I talked to our readers under 250k is the FED threshold. Most of us in their checking accounts, we keep less than that. So we would be made whole. But in this bank, you had entire companies running their operating capital. Out of this, we’re talking millions. What they’re saying is about 96% of the money in this bank was uninsured.
This is going to be very, very complex and difficult to decipher who gets what, who the senior creditors are, how this is all gonna be distributed and like we talked, what’s the timeline on how this is gonna be sorted out? Silvergate Capital, which we did mention, they went broke. It wasn’t the 16th biggest bank. So now we had a bank go broke. Now we had another bank go broke. And then if we look out there, there’s two key, crypto banks: one is Silver Gate, the other one is Signature Bank.
Signature Bank’s trading was halted today. Here is what their stock was trading for. If I can give you the wild craziness that it was dealing with today. It was literally trading at one point, went down to 45, bounced really all the way up to 90 and then closed somewhere in the 70 range after, after being halted numerous times throughout the day, and it was trading at over 135 just in.
So like this is all over the place. We go and we look at another bank that has exposure on the West Coast: First republic, it traded as low as 47 and then bounced and finished the day at about 78 right now, in the after hours trading. So the fluctuations on these and the fear of, oh my gosh, am I gonna get my money out is real folks, and it’s real.
Whole bunch of Silicon Valley, a whole bunch of the VC world and the whole bunch of the start-up world. This is exactly what I was talking about last week, but I was referring more to individuals and whatnot. This has already started. In the professional banks, the ones that have more than 250k, which means that they could potentially be on the hook for this.
Now you’re asking, is it something like 2008? No, it’s not. It’s actually something different. It’s actually a mismatch in duration. Instead of most traditional banks you think of as having customers deposit money, those banks take that money, they make loans and they lend it at a higher interest rate than what they pay the depositors and they make a money on the spread.
Start-ups get funding and they come and deposit the money. They have an IPO, they have a round of funding. They deposit this money in the bank and then that money they use as their operating capital until they can do more funding. Well, they haven’t been able to do more funding for a while, right?
Because the credit markets are tight, because interest rates have been going up, so there’s no more new funding coming in. So the bank is stuck saying, okay, when someone comes and asks for more of their capital, we need to have our money sat in something that we can quickly access. And what they did is mostly put it into treasuries.
Seems okay. But the problem is they put it in long dated treasuries a while ago, and when they had to go cash that out, they didn’t keep that until duration, the end of the bond. They had to take it out, and they took it out at the loss because interest rates have gone up. Remember, when yields go up, the price of bonds go down. So now we’re cashing out these bonds at a much lower price. And so they had to cash out some bonds the other day and mark to market, they had to take a loss and that put them in a threshold that made everyone say, oh boy, this is a little bit of a precarious situation.
And people started saying, I think I’m gonna take my money out. And then somebody else did. And then they texted somebody else, and then somebody else did. There was people waiting outside the Boston branch of Silicon Valley Bank for 18 hours trying to get their money out, and these are people with millions of dollars in their account and they’re insured for 250k.
The amount of tentacles that this has reaching out into the number of people that’ll be laid off at these small businesses and this and that is why Bill Ackman came out and said he would recommend, and he thinks there should be a bailout because of the effect on small businesses. I’m sorry, Bill, but you’re gonna have a tough time getting people to bail out big, rich folks, VC start-ups, and private equity again, after what happened in 2008, while people are suffering at the pumps from inflation and at the grocery store, you’re gonna bail out a bunch of rich people? That will not go over well.
And that’s the quickest way I could see to having the US start protesting and having fires like they’re doing right now in Paris.
I’m going to throw a crazy speculative guess out there of what we’re gonna be talking about next week. The floods in California have started and they are really bad. And so it’s raining very, very hard. They’re already preparing to evacuate people. And so this is something that we wrote about and we said, Hey, this could be something to watch on LBLF, like the flood of 1860. If all that snowfall that they’ve got, 10, 15, 20 feet of snow in the last two weeks starts melting and there’s a rain, we could be looking at something that we might be talking about next week.
So, this is the first FDIC bank to fail since November 2020. The customers don’t know if they have access to their accounts, now it’s all locked up. It’s in the FDIC’s hands now. The FDIC plans for this, they’ve done this before and I think it’ll be interesting to see. The first numbers I’ve been hearing is most people will get about 80 cents in the dollar, which would be okay. That would be a real problem and a real haircut, but it wouldn’t be catastrophic because they did have some bonds. We don’t know everything and it’s very soon, but from what I’m seeing, it looks like they will have an off ability to get some of them out, some of their funds back.
Because as depositors it’s a little bit different, but there’s still real risk is the big thing. And so the other thing that people are talking about and they’re starting to see now is, “wait a second, I have that risk”. “I’m gonna pull all of my money out of my bank up down to the 250k.” And this is how this becomes a contagion across multiple banks and multiple areas and multiple systems because we know Infarctional Reserve banking can’t afford to do that.
So it’s gonna be a very interesting weekend, or Monday morning. It’s gonna be very interesting to see what’s happened. The markets did not like it. They’re already anticipating that the Fed is going to pivot because of this. That was factored in and we don’t even have a chance to talk about this because we’re already running late.
But there’s a whole bunch of things that we’ll be keeping our eye on and we’ll have a very full LBLF and we’ll have very full Bygone Relic next week for sure.
Sincerely Yours,
C Thomas Printer
“What’s happening, Norm?
It’s a dog eat dog world Sammy and I’m wearing Milkbone underwear.”
Norm Petersen on CheersFinancial Tip of the week
Our whole episode today was a financial tip to you! In a nutshell: the key is to
diversify. Diversify your counterparty risk. Your bank, maybe your credit cards, maybe where you keep
some extra cash. The key is not putting all your eggs in one accessible basket.
On this date in history
14 years ago to be exact Bernie Madoff was sentenced to 150 years in prison due
to running the biggest Ponzi scheme in history. I don’t think that record is going to last…
Also born on this date
Austerity Jones 🙂