Ep.9- Is Your Cash Safe?

One of the greatest investors of all time has a great quote: “When the tide goes out, you find out who is swimming naked”-Warren Buffet. Well the tide has gone out and Silicon Valley Bank and some others are now naked. The question that a lot of people are wondering is: what happened and is my bank next? 

To fully understand what happened to SVB, you need to understand diversification, interest rate risk, accounting, and FDIC insurance. These all created the perfect storm which ended up being the downfall of SVB. 

Ever heard the term "Don't put your eggs in one basket?" Of course you have, who hasn't. But, SVB didn't get the memo. The majority of the SVB holders were tech companies, tech startups, or venture capitalists. This created the first major issue.

It's no surprise that inflation has been an issue and will likely continue to be an issue. The Fed has tried to step in to fight inflation. Not like any fight, but a Mike Tyson vs Marvis Frazier type fight. The Fed has come in swinging and swinging hard. The fastest rate hikes we have seen in history. This created the 2nd major issue.

Before and during Covid these tech companies were flush with cash. Who do they turn to? The bank closest to them (SVB). The bank does what they normally do when they get deposits, and buys U.S. treasuries (at record low interest rates). Fast forward to 2022-23 and these tech companies get hit the hardest in this economic downturn. So, they go to the bank to make big withdrawals.

SVB now has to sell their treasuries to raise cash for their clients. Insert the 2nd major issue. Interest rates and bond prices work in an inverse relationship. When interest rates increase, the bond price goes down. SVB now has to sell these bonds at a lower price, which causes a loss. 

Now SVB depositors run into the biggest issue. Their deposits are over the FDIC limit. And that is how you get the perfect storm. Or, as Warren Buffet would say “they were caught swimming naked.” 

 

Links to FDIC and NCUA Coverage Calculators:

\https://edie.fdic.gov/calculator.html

https://mycreditunion.gov/insurance-estimator