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  1. Home
  2. / Investing
  3. / Stocks

Here's One Thing You Can Bank On: A Tough Lesson for This Generation

The 1980s has savings and loans, the '90s have long-term capital management, and the 2000s had Enron and Lehman and now we have Silicon Valley Bank.
By JIM COLLINS
Mar 10, 2023 | 01:22 PM EST
Stocks quotes in this article: SIVB, JPM, BAC, AAPL, TSLA, PTON

Every generation has a learning experience. From the savings and loans in the '80s to long-term capital management in the '90s, to Enron, to Lehman to ... Silicon Valley Bank  (SIVB) .

What I have learned, in around 30 years of researching equities, is to not discard any possible outcome. Ever. What is happening with Silicon Valley Bank is very disturbing. There are systemic consequences of bank failure, and when a bank's CEO is calling investors to reassure them "everything is OK," as SIVB CEO Greg Becker has apparently been doing this week ... you can be pretty certain that things are not OK.

And they are not OK. Now we have one of the great bank failures of our time.

The California Department of Financial Protection and Innovation on Friday closed the Santa Clara bank. That state department appointed the Federal Deposit Insurance Corporation (FDIC) as receiver in a plan to protect insured depositors.

"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023," said the FDIC in a statement Friday. "The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors."

Silicon Valley Bank had approximately $209 billion in total assets and about $175.4 billion in total deposits as of the end of December, according to the FDIC, which said that "the amount of deposits in excess of the insurance limits was undetermined" at the time of the closure, and asked those with accounts in excess of $250,000 to contact the FDIC.

You can guess what I would be doing if I had funds in Silicon Valley Bank. It seems to me that those faded photos of folks lined up outside Manufacturers Hanover, or whatever it was called in 1929 , are quite relevant these days.

To own bank stocks, you really need to understand the unique accounting that bank holding companies face. When you put your money in Chase (JPM) , or Bank of America (BAC) or wherever, that deposit is counted as a liability -- yes, a liability.

Why? Because you could pull those funds at any time. That's what I would have been doing if I had an account at SIVB.

Your classic bank holding company has long-term assets (loans) and finances those assets with short-term liabilities (deposits). That's why an inverted yield curve is bad for banks, and why at my firm, Excelsior Capital Partners, we have zero exposure currently to bank common equity.

Dealing with an inverted yield curve is like swimming upstream for a bank. As the fact that the absolute level of interest rates is so much higher than it was a year-ago (the 2-year U.S. T note hit a 5% yield, its highest yield since 2007, in this week's trading) makes the ability of a bank's customers to generate cash flow that much more difficult.

SIVB was the bank of choice for tech startups, and we are in the worst macro environment for startups since the Great Financial Crisis.

When Fed Chair Jerome Powell and United States Secretary of the Treasury Janet Yellen try (belatedly) to stomp out the inflation fire -- that they created themselves -- there has to be collateral damage.

Silicon Valley Bank is just an unintended consequence of the Covid money storm that did nothing but convince people that Apple (AAPL) was worth $2.5 trillion, Tesla (TSLA) was worth $1.4 trillion, and Peloton (PTON) was worth ... anything.

Charles Darwin would have been one hell of a fund manager. Just make sure you don't get trampled underfoot as investors head for the exits.

(AAPL is among the holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells this and other stocks? Learn more now.)

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At the time of publication, Collin's firm owns puts on TSLA.

TAGS: Investing | Stocks | Banking | Community Banks

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