The Trouble with Banks

Fifteen years ago, the financial world hit a huge pothole, and it started with banks. It was known as the “Subprime Crisis.”  Banks lent money to people who could not afford the loans.  These loans were bundled together, re-packaged and re-sold to investors and other financial institutions as “safe.”  They were not. It nearly brought down the economy, and over 600 banks failed.

The current banking crisis started at Silicon Valley Bank (SVB), a bank where many tech companies deposited their money. Because interest rates were so low, SVB used those deposits to buy long-term government bonds.  These paid more than short-term bonds but come with more risk.  The problem became apparent when the Federal Reserve raised interest rates.  When interest rates go up, the price of existing bonds goes down. This reduced the market value of the bonds on SVB’s books.  When depositors at SVB began to withdraw their money, SVB was forced to sell bonds at a big loss.  They could not raise enough cash fast enough and was forced to close their doors.  Signature Bank was a similar story, except that they focused on cryptocurrency businesses, another niche specialty that has seen recent steep declines, as in the tech industry.

The lesson is that you need to know what can go wrong, and a lot of that knowledge comes from experience.  We have over 60 years of combined experience as investment managers.  We have seen a lot of the mistakes that people make with money.  The mistake that SVB and Signature made is a classic. In the last week investors have been flocking to Treasury bills for safety; we have been doing that for over six months.

The FDIC guarantees bank deposits up to $250,000 per individual per bank if your bank runs into trouble. But banks don’t advertise the risks they are taking.  If your faith in banks has been shaken, we would be happy to provide advice as you navigate the troubled waters of the financial ocean.  Give us a call to speak with Arie or Stephen. We provide investment management and planning services to individuals and families throughout the country.