The tech industry is facing yet another challenge as its go-to bank, Silicon Valley Bank (SVB) collapsed last week. Once a major lender to VC-backed startups, SVB is now the second largest bank in US history to go under.
The bank’s shocking failure immediately followed the collapse of Silvergate Bank, which served as one of the two main banks for crypto exchanges, along with New York-based Signature Bank — another bank that regulators shut down Sunday in a bid to prevent a looming banking crisis.
The federal government has now stepped in to make depositors whole. But while the recent and sudden deterioration of these crypto-friendly banks has been most impactful to the tech ecosystem, it underscores the risk of financial system interconnectedness.
In this Friday episode, Dylan breaks down the failure of the crypto banking trifecta, the government’s response to this crisis, and how this all relates to the debt ceiling debate.
- [02:16] Why Silver Gate Bank became the bank of choice for crypto exchanges
- [05:54] What happens when a bank dies
- [09:05] What are bonds?
- [13:08] The two different types of investments that banks hold
- [15:26] How and why Silicon Valley Bank suffered massive losses
- [22:58] How the Silicon Valley Bank collapse affected the value of the USDC stablecoin
- [26:58] Why people’s faith in financial markets is critical
- [28:19] How and why Signature Bank collapsed
- [30:49] How bank bailouts work
- [34:43] How the collapse of the banks relates to the debt ceiling debate
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Happy Friday, everybody. Alright. On these Friday shows here on Fiscally Savage, I try to take one thing in the news and go one step deeper and I want to make a disclaimer at the top of the show. I am recording this on March 13th. That’s Monday. And you’ll probably note and be like, but Dylan, I’m listening to this on Friday. Well, of course, you are ’cause that’s when I release it. My point is is that a lot might have changed because today, I’m gonna be talking about a situation that’s in flight and I’m going to, of course, be talking about the collapse of Silvergate Bank and Silicon Valley Bank and Signature Bank. And one of the interesting things about this whole story, though, is that Silicon Valley Bank collapsed on Friday and when as soon as I saw the headline, I was like, I know what my topic for my next Friday show is gonna be. And because I’m me, I’m, you know, everybody who’s been listening to this show for a while knows that my job is I am an auditor. Now, I’m a CPA but I’m not a tax CPA so please don’t ask me to do your taxes. I am a corporate auditor so if you want me to pull up your books and tell you where you’re committing fraud, I’m probably your boy. But the point is is that I love this stuff. Like I actually legitimately am one of those people who’s like, man, I really do like my job. I like taking things apart from the inside out and this was no different. So, I set about reading as much as I possibly can about the collapses of Silvergate Bank and Silicon Valley Bank and I was all ready and so excited and I was like, alright. I’m gonna hit record on Sunday night. And just as I was about to do that, my computer pings and my newsfeed tells me that Signature Bank has been closed and that the Fed is putting together a program to bail these people out. And so, that just kind of illustrates how fluid this situation is. So, whatever I talk about on this show, I’m gonna ask my audience to be discerning and forgive me for recording early. Why am I recording early? Well, because I’m traveling this week and I’ll be back on Monday to record another one before I head out the door for my next adventure.
[00:02:16] Let’s get into it. So, a statement that I made when the Fed announced that they were going to raise interest rates, I turned to my wife and I said, when interest rates rise, fraud is revealed. And what I mean by this is that when interest rates are artificially low like they’ve been for the past decade, it creates market distortions. That is, money is so cheap that people just start blowing it out the window. And you see this a lot with all the VC firms that’s those are venture capital firms where they’re just they’re borrowing money and if they can get a 4% return on whatever it is, they can beat the interest rate in which they borrowed the money at. So, you see a lot of things. In my shows on cryptocurrency, one of the things I’ve pointed out is that cryptocurrency has never been tested in a high-rate environment. Crypto as a market, as a share of the market in investments and exchanges and all that other stuff, has grown up in a low-rate environment. And so, as rates have started to rise, you’ve seen a corresponding crash in crypto and, of course, markets will do what markets do so they go up and they go down. But for the most part, we’re not seeing a real healthy, vibrant market with the collapse of Terra Luna, Celsius, and so many other firms over the last couple of years. And that’s where we’re going to start our story and that is really what this is going to be. This is going to be an epic story of how sultry wood nymphs and Sam Bankman-Fried led to where we’re at right now. Because one of the things that I pointed out in my series back in December on cryptocurrency is that, well, the headlines for cryptocurrency is that it’s this trustless system. There’s no middlemen. Well, unfortunately, there are because you have to have on-ramps and off-ramps. When you go to, say, FTX and you open an account and you transfer fiat currency — that’s dollars, if you’re keeping track at home — into FTX so you can buy, crypto could thus converting the fiat currency of the dollar into the cryptocurrency of the whatever token you bought, that money doesn’t just go poof and is gone. Like FTX now has cash. And so, what they need to do is they need to bank the cash because cash is king. And while they might very much believe in their protocols, I assure you their vendors and investors do not. And so, they’re going to need a place to bank. Crypto being highly volatile didn’t have a whole lot of banks that were lining up to go, yep, I’m your boy. Come on in. But Silvergate which was at the time a really small bank went, well, we’re not really making any money so what do we have to lose? And they did this back in the heyday of the crypto frothy market where cryptocurrencies were the talk of the town and people were being minted as millionaires with crypto bets on what seemed to be like a daily basis. So, Silvergate Bank became the bank of choice for a lot of crypto exchanges. That became their niche within the market and when they went public, it seemed like they were just the smartest people in the room. Why? Well, because their stock went up 1300% in a little over a year. To put this in perspective, if you had invested in Silvergate Bank on the 1st of September 2020, you would’ve paid $14 and 40 cents a share. But if you had liquidated on November 1st 2022, you would’ve done so at a position of $204 a share. And that’s a hell of a gravy train. But if you notice that date and I chose that date deliberately, November 1st 2022 is right around when FTX collapses.
[00:05:54] Now, this is where the story might have to go a little bit deeper because we’re going to take a sidebar. When banks die, what typically happens is that banks will have experienced what’s called a run on the bank. People lose faith in it. They run to the bank. They withdraw their money. The bank runs out of money and now the bank’s dead. This was a huge problem in the era of free banking. Before we had things like federal regulations on banks and a centralized bank to serve as the lender of last resort. And, of course, there’s also the FDIC, the Federal Deposit Insurance Corporation, that was set up to make depositors, not investors, not bond holders, but depositors whole should the bank fail. They would step in, the government would step in, liquidate the bank’s assets, and then pay the depositors back up to a certain cap. That cap today is a quarter of a million dollars or $250,000. And for the most part, other than extreme circumstances and, you know, the depths of the Great Recession, it’s worked. The idea that we have, you know, runs on the bank where like people just go in and withdraw all their money and completely destroy banking and hold communities for the most part hasn’t really happened in my lifetime. The problem, though, is that no such regulations exist for crypto exchanges. Now, one of the banner ads about when it comes to VC-backed firms and all the technology is like no regulations because we’re gonna make a bunch of money. We’re innovating. Regulations are gonna slow us down. Well, that didn’t really help FTX when everybody showed up at their door demanding their money back. Essentially, when FTX collapsed, it caused a run on crypto exchanges. Some of them survived, a lot of them didn’t. And what was happening was people were withdrawing their money out of these crypto exchanges. Sam Bankman-Fried actually made the statement that, oh, well, the FDIC will make you whole but the FDIC shut him down and went, no, we won’t. You’re not a bank. In fact, you insisted over and over and over again that you weren’t a bank so there will be no bailout for you. Now, how does this connect back to Silvergate, the bank of choice for all these crypto exchanges? Because a run on the crypto exchange was a de facto run on the bank. Because what happened to the dollar you put into the crypto exchange? Well, they turned around and put it into Silvergate and Silvergate now has to give that dollar back when you’re trying to withdraw your dollars from that crypto exchange, which meant that Silvergate Bank lost two-thirds of its deposits from the crypto exchanges in a little over a month. I mean, this is essentially a backdoor way into making a bank run a reality because we went through this unregulated pseudofinancial space that looks like a bank but is not a bank and, of course, we ended up with the exact same result that we had back in the 1800s and early 1900s. People had a run on the crypto exchanges. And because the crypto exchanges require on- and off-ramps, it created a run on the bank.
[00:09:05] And this is the point, ladies and gentlemen, where Dylan’s gotta put back on his teacher hat and explain to you Finance 101. Okay. So, we gotta take another sidebar because this is infinitely complex and I’m desperately trying to keep it at least under 40 minutes but I’m probably gonna fail on that so just bear with me. Okay. So, let’s get into it. Bonds. What’s a bond? A bond is basically a loan. So, if I go and I sit there and I buy a government bond, what I’m doing is I’m exchanging cash for the bond and I’ve given the government a loan and that bond will have on its terms a maturity date — that’s when they’re gonna pay me back — and then a rate — and that’s how much money they’re gonna pay me on a periodic basis. Okay. That’s the important pieces of a bond. It’s more complicated than that but let’s just stick with it. Now, bond prices — the price that you could take and sell on the open market — is inversely proportional to the going interest rate in the market at the time. So, for example, let’s say that I bought a hundred dollar-bond. That means I gave a loan for a hundred dollars at 1% interest. Now, I’m holding my bond, collecting my 1% interest, and then the Fed comes along and raises rates to say, oh, I don’t know, 5%. Okay. Now, I wanna sell the bond and I’m gonna turn around and go to the market and say, hey, everybody. I got this hundred dollar-bond for 1%. And then now, everybody in the market has to say, why would I buy a hundred dollar-bond for 1% when I could buy a hundred-dollar bond from somebody else at 5% because the Fed raised the rates? And so, what I’m gonna do is I’m gonna discount it. No, no, no. This one’s only worth 70. And they go, oh, that’s a good deal. I’ll take $70 for 1%. Cool. And now, I sell it and I’ve got $70 but I have a loss of $30. This is super important to understand this story because that’s how bond trading goes. In a period of rising interest rates, the bonds you bought at the lower rate are now depreciating in value for in terms of what you could get on the market. When Silvergate started losing their deposits, what happened is they had to turn around and sell their bonds to cover that amount because we will exist in what’s called fractional banking. Every dollar that you deposit into the bank, they will keep four cents of that dollar on hand and the rest of it, that other 96 cents, they’re gonna do their banking operations: lend it out, buy bonds, you know, make investments — the whole nine yards. So, they don’t have it all sitting there. And so, what they had to do was they had to sell their investments in order to actually pay back those deposits that were held at the bank.
[00:11:38] The problem is is that because they bought those bonds at such a low rate and rates have steadily increased in the market now because the Feds have been raising rates to combat inflation, Silvergate’s losses were four times greater than the last eight years of profits combined. Whoa. And that basically was the end of Silvergate Bank. They announced their losses and they voluntarily decided they were gonna liquidate the entire bank because it’s better to liquidate yourself than the FDIC come in, fire everybody, take it over, and liquidate it for you. But that was the end. They’re done. And once again, we see that the crypto markets are stumbling one crisis at a time and understanding why certain banking regulations exist. And it’s of course not lost on me that the executives of Silvergate not two months ago were arguing for looser regulations so that they could take on more risk when they had a ton of risk already there. Because ladies and gentlemen, understand that to a bank, your deposits are not assets, they’re liabilities. And in this particular case, Silvergate didn’t make hugely risky bets with its investments. It bought the safest of the safe. Just turns out they’re really bad at predicting the rest of their risk profile because their deposits were also a risk, in this case, overexposure to the crypto market and that’s gonna come back again so just bear with me here.
[00:13:08] Now, the other thing to understand, and this is gonna be relevant in the story is that there are two different types of investments that banks hold. There’s those that are available for sale. That is, these are the ones we’re gonna trade. So, as the interest rates go up and go down, they have to do what’s called mark to market. That is, they’re not gonna tell their investors, yeah, we got a billion dollars worth of government bonds over here when, if I tried to sell them, they’re not worth a billion dollars. So, they mark them down. And that’s normal. That’s a typical thing. But there’s this other set called held to maturity, which is they don’t mark them to market because they don’t plan to ever sell them. They’re gonna hold them until the face value of that bond — remember we bought it for a hundred dollars so it says a hundred dollars in the face — they’re gonna hold it for the 10 years in the bond when that person’s gonna give them a hundred dollars back. To mark it, those don’t get adjusted on the balance sheet. And so, this is gonna be really relevant later but I do want you to understand, as of Monday, one of the things you’re hearing is like there is $600 billion of unrealized losses in the banking industry. This is what they’re talking about. They’re held to maturity securities that are on the balance sheet that are held to maturity. They have no intention of selling them. But if they did, they would lose $600 billion. That’s what they’re talking about. Now, this again will be relevant later but I do want you to understand this. At the end of the day, it’s terrible risk management. You get an F in the class on risk management here because what they failed to do was that while they were looking at what they were buying with your money, they failed to consider where your money as a depositor came from. And so, they’re overexposed to the crypto market because, again, those deposits are liabilities to the bank. And so, they failed to look at it and go, oh my God, what would happen if this entire industry collapsed? Because, again, why? Why would they do that? Well, go back to that stock price. If you’re an investor and you’ve just experienced a thousand percent return in a little over a year, are you really gonna want the bank to be like, you know, maybe we’re driving a little too fast? No. In our current market, the whole game is, well, you gotta do that over the next year. Otherwise, you’re a terrible company. And I’ve said this before and I’ll say this again. When you have massive returns, you should really be asking lots of questions.
[00:15:26] So, that’s the end of Silvergate. Why is that important? So, I said I was gonna talk about Silicon Valley Bank and instead I’m talking about Silvergate. That’s because on the exact same day that Silvergate Bank announces that they have suffered massive losses — almost totaling a billion dollars that equate to four times the past eight years of profits combined — Silicon Valley Bank, a venture capital-focused bank, announces they’re having similar issues for similar reasons. Talk about just terrible timing. But really like Silicon Valley Bank couldn’t have put it out anymore. So, what’s Silicon Valley Bank? So if Silvergate was all about crypto, Silicon Valley Bank was the 16th largest bank in the United States and it was focused on VC-invested firms. That is, when venture capital comes in and says, yes, we will put money into your firm, the next words out of their mouth typically were, and you need to open an account at Silicon Valley Bank. Well, because apparently they all wanted, you know, these innovators who are all individuals with unique ideas all wanna bank at the same institutions. I don’t know if Silicon Valley Bank was handing out Patagonia vests and then just, you know, a lot of goodwill or maybe it was, you know, something else but this is how it went. So, if you were a VC-backed firm, chances are good you banked at Silicon Valley. The thing about these VC firms is when they make the venture capital investment. They’re looking for these unicorns. They’re looking for companies that are have a great idea and are going to explode. What it’s important to understand is that when you look at the time value of money — when you’re making this investment — if your expectation is that interest rates are gonna continue to be low, it doesn’t matter how long you have to wait until you get the return in your investment. But — and there’s a pretty big one here — if rates go up, that calculation changes. That’s right, ladies and gentlemen. What you have are a lot of tech startups that have zero income are burning cash like crazy in a period of rising interest rates and such that the people who are normally funding these things no longer want to fund them because it’s more risky in a period of rising interest rates. So, if you are one of these startup funds, what are you gonna do? Well, it’s time to go dip into the old account. So, where Silvergate was focused on crypto, Silicon Valley was focused on these VC-backed firms. Nearly half of all VC-backed tech and life science companies in the United States are parked at Silicon Valley and all of those companies are now having the same issue with their VC backers not giving them any more money. This is a huge problem for Silicon Valley Bank.
[00:18:24] To put this in perspective, if you are banking at a bank, like I think about myself. Like I’m building wealth and I’m growing as a person and I know the FDIC only ensures my deposit up to $250,000. Okay. When I start getting close to the number, I’m gonna go open up another account in another bank and put my money there, right? Because I don’t wanna take the risk that the bank’s gonna go under because at the end of the day, I don’t trust bankers so, and I would advise most of you and I think most of my listeners probably don’t either so we’re all in good company here because maybe histories should have taught us a few lessons. But these VC-backed firms didn’t do any of that. They banked it all — everything was at Silicon Valley Bank. And so, when they looked at it, when Silicon Valley Bank looked at this and went, how much of our deposits are uninsured? It was almost 90%. To put that in perspective, at like Bank of America, it’s less than 50. So, Silicon Valley Bank is just absolutely bonkers in terms of how much risk their depositors have and, of course, they’re very focused in this place. We know interest rates are rising. And you might be asking yourself, well, Dylan, like the Fed wasn’t exactly like sneaky about this. It wasn’t like Jay Powell just suddenly showed up at Congress one day and went 5% interest rates. Surprise! Like no. They telegraphed it to everybody. So, like shouldn’t have Silicon Valley Bank realized this? And like you really think so. The problem here is is that in early 2022, Silicon Valley Bank fired their risk management department. So, they don’t have people doing the whole — thing and looking around and going, the interest rates are gonna rise. Maybe we should change our risk portfolio in terms of our investments and the bonds that we’re holding to maturity and the ones that are for sale and find a way to do this because after all, interest rates are gonna rise. They didn’t have anybody in the bank to tell them that because they didn’t bother to hire the position. And then when they did hire the position, they hired somebody who’s not great at it. And if you’re a connoisseur of Fox News, you know that they’re so focused on like, oh my God, it was woke agendas. No, no, no. That’s a sideshow. The real thing here is is that they went nine months without a risk manager and they’re a bank. This is mind-blowing. It’s akin to saying like, oh, we all get on the bus and we’re like, well, I mean, the windshield was blacked out for only nine blocks and what’s the big deal? Like that’s the level of stupidity this risk profile went and, of course, what happened? If you don’t have a risk manager to tell you what to change to, you just continue off with whatever you were doing. So, Silicon Valley Bank continued to buy bonds, long-term bonds, at very low interest rates whereas other banks have started to pivot such that over 54% of their total portfolio was in these really long-term low-rate bonds. And, again, putting it into perspective, when you look at other peers and you look at what they were doing, well, they’re in the 25% range. That’s a huge difference.
[00:21:27] And so, the more I dig into this and this is where I say like, oh my God, like and I live for this, right? Because as you start to like really dig into this and you suddenly realize like, okay, so they’re way more riskier. They’re way focused on this one thing. And they’re having to sell assets, which means they’re incurring losses. And so, what happens? Well, on the same day that Silvergate goes under, Silicon Valley Bank announces that they have sold a bunch of assets. They suffered $1.8 billion loss on the sale of those assets for the same reason that Silvergate lost all their money on those assets. And that brings us to Friday of last week, ladies and gentlemen. When all of these disruptors woke up and suddenly discovered that they weren’t as individualistic as they thought they were, they were in fact hurt animals who had all banked at the same institution, they run down to the bank and they withdraw $42 billion in a single day. Like unbelievable. Why? Because all of their VC backers told them to. They were banking at Silicon Valley Bank because their VC backers who gave them a bunch of money told them that’s where they were gonna bank. And now, they’re pulling their money out because their VC backers who gave them a bunch of money told them they were no longer banking there. Where they went with that money? I have no idea. But now, Silicon Valley Bank breaches their liquidity because remember they don’t have all that cash on hand. And when that happens, they got shut down by their regulators and they were assigned to the FDIC to be liquidated in a receivership.
[00:22:58] And it’s at this particular point in time that suddenly something else happens. And this is where I think the story gets really interesting personally because now we gotta go back to the crypto markets ’cause I said these things were all linked, right? When we go to the crypto market, we suddenly see this little stablecoin. A stablecoin is a piece of cryptocurrency that is going to hold its value. This one coin? $1. One coin? $1. That’s the key for cryptocurrency to become a medium of exchange to actually become a currency. So, they gotta be a medium of exchange, a unit of account, and a store of value. They need stability. So, USDC — United States Dollar Coin — which has been very stable, loses its peg and drops to 80 cents. What the hell? But it makes sense when you realize that circle, the group responsible for the consortium that runs the stablecoin USDC, has $3.3 billion at Silicon Valley Bank. And remember only $250,000 of that is in fact insured so of course it lost its peg. Because the only reason it had the peg in the first place is that circle, this group that runs this, had raised a ton of capital and were using that as the backing for the coin. And now, they’re about to lose almost $3.3 billion of it. And if you’re sitting there thinking, well, are they that dumb to put it all in one bank? Oh, no. They had it in like three other banks, one of them being Silvergates. So, you can kinda see where this is gonna go. And so, again, now we have another bank that has ties to crypto overfocused and now has collapsed.
[00:24:49] Silicon Valley Bank’s collapse is the second largest collapse in US history because when a bank dies, what happens is they breach their liquidity floor, they run outta money, they don’t run outta monies per se because they have a bunch of securities and stuff laying around, but the FDIC takes them over and they wind down the operations. They sell their assets. Deposits insured up to $250,000 are given back to the depositors and that’s how it goes. So, Washington Mutual was the largest bank to ever go under and Washington Mutual had focused their operations on mortgage-backed securities in the lead up to the Great Recession, which in hindsight doesn’t sound so great but you gotta have to remember that at the time, they were investing in the safest of the safe of the safe and they were making a ton of money doing it. And they were arguing the whole time, no, no, no. Don’t regulate us. No, we got it. We can — you can totally trust us. It’s fine. Well, can we look at your books? Can we, you know, look at are you how — what’s your liquidity position? No, no, no. It’s fine. And when WaMu, which is what Washington Mutual was called, collapsed and was then purchased by I believe by Chase — don’t quote me on that — we ended up with the Dodd-Frank Act. That said, well, you know, certain banks have to have certain capital liquidity requirements and they have to follow these international standards and blah, blah, blah. And then, of course, because we’re the United States and we have basically four different banking systems running in parallel, the lobby for the regional banks came in and said, no, no, no. The small town regional banks, you can’t put more regulations on them so, you know, why don’t you just back off on small town America? Which is why Silicon Valley Bank got classified as a small regional bank not subject to the same liquidity requirements that something like Bank of America or Chase are actually held to. So, the very same fixes that we went in to say, we should never have to deal with a Washington Mutual again, well, guess what? They found a way around it by classifying themselves as a small regional bank and not two months before they went under were arguing for even looser regulations and now, they’re the second largest collapse in history.
[00:26:58] And ladies and gentlemen, the biggest problem here in the banking system is that when one falls, we all get skittish because money is emotional. And so, now you might be sitting there going, I gotta go get my money, which is the exact problem that would drive this whole thing off the cliff. Faith in the financial markets is critical because US dollars is great but the true currency of any economic system is trust. When you lose trust in the banks, well, bad things happen. And this is why FDR’s statement, the only thing we have to fear is fear itself, well, what he was talking about was the fear your money was gonna evaporate and was causing a greater financial calamity, which is why he created things like the FDIC. And you might be asking yourself like, okay, well, it’s over, right, Dylan? Like Silicon Valley Bank collapsed and they’re, you know, how much more contagion — which is the technical word when one bank collapses it starts triggering the next bank collapsing. Because if Silicon Valley Bank had just been in a vacuum, like if Silvergate hadn’t announced on the exact same day that they were having this issue, Silicon Valley Bank probably would’ve survived in my estimation. But because we already had one failure in the crypto market, this next bank that now we knew were involved in a bunch of these other firms collapses. Well, that’s the second domino.
[00:28:19] So, is there a third? Well, of course there is. Because anybody who was looking at this as of Saturday and I remember actually reading this on Friday and on Saturday as I was doing research for this story, they named several other banks, including Signature Bank, First Republic Bank, Consumers Bank as ones in which large crypto firms had parked their some of their additional cash and specifically a group called Circle that was running a stablecoin called USDC had parked their funds in those other places as well. And so, basically, what had happened is Signature Bank, which has been around for a long time, that had been a very conservative institution, looked over at all the money that Silvergate and Silicon Valley Bank were having, watching their stock prices increase, increase, increase, and said, you know what? I’m gonna have what they’re having. And so, by the time I got to Sunday night and I was gonna hit record on this, as I was writing the very last of the notes, it was announced that Signature Bank was closed and put into receivership because of systemic risk. What is systemic risk? It means that the contagion is coming for them and they are overexposed to it. What were they overexposed to it? You guessed it, ladies and gentlemen: the crypto market. Because when is a bank run not a bank run? When you do a run on the cryptocurrency exchange, that triggers a bank run. And so, now what’s happened is the FDIC, the Fed, and the US Treasury, have had to get together and go, this is going to cascade through the United States economic system. In a market free of regulations in which we privatize profits and privatize losses, we should just let them all collapse. But that would, of course, unemploy a ton of people. Like just stop and think about with Silicon Valley Bank. We let all these tech startups lose all their money and that’s going to shut down huge innovation centers and have ripple effects for generations throughout the United States. And so, the question is, well, should we do that as a way to tell them like, no, no, no like you guys need to do a better job with risk management or do we want to try to preserve the economy by figuring out how to keep these systems running? So, the FDIC, the FED, and the US Treasury announced that they would make all depositors whole regardless of the value of their deposit. Remember the FDIC had a cap at $250,000. What they’re doing is they’re saying, we’re removing the cap and we’re gonna make you entirely whole.
[00:30:49] Now, this is about the point where people start screaming the word “bailout.” Let me explain to you how this system would work, okay? What’s going on here is that the Federal Reserve, which is the Central Bank of the United States, has a core function of being the lender of last resort. That is, at the end of the day, when no one will give you a loan, they will. And when I say you, I mean if you’re a financial institution with any size behind you. Because let’s face it. The Fed doesn’t work for Main Street. So, what ends up happening here is the Fed has said, okay. What is the fundamental problem in here? Well, the fundamental problem is you all bought government bonds at really low interest rates that I drove down and then I created a problem by driving the value of those bonds down by raising interest rates to combat inflation. So, what I’m gonna do as the Fed is I’m gonna give you a loan against as many of those securities that are of high quality that you want at face value. So, if you have a bond that says on the face of it a hundred dollars and in the market says, no, no, no, it’s only worth 70, the Fed’s gonna give you a loan for a hundred and the entire idea here is that you can ride it out and make sure you don’t end up with a liquidity problem like Silvergate and Silicon Valley Bank had. Now, the FDIC on the other side is gonna be doing what the FDIC does. So, that’s not gonna cover everything. It should cover a lot because on the other side of this is we now have two banks that are in receivership so there’s no one to give a loan to. So, the FDIC has a pool of funds so if you’re an FDIC-insured bank, it’s insurance. So, how does that work? Well, there’s a pool of cash because if I’m a bank, I have to pay the FDIC insurance premiums based upon a formula that they have. The FDIC has already basically said, we’re gonna blow through this entire fund to make the depositors of Silicon Valley Bank and Signature Bank whole. They’re not involved in Silvergate because Silvergate’s doing this voluntarily. And they were also very quick to point out that the taxpayer will not be footing the difference. Who will then? Well, because at the end of the day, what they’re going to do is they’re gonna charge the banks a higher insurance premium to refill the pool and it’s likely the banks will pass that along onto their customers. But at the end of the day, that’s the banks charging their customers, not necessarily Congress and mandating deficit spending. Is it a bailout? This is the first question everyone always asks me. Is this a bailout? Well, it depends on your definition of bailout. To me, when I look at Silicon Valley Bank and Signature Bank, what I see is the depositors, the people who went to the bank and put their money in are gonna be made whole. So, yes. Those people are gonna be bailed out and a lot of those people that are getting bailed out are tech firms and startups and that type of thing. So, I guess we’re bailing out the startup industry. But unlike a lot of the bank bailouts in 2008 and the other bailouts we’ve seen, the investors in those institutions that ran them into the ground, they’re losing everything. That’s how the stock market works. When you buy a stock in a company, if that company goes belly up and all pear shape, you lose everything. So, the bottom holders and stockholders of Silicon Valley Bank and Signature Bank will walk away with nothing and the depositors will walk away with the money they deposited and that money was made available as of this recording on the 13th of March. So, is it a bailout? I don’t know. You gotta tell me because you could see it either way based upon what you want to see. Personally, if the investors lost all the money and the depositors walked away, I guess I can’t be too angry about it although I of course have more complicated feelings than that.
[00:34:43] Ladies and gentlemen, I could be here a lot longer. When things like this happen, to me it’s like catnip. I can’t resist just digging into it and trying to find all the little nooks and crannies and go around and look at it from all the different angles and try to discern what really happened and what does it mean. And while I could talk longer, I’m just gonna leave you with one final if terrifying thought. How does all of this relate to the debt ceiling debate that we’re all just not paying attention to anymore? Well, ladies and gentlemen, the core problem that was faced by all three of these institutions was they had government bonds at low interest rates. And when they needed liquidity, they couldn’t sell them at a price that was actually going to be able to solve their liquidity problem. If the US is to default on its debt — and some reports are that Republicans are getting ready to do just that — it will spike interest rates on US government debt. And if that happens, more and more banks will fail because the value of the securities that they hold are no longer the face value that they were expecting to be able to hold over the long term. One of the reasons finance is so unbelievably fascinating to me is the interconnected nature of all of it. And I tell you this story to help you understand the state of play. Fiscally Savage is all about working for ourselves, about taking control of our financial lives and living free, but we don’t exist in a vacuum. I hope today has been if not interesting and terrifying then educational and gives you a better understanding of what you’re looking at. There’s a lot of hot air out there. I have heard a lot of tall tales that border on straight outright lying about this entire situation. So, until next Tuesday, ladies and gentlemen, I’ll be off on my adventure. I’m recording ahead of time. I’m sure a lot of this changed but go out there, take control of your financial lives, live free.
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