Retirement Answers

Jacob: 00:00

Hey there, and welcome back to this episode of The Retirement Answers Show. My name is Jacob Duke. I'm a certified financial planner. And this week, we're gonna kinda go off script a little bit and talk some about, Silicon Valley Bank that has recently gone under and some of the ramifications that are there and what it might mean for you as someone who's thinking about retirement or who is retired already. Let's just kind of dive in.

Jacob: 00:21

The main thing that I wanna do first is let's before we jump into Silicon Valley bank, let's talk a little bit about how banks work and operate in general. Basically, banks make money on spreads between what they take in and deposits and then what they lend out to, someone for a mortgage or a business loan or something like that. So for example, if you go in and they loaned you and they loan you money for a $100,000 for a house at 4%, that's the interest rate. And then you also deposit your money at that bank for your savings or checking account, and they give you point 5% as an interest rate. There's a three and a half percent spread there between those two different things.

Jacob: 01:01

And so that's how they make their money. Banks take in deposits, and they give you an interest rate that's smaller, and then they loan that deposit out to some other institution or person for a larger interest rate in return, and that's how banks earn their money. Now what we saw here in Silicon Valley Bank is just a mismanagement of those deposits. Okay? And so what happened was is they invested in long term treasuries in 2020 whenever interest rates were really low.

Jacob: 01:27

So those interest rates on those treasuries were 2%, one and a half, somewhere in that range. And so the value of those long term treasuries went down as interest rates rose so quickly. Remember how bond prices or values and, interest rates, they work inversely of each other. So as interest rates increase, bond values go down. As interest rates decrease, bond values are gonna go up.

Jacob: 01:50

And so what happened was is they invested in long term treasuries, which is probably obviously a bad decision, but they invested in long term holdings whenever interest rates were at their lowest point in 2020. So the value of those, investment funds, they went down 2021 and 2022 as interest rates rose. The tech companies that SVB serves, they needed cash quickly because they were no longer receiving venture capital funding because the tech sector of the market just kinda slowed down as interest rates increased. If you look at the stock prices on a tech portfolio or tech sector of the market, that has, not performed as well as other sectors throughout the last year and a half. So the value of those, long term treasuries that Silicon Valley Bank held, they went down.

Jacob: 02:35

Tech companies needed cash, and word spread pretty fast. So in the venture capital world and the technology world over there in California, that word spread really fast that Silicon Valley Bank was illiquid. They did not have the cash to meet the demand. And so what happened was is Silicon Valley Bank, they decided to sell stock holdings of their company to raise capital. So they sold stock.

Jacob: 02:56

They sold shares and equity to the open market. That way they can raise capital to meet the demand of cash that was coming in from these different companies and businesses that were saying, we need cash for payroll. We need cash for, this new r and d thing that we're gonna do, the research and development. And so SVB actually had to sell stocks so they could raise capital to meet those liquidity demands. And And when that didn't work, they had to then go and sell the treasuries that they bought back in 2020, but they had to do it for a huge loss.

Jacob: 03:25

They actually sold those treasuries for a loss of $1,800,000,000. That was only the loss, not the total sell. And so the loss was 1,800,000,000 on those treasuries they sold. So everyone begins to panic, especially those who have deposits and operate with, Silicon Valley Bank. And so what end up happening was a classic bank run.

Jacob: 03:44

Everyone was like, hey. I see that Silicon Valley Bank is not gonna make it. They're not gonna make it through this. And so, everyone went to go with their money all at the same time. And if you know anything about banks, they don't keep all of everyone's money at the bank at any given point.

Jacob: 03:57

So there was a classic bank run, and that's literally what ran this bank into the ground. And so it went into insolvency, and, obviously, the Fed and the government has stepped in and tried to prevent any other contagion or outrage that could happen for other local bank, you know, that you and I know. And so the government, basically, they had to step in and say that all those deposits that are over $250,000 that are not covered by FDIC insurance, those are gonna be covered in full so that we prevent basically any other contagion or bank runs that could happen throughout the country. The goal is to stop that from happening. And so I understand the government's stance on this.

Jacob: 04:32

I understand why they want that to happen. There's arguments on both sides, but but at this point, I I guess I understand why they're doing what they're doing and stepping in and making things whole, making things right for those who had deposits and things like that there. Now who this doesn't work out in in favor for is obviously anyone who had equity holdings in Silicon Valley Bank is because those holdings are worth zero, and now they lost all their money. So only thing who's being protected or credited back are the people who had deposits there, but it seems as if they're gonna do all deposits regardless of the FDIC insurance of 250,000. So this is what I believe to be an isolated event.

Jacob: 05:09

And I don't think this is something across the whole banking industry that is an issue because it's unique to the fact that Silicon Valley Bank strategically positioned themselves poorly based on how they invested the deposits they were given. Okay? And so that's that's why I can say almost that it's an isolated event. Now are there other banks that have done this? Perhaps.

Jacob: 05:29

But is it an industry wide issue? Probably not. JPMorgan's, Chase's, you know, Wells Fargo's, all those banks, they are very strategic in how they manage and invest the deposits they receive or lend out the deposits they receive. And so it's probably not likely that this is an industry wide thing. It's just based on poor portfolio positioning.

Jacob: 05:49

Now one of the striking numbers that I heard throughout all of this was that 89% of the deposits that were at SVB were not insured. That is a large, large number. In fact, around 50% of all banks the average for banks is that 50% of all deposits are insured. And so that's obviously 89% versus 50%. That's a lot of risky stuff going on there from Silicon Valley Bank's perspective.

Jacob: 06:15

Perhaps that's just due to the market they serve. Right? Really wealthy tech companies or startups had to have a lot of cash. So if they had to spread that out over a ton of banks, I mean, $250,000 really isn't that much for those types of companies and venture capitalists. So so what's next?

Jacob: 06:30

You know, should we panic as normal investors, just normal people, living normal lives? Should we panic and say, hey. The banking system is not stable. I don't trust my bank. I wouldn't I wouldn't go that far.

Jacob: 06:41

It's it's not really to that level. As I mentioned, it's not an industry wide thing. It's more of an isolated event because of poor management. And so what this might do is cause the Fed to slow down on hiking rates. We've seen that kind of being mumbled and kinda said a little bit is that it might throw a hitch in the plan to continue raising rates at a quarter percent, I think is what the plan was for a couple more times this year.

Jacob: 07:02

And so perhaps this issue might slow that down or cause them not to raise rates the next time that they were supposed to. So maybe we'll see that, which may be a good thing or a bad thing. Who knows? Inflation is still 6% plus, based on the most recent data. And so I I would probably say that maybe the more important lesson here is not so much of you can't trust the banks or you've got to make sure you've got a better asset than cash.

Jacob: 07:27

It's I think it's more of a lesson about investing. And I think it proves that diversification is important to what you're trying to accomplish as an investor. You know, if you invested all of your money in Silicon Valley Bank and they go under as they did, well, there goes all of your net worth with it. And so that's what I think it's it just kinda emphasizes in my mind when the first thing I thought was, oh, well, investors shouldn't have been invested only in Silicon Valley Bank. And so diversification was the first thing that came to my mind as an investor and for my clients.

Jacob: 07:57

I'm just kinda re reiterating that once again is that all of the Silicon Valley Bank investors lost every bit of money if they held equity shares. Right? So there there's something to say for, hey. Being diversified across how you invest is very valuable, and this is one example of you can't put all your eggs in one basket. So the same thing applies to, like, Tesla or Apple or Amazon.

Jacob: 08:19

Those are all great companies just like Silicon Valley Bank was a great company from what I hear. But at any given point, one wrong mismanagement, run one wrong move could position that company poorly, which means if you're an equity owner or an investor in that, you could be holding the bag at the end of the day, and there's not much money left. So that's just something from an, investing standpoint that I wanted to reiterate and just kinda reemphasize there. And another perhaps lesson from this is that there's even risk in what we call safety. You know, we think cash in the bank is safe.

Jacob: 08:49

There's always risk. There's nothing that's perfectly 100% safe or fail proof. Obviously, like US treasuries or bonds or T bills and things like that, they claim to be a 100% backed by the full faith and credit of the US government. At this point, who knows? I I think, obviously, they'll just print money if they want to to make everything whole, which is maybe not right, but it's what they'll do no matter what.

Jacob: 09:11

So perhaps that is true, but but just know that there's there's even risk in the safety of safe investments or cash holdings. So I appreciate you tuning into this, this week's episode. I know it's a little bit different than what we typically try to talk about here, but I thought it was a relevant event and, just something that perhaps was top of mind for a lot of you. And so I wanted to talk through that and just share some thoughts on it with you. But I hope you're having a great week, and, I appreciate you tuning in to this week's episode of the Retirement Answers Show.

Jacob: 09:39

And, we will see you next week and talk a little bit more about some retirement questions. Thanks so much. Hope you have a good one.