{"id":6210,"date":"2023-03-14T10:40:50","date_gmt":"2023-03-14T14:40:50","guid":{"rendered":"https:\/\/dahlman.online\/?p=6210"},"modified":"2023-07-13T11:24:50","modified_gmt":"2023-07-13T15:24:50","slug":"run-on-the-bank","status":"publish","type":"post","link":"https:\/\/dahlman.online\/index.php\/2023\/03\/14\/run-on-the-bank\/","title":{"rendered":"Run on the Bank"},"content":{"rendered":"\n

George Bailey<\/h3>\n\n\n\n

Let me see if I can get this right.  So Silicon Valley Bank, known for investing \u201cventure capital\u201d for cutting edge industries, was closed by the Federal Deposit Insurance Corporation.  The FDIC stepped in, because the Bank didn\u2019t have enough money to cover its deposits, just like the \u201cbad old days\u201d of the Great Depression.  Depositors went to the bank, and their money wasn\u2019t there.  It\u2019s just like Jimmy Stewart in \u201cIt\u2019s a Wonderful Life\u201d, when everyone showed up at the Bailey Bank to take out their money.<\/p>\n\n\n\n

Except, instead of folks lining up at the door, in 2023 they just hit the screen on their phones.  They move the money with lightning speed, no waiting in line, and in almost no time, the SVB bank was \u201cempty\u201d. <\/p>\n\n\n\n

So that\u2019s sucks for them, right?<\/p>\n\n\n\n

Make Money on Money<\/h3>\n\n\n\n

Banks make money.\u00a0\u00a0They do it by investing the money of their depositors.\u00a0\u00a0One way to do that is to loan that money out to others (venture capital, mortgages, car loans), and another is by investing in \u201csafe\u201d securities, like US government bonds.\u00a0\u00a0And Government bonds are incredibly safe.\u00a0\u00a0But SVB put so much money in bonds, that when interest rates went up, and money go \u201ctighter\u201d, all of a sudden SVB was \u201cshort\u201d.\u00a0\u00a0They didn\u2019t have the cash on hand to cover deposits.\u00a0<\/p>\n\n\n\n

Remember that interest rates went up because the Federal Reserve itself was raising the rates, in order to slow inflation.\u00a0\u00a0I think all of us knew that was going on, and it\u2019s hard to understand how a \u201ccutting edge\u201d bank would miss this.\u00a0\u00a0Actually, I\u2019m sure that the fine investment minds at SVB knew what was going on, but they thought they could \u201cride out\u201d their cash short fall.\u00a0\u00a0They would go out and raise more capital for the bank, kind of like when George Bailey\u2019s family got everyone in town to pitch in money around the Christmas tree.<\/p>\n\n\n\n

But the depositors found out, and started to get their money out.  And in this age of Twitter, the word went out fast, and soon the bank was caught, and the grim FDIC inspectors showed up, and padlocked the doors.<\/p>\n\n\n\n

FDIC<\/h3>\n\n\n\n

The depositors in Silicon Valley Bank are protected by the FDIC, up to $250,000.\u00a0\u00a0And yesterday the FDIC was already paying out to those depositors, their money no longer in the SVB.\u00a0\u00a0But the problem is, there are many corporate depositors, who kept their \u201cliquid assets\u201d for things like payroll, in the bank.\u00a0\u00a0And those assets were much greater than $250,000.<\/p>\n\n\n\n

Of course businesses keep their money in the bank, just like you and I do.  And if it\u2019s a big enough business, one month\u2019s payroll might be in the millions of dollars.  All of a sudden, those companies can\u2019t meet their payroll obligations \u2013 the money ain\u2019t in the bank.  The FDIC promises that they too will get their funds ultimately, but it wasn\u2019t yesterday and it\u2019s not likely to be tomorrow either.  Hard to accept the word from your boss, \u201cThere won\u2019t be a paycheck this week, but come to work anyway\u201d.  <\/p>\n\n\n\n

Shares of Nothing<\/h3>\n\n\n\n

And then there\u2019s one more set of \u201cmonies\u201d tied up in the Silicon Valley Bank.\u00a0\u00a0Most banks are publicly held companies; they sell shares of \u201cstock\u201d on the market.\u00a0\u00a0While the FDIC insures the deposits, there is no insurance for owning shares of stock.\u00a0\u00a0So all of those investors in this \u201ccutting edge\u201d bank are likely to lose their money, just like many did in the stock market crash of 2008, and the \u201cdot.com\u201d crash of 1995 (I remember well when my $4000 of Worldcom shares ended up worth about $0.45 – total).\u00a0\u00a0<\/p>\n\n\n\n

So woe-for-those Silicon Valley Bank owners.\u00a0\u00a0Their shares in ownership are literally valueless.\u00a0\u00a0And it\u2019s not just individuals.\u00a0\u00a0The Ohio Teachers Retirement System, my pension fund, owned $40 million worth of SVB stock.\u00a0\u00a0There’s some \u201cfine investment minds\u201d in Columbus, Ohio too.\u00a0\u00a0I guess in their favor, they lost over $5 billion last year on $95 billion in investments, so $40 million is just another drop in the 2023 bucket.\u00a0\u00a0<\/p>\n\n\n\n

Silicon Valley Bank screwed up.  This doesn\u2019t mean that we are headed to another Great Depression, with runs on all the banks.  Don\u2019t start lining up at the Park National ATM machine, and don\u2019t start storing that inflation\/vulnerable cash under your mattress.  Most banks (well, not New York\u2019s Signature Bank) are safe.  And the FDIC is well funded to protect deposits, as long as, the BIG-BIG-BIG banks don\u2019t fail.   And don\u2019t worry about that: those banks are why the term \u201cToo big to fail\u201d began.<\/p>\n\n\n\n

            Top Ten Banks in the United States<\/h5>\n\n\n\n