Why are banks collapsing and is your money safe in the bank?

NEWS CLIP: the federal government is scrambling to contain the fallout of silicon valley bank.

NEWS CLIP: this is the biggest bank failure since 2008.

NEWS CLIP: ironically you cannot bank on banks anymore.

SIMONE DEL ROSARIO: SINCE THE SWIFT, SPECTACULAR COLLAPSE OF SILICON VALLEY BANK, THE ENTIRE BANKING SYSTEM HAS BEEN IN TURMOIL. AND I KNOW YOU HAVE A LOT OF QUESTIONS. SOME OF THE BREAKOUT SEARCHES ON GOOGLE INCLUDE: 

WHAT CAUSED THE BANKING CRISIS? ARE WE HEADED FOR A DEPRESSION? AND IS MY MONEY SAFE IN THE BANK?

THESE ARE SOME OF THE SAME QUESTIONS I’M GETTING FROM FRIENDS AND FAMILY. AND OVER THE COMING DAYS – AND WEEKS – HOWEVER LONG IT TAKES, I’LL BE HERE ON STRAIGHT ARROW NEWS TO ANSWER THESE QUESTIONS, TO GIVE YOU THE CONTEXT BEHIND WHAT’S HAPPENING, AND TO BRING ON EXPERTS TO TELL US WHAT THEY THINK IS COMING NEXT. SO STAY TUNED.

COMING UP LATER IN THIS SPECIAL REPORT – WE HAVE A FORMER DIRECTOR AT CREDIT SUISSE JOINING US TO TALK ABOUT THE SUDDEN FALL OF THAT 166-YEAR-OLD BANKING INSTITUTION. 

BUT THERE’S REALLY ONLY ONE LOGICAL PLACE TO START HERE, AND THAT’S AT THE BEGINNING. WHAT HAPPENED TO SILICON VALLEY BANK?

THE CALIFORNIA BANK WAS A BIT OF A SPECIAL BREED. IT CALLED ITSELF “THE FINANCIAL PARTNER OF THE INNOVATION ECONOMY,” AND CLAIMED TO BANK NEARLY HALF OF ALL VENTURE-CAPITAL-BACKED STARTUPS IN THE U-S.

IN OTHER WORDS, IT HAD A PRETTY HOMOGENOUS CLIENT BASE.

NOW COMMERCIAL BANKS USUALLY MAKE MONEY BY TAKING IN CUSTOMER DEPOSITS, AND THEN USING THAT MONEY TO DISH OUT LOANS TO OTHER CUSTOMERS, EARNING MONEY ON THE INTEREST. 

BUT FOR THE PAST COUPLE OF YEARS, MANY OF SVB’S CUSTOMERS DIDN’T REALLY NEED LOANS. THE STARTUP WORLD WAS FLUSH WITH V-C CASH BECAUSE, WITH LOW INTEREST RATES, MONEY WAS CHEAP.

BY THE END OF 2022, SVB SAID IT HAD $212 BILLION IN ASSETS.

SO INSTEAD OF MAKING LOANS WITH ALL THE MONEY, SVB BOUGHT UP A LARGE AMOUNT OF INTEREST-BEARING GOVERNMENT BONDS, AND PLANNED TO HOLD THOSE BONDS UNTIL THEY MATURED.

HERE’S WHERE THEIR PROBLEM STARTED.

WITH INFLATION AT 4-DECADE HIGHS, THE FEDERAL RESERVE STARTED HIKING INTEREST RATES, AND FAST.

MONEY STARTED DRAINING OUT OF THE STARTUP WORLD, AND SVB’S CUSTOMERS NEEDED TO TAKE OUT THEIR MONEY TO PAY BILLS AND MAKE PAYROLL.

BUT SVB HAD A LOT OF IT TIED UP IN THESE BONDS. AND BECAUSE INTEREST RATES HAD GONE UP, THEIR LOWER-INTEREST-YIELDING BONDS WERE WORTH LESS ON THE OPEN MARKET. 

ON WEDNESDAY EVENING, MARCH 8TH, SVB ANNOUNCED IN A PRESS  RELEASE THAT THEY WERE TRYING TO RAISE MONEY BY SELLING MORE SHARES. THEY ALSO SAID THEY SOLD $21 BILLION DOLLARS WORTH OF BONDS – AT A $1.8 BILLION DOLLAR LOSS.

THEY WERE TRYING TO SHORE UP THEIR BALANCE SHEET, BECOME MORE LIQUID – BUT IT CAUSED THEIR CUSTOMERS TO PANIC. BIG TIME VC FIRMS STARTED TELLING STARTUPS TO PULL THEIR MONEY AND IT TRIGGERED A BANK RUN.

ON THURSDAY ALONE, MARCH 9TH, CUSTOMERS ATTEMPTED TO PULL OUT $42 BILLION DOLLARS, 20% OF THE BANK’S TOTAL ASSETS. THAT’S WAY MORE CASH THAN ANY BANK IS REQUIRED TO HAVE ON HAND AND SVB CERTAINLY DIDN’T HAVE IT LIQUID. 

STEFAN KALB, SVB CUSTOMER, SHELF ENGINE CEO: We wired out the money yesterday, but Silicon Valley Bank did not honor our wire. So we were not able to move any of our cash out of our bank account. Unless someone comes in and is able to support Silicon Valley Bank through an acquisition, through other means, a lot of us are going to be in a very painful situation very quickly. And so the big ask is for the federal government to come in and step in. 

SIMONE DEL ROSARIO: BY FRIDAY MARCH 10TH, FEDERAL REGULATORS TOOK OVER THE BANK AND SHUT IT DOWN. TWO DAYS LATER, ON SUNDAY, NEW YORK-BASED SIGNATURE BANK BECAME THE NEXT CASUALTY, AS CUSTOMERS THERE WORRIED THEIR DEPOSITS WOULD ALSO BE UNSAFE. 

When a bank run of that magnitude takes place, is there anything that the bank can do?

BARTLETT NAYLOR: Well, there really isn’t, these are uninsured deposits. So everybody’s insured up to $250,000. But these are small startups and other firms that have multi million dollars or cryptocurrency firms that are having a stablecoin, in the case of Signature, where there’s bunches of millions of dollars, and they want to take them out, because it will be uninsured it will be frozen in this bank, short of what the regulators did over the weekend.

SIMONE DEL ROSARIO: A WEEK AGO – FEDERAL REGULATORS TOOK EXTRAORDINARY STEPS TO PROTECT THE UNINSURED CUSTOMERS OF FAILED SILICON VALLEY AND SIGNATURE BANKS.

PRESIDENT JOE BIDEN: Rest assured they’ll be protected, and they’ll have access to their money as of today.

BECAUSE WHILE THE F-D-I-C INSURES DEPOSITS UP TO $250K, MORE THAN 90% OF ACCOUNTS AT BOTH BANKS WERE OVER THAT LIMIT. BUT UNLIKE THE BANK BAILOUTS OF 2008, REGULATORS DIDN’T USE TAXPAYER MONEY TO MAKE DEPOSITORS WHOLE. INSTEAD, THEY DREW FROM THE GOVERNMENT’S BANK-DEPOSIT INSURANCE FUND, WHICH FDIC-INSURED BANKS ACROSS THE COUNTRY PAY INTO. THE GOVERNMENT SAID ANY LOSSES TO THE FUND WOULD BE BACKFILLED BY A SPECIAL FEE ON BANKS.

JANET YELLEN, TREASURY SECRETARY: We felt that there was a serious risk of contagion that could have brought down and triggered runs on many banks.

BARTLETT NAYLOR: Much as regulators and our President is trying to reassure us, this system runs on faith.

SIMONE DEL ROSARIO: AND FAITH – IS SHAKEN. FOR MORE THAN A WEEK, AMERICANS HAVE BEEN PULLING THEIR MONEY OUT OF SMALLER REGIONAL BANKS AND PUTTING IT INTO BANKS CONSIDERED TOO BIG TO FAIL.

AND THAT’S HELPING EXACERBATE THIS CRISIS OF CONFIDENCE IN REGIONAL BANKS, FROM FIRST REPUBLIC TO PACWEST. 

WHILE THE FEDERAL GOVERNMENT MADE THE DECISION TO FULLY SECURE THE UNINSURED DEPOSITS AT SILICON VALLEY AND SIGNATURE BANKS, TREASURY SECRETARY JANET YELLEN SAID BANKS WILL ONLY GET THAT TREATMENT IF THE FEDS BELIEVE LETTING IT FAIL WOULD CREATE SYSTEMIC RISK AND SIGNIFICANT ECONOMIC CONSEQUENCES.

HERE’S OKLAHOMA SENATOR JAMES LANKFORD QUESTIONING YELLEN ON HOW COMMUNITY BANKS CAN SURVIVE. 

SEN. LANKFORD: WHAT IS YOUR PLAN TO KEEP LARGE DEPOSITORS FOR MOVING THEIR FUNDS OUT OF COMMUNITY BANKS INTO THE BIG BANKS? WE HAVE SEEN THE MERGER OF BANKS OVER THE PAST DECADE. I’M CONCERNED YOU ARE ABOUT TO ACCELERATE THAT BY ENCOURAGING ANYONE WHO HAS A LARGE DEPOSIT IN COMMUNITY BANK TO SAY WE ARE NOT GOING TO MAKE YOU WHOLE BUT IF YOU GO TO ONE OF OUR PREFERRED BANKS, WE WILL MAKE YOU WHOLE. 

SEC. YELLEN: THAT IS CERTAINLY NOT SOMETHING WE ARE ENCOURAGING.

SEN. LANKFORD: THAT IS HAPPENING RIGHT NOW. 

SEC. YELLEN: THAT IS HAPPENING BECAUSE DEPOSITORS ARE CONCERNED ABOUT THE BANK FAILURES THAT HAVE HAPPENED AND WHETHER OR NOT OTHER BANKS COULD ALSO. 

SEN LANKFORD: IT IS HAPPENING BECAUSE YOU ARE FULLY INSURED NO MATTER THE AMOUNT IF YOU’RE IN A BIG BANK. 

SEC. YELLEN: YOU ARE NOT FULLY INSURED.

SIMONE DEL ROSARIO: SO LET’S TALK ABOUT ONE OF THE MOST IMPORTANT QUESTIONS OUT THERE. IS YOUR MONEY SAFE IN THE BANK?

THE SHORT ANSWER IS YES, UP TO $250-THOUSAND DOLLARS – WITH AN ASTERISK.

MOST BANKS ARE FDIC-INSURED. AS LONG AS YOU BANK WITH AN FDIC-INSURED BANK, YOUR CASH IS SAFE UP TO $250 THOUSAND, PER ACCOUNT OWNER, PER ACCOUNT TYPE, PER INSTITUTION.

SO THAT MEANS IF YOU’RE MARRIED AND HAVE A JOINT ACCOUNT IN BANK A, YOU COULD HAVE UP TO 500-THOUSAND DOLLARS IN IT INSURED BETWEEN THE TWO OF YOU.

YOU COULD ALSO HAVE A SINGLE ACCOUNT ON TOP OF THAT – FOR AN ADDITIONAL 250 THOUSAND. 

THE FDIC EXPLAINS ON ITS WEBSITE THE DIFFERENT ACCOUNT TYPES YOU COULD TECHNICALLY USE TO SPREAD OUT COVERAGE.

MONEY MARKET DEPOSIT ACCOUNTS ARE ALSO INSURED UP TO 250K. 

LET’S SAY YOU’RE A SINGLE PERSON AND FORTUNATE ENOUGH TO HAVE MORE THAN 250K IN CASH, YOU CAN ALSO DIVVY IT UP INTO DIFFERENT INSTITUTIONS AND BE COVERED. 

YOU COULD PUT 250 IN BANK A, 250 IN BANK B, 250 IN BANK C, AND SO ON. 

WHAT ABOUT A CREDIT UNION? THE INSURANCE SOURCE IS DIFFERENT, BUT THE SECURITY IS THE SAME. INSTEAD OF THE FDIC, THE NATIONAL CREDIT UNION ADMINISTRATION IS WHAT SECURES CREDIT UNION DEPOSITS UP TO 250K.

SO FROM CREDIT UNION TO SMALL COMMUNITY BANK TO A SO-CALLED “TOO BIG TO FAIL” INSTITUTION, UNDER THESE LIMITS, YOUR MONEY WILL ALWAYS BE GUARANTEED.

Speaking of too big to fail, over the weekend, Switzerland’s largest bank has agreed to by its struggling rival Credit Suisse in a deal worth 3.2 5 billion. Credit Suisse has faced its share of troubles for years. But the stunning end to the institution after 166 years, is shaking Banking Markets around the globe, the two banks could receive more than 280 billion in state and central bank funding as part of the deal. According to the deals documents reported by Reuters, but Swiss finance minister Karen Keller-Sutter insists the move is not a bailout, but a commercial solution. Then addressed the concept of too big to fail.

KARIN KELLER-SUTTER: I mean, the too big to fail framework couldn’t have be applied here, really, because usually, you know, this is supplied to a bank that cannot meet its liabilities anymore. And here we had a problem of liquidity. So it is not typical at all.

SIMONE DEL ROSARIO: She added that a bankruptcy of the nation’s second largest bank could have created a contagion effect causing huge collateral damage. I want to bring in Hal Lambert now, he’s the founder of Point Bridge Capital and a former director at Credit Suisse, managing assets in excess of $1 billion. Hal, do you think this buyout is going to calm contagion fears?

HAL LAMBERT: No, I don’t think it’s going to at all, I think it’s going to exacerbate it. You know, if you think about what she just said, there, it wasn’t a built in ability to meet the liabilities is a liquidity problem? Well, when you have a liquidity problem, that means you can’t meet your liabilities. So, you know, I don’t know what she’s quite saying there. But it is not going to stem it. In fact, now, what you’ve created is this monstrous bank in Switzerland. And I don’t know what they’re going to do now that you have UBS and Credit Suisse merged together, you have one institution now that literally could could collapse the Swiss economy, if it were to have a problem. So this is not the end of things, this is the very beginning of something they’re going to have to work through over many years to try to reduce that systemic risk that they now have with one giant bank like UBS. And then of course, you’ve got Deutsche Bank, BNP Paribas, some other banks in Europe, that are down significantly this morning after this news, because of course, they have their own issues. And I think we’re gonna have some more banking issues in the United States as well. So this is not, this is not solving the problem, it’s likely creating more fear out there.

SIMONE DEL ROSARIO: There’s a lot to get into how I want to start with this, though Credit Suisse has had its fair share of trouble over the past few years, but had SBB not collapsed. Do you think that Credit Suisse would still be standing today?

HAL LAMBERT: They probably would still be standing at this moment. But that but they’ve had, as you just said, they’ve had problems for years, and they’ve lost billions of dollars in bad decisions. It’s really been poorly managed for the last few years. And if you look at what they lost last year, was $7 billion over $7 billion last year. So they were they were already having problems. Would they still be there right now, probably, I think this created a situation where, you know, bank failures in the United States caused European markets to get more nervous. But you know, I don’t know that it meant that they would be here six months from now. So the Swiss National Bank should have started a much longer time period ago, they they should have been on this a couple of years ago, and looking for solutions to reduce the risk of Credit Suisse. Because again, the size of the bank, not from a market cap standpoint, but from an asset standpoint, was very, very large for the for the country. And so they needed to have been on top of this working through how to reduce the risk at Credit Suisse, probably two to three years ago, rather than this kind of pushed over the weekend solution that they’re claiming as a market solution. When it’s really we all know everyone knows that this is a forced merger by the government of Switzerland for UBS to purchase Credit Suisse, UBS did not want to do this deal.

SIMONE DEL ROSARIO: Yeah, we’re talking about a real pressure cooker situation when it comes to the banking industry across the globe, Credit Suisse has specific demise seems tied to the annual report that came out last week that declared the bank had material weakness and its financial reporting. And with the sentiment going on with banks, it was just a terrible timing for them. Do you think that there are more institutions out there that have cracks like this that will become casualties of the banking turmoil happening?

HAL LAMBERT: Well, sure, I mean, Deutsche Bank is one from a global standpoint that has had trouble for years that you could almost put in a similar category, meaning they’ve just had problem after problem like Credit Suisse has. So I don’t know whether they have a risk of liquidity problem right now or not. But but they’re certainly under a lot of pressure. And then if you look at the United States, I mean, there’s about 4000 banks in the United States. So you know, I read that there’s about 200 of those that could have some problems. You’ve got to figure with that number. You’re going to have one or two at least more banks that are going to have similar problems to Silicon Valley. And then what’s the, what’s the Fed going to do? Are they going to let depositors at those banks lose their money and start picking winners and losers at the regional bank level, you know that that’s a real problem that that will create a lot of uncertainty around the US system as well. And then, you know, they’ve already picked winners and losers, because they made the systemic banks, the large ones, the JP Morgan’s the Wells Fargo’s, the Bank of America’s too big to fail. So people are putting deposits into those banks, because of the implicit bailout guarantee that the government has for depositors there. And, you know, that’s again, picking a winner over a regional bank. So, you know, it’s a real problem that, you know, we’re trying to do these one off hodgepodge solutions globally. I think they’re gonna have to really get it together to stem the the lack of trust really, that’s out there in the marketplace on banks.

SIMONE DEL ROSARIO: Going back specifically to UBS for a second to you mentioned that this was kind of something that they did begrudgingly, they basically got Credit Suisse for pennies. Here’s how the chairman plans to rein it in.

UBS CHAIRMAN COLM KELLEHER: Let me be very specific on this. UBS intends to downsize Credit Suisse, his investment banking business, and align it with our conservative risk culture.

SIMONE DEL ROSARIO: How what does this tell us about the risk environment we’re facing?

HAL LAMBERT: Well, yeah, I mean, UBS, not only did they are they doing that, that, you know, they got another 100 billion dollars from from the Swiss National Bank and kind of a backstop, they’ve got some additional billions, in first losses that the s&p is going to take, I believe was 9 billion there. They’re 16 billion of, of debt that’s supposedly going to go to zero, not sure exactly how that works, because debt holders are supposed to be senior to equity holders. But again, this whole thing is being put together by the government, and the Swiss National Bank. So I guess they could do what they want to do. Which again, though, that creates uncertainty when you start making changes in the rules of the game effectively, to make deals happen. But yeah, I think there’s gonna be a lot of layoffs, what UBS is going to see, as you know, when you’ve got a lot of a lot of investors have assets at both banks. So then when you combine them, they’re going to look out and go, Wait, I don’t want to have this much at one bank now, because I’ve already spread my risk out. So I think you’re likely to still see asset outflows. But just from a risk reduction standpoint for investors that don’t want to have too much now in one giant bank, meaning UBS.

SIMONE DEL ROSARIO: The Swiss finance minister, as we talked about, said that this is a commercial solution, not a bailout for when you’re talking about giving these banks access to funds, which are tantamount to a third of Swiss GDP. What’s your read on it?

HAL LAMBERT: Right, that’s that’s the big risk, right? These banks are so large. I mean, you look at Credit Suisse, his loan book was probably three times the size of Silicon Valley Banks. So you know, it’s very large. And then when you look at it on a GDP perspective, as you just said, you know, Switzerland is obviously much smaller than the United States. So it’s much harder for Switzerland to absorb this. And let’s, you know, let’s be real. I mean, banking is Switzerland. I mean, that’s their number one economic growth driver. So this is a really bad situation for Switzerland as a whole, because banking has historically been their main industry. And when you have problems in your main industry, you know, it’s kind of like Texas back in the 70s, when, when oil prices collapsed, I guess, technically, in the, in the, in the early 80s, when oil prices collapsed, it was really bad for Texas, because that was a mainstay of their economy. You’re looking at a similar situation with banking in Switzerland. So they, they’ve really got to try to make sure that this doesn’t, you know, there’s no contagion to this banking issue with other banks in Switzerland.

SIMONE DEL ROSARIO: Yeah, and this is something else that really perked my ears a little bit. Keller Sutter said that it didn’t qualify under too big to fail, because it was like a liquidity issue, not a liability issue. But isn’t that what a lot of banks are facing right now?

HAL LAMBERT: What banks most people don’t realize this banks are inherently levered 10 to one. So you take in a deposit, and you loan it out to in lending. And that’s typically done at a 10 to one ratio. So all banks have that issue. So if you ever run on deposits, you don’t have the liquidity to pay your depositors. And this is all based on trust and the ability for, you know, the depositors to trust that the banks run well, and that they’re not going to have any loan problems. So you know, perhaps she’s right that there wasn’t a loan problem necessarily at Credit Suisse. There were certainly a management problem where they were losing, and have lost billions of dollars of equity. So when you do that you make depositors nervous, and they start pulling assets out and that’s exactly what happened. They were pulling, pulling assets out in a very large space that started in the fourth quarter of last year, and didn’t seem to be abating this year.

SIMONE DEL ROSARIO: Well, this conversation certainly isn’t going away. Hal Lambert, founder of Point Bridge Capital and former director at Credit Suisse thank you so much for giving us your thoughts today.

HAL LAMBERT: Thank you.

SIMONE DEL ROSARIO: WE’VE GOT A BIG WEEK AHEAD, THE FEDERAL RESERVE IS MEETING TUESDAY AND WEDNESDAY. WILL ITS FIGHT AGAINST INFLATION TAKE A BACKSEAT TO THE BANKING CRISIS? OR WILL THEY STILL HIKE RATES DESPITE THE TURMOIL? STAY WITH US AT STRAIGHT ARROW NEWS DOT COM.