This whole Silicon Valley situation has been frustrating, as it was totally preventable in my assessment. While everyone I have listened to and read tries to pass blame, the fact is that blame gets us nowhere. Progress is made from knowledge, understanding and self-accountability. This is why a core value of my firm, Julius Wealth Advisors, is knowledge, as we help lay a foundation of financial literacy with clients. We try to teach people how to fish versus giving them a fish.
If both the management team of Silicon Valley and its consumers were knowledgeable, this probably would not have taken place. Just remember, when we point a finger at others, we have three pointing back at us. We can’t blame regulators or politicians either, as we can’t regulate all forms of human behavior. Plus, regulation tends to be backward looking, as it’s tough to regulate the “unknown unknowns.”
In addition to articles I write, I also have a podcast, The Big Bo $how, which is distributed on many podcast platforms including Spotify and Apple Podcasts. In my latest episode, I dive into the latest banking crisis in detail, and outline four key lessons we can all learn from this. While mistakes and controversies at times happen, the bigger issue is if we do not learn from them. With this said, here are four lessons we can ALL hopefully learn from this, as it was totally preventable in my opinion:
1. Stretching for Yield
It appears that Silicon Valley’s management team stretched for yield/return. A fundamental principle of finance is if there is a higher return expectation, there is also a higher expectation for risk. Their deposit base grew by 2.6X from 2020-2022, of which they only used ~32 percent to make loans. Granted, they grew so fast, they probably couldn’t underwrite quality loans that fast. However, they were paying depositors about 1.1 percent, which also grew about 4.7X. Thus, given the low-interest-rate environment (the three-month Treasury only hit <1.1 percent in May 2022) they had to stretch for yield. So, where did they go …
2. Understand the Concept of Duration and Asset/Liability Matching
They bought longer-duration assets that had a higher yield. Their bond portfolio had a yield of ~1.9 percent. Presto, problem solved! Not. Now they have long-duration assets versus short-duration liabilities, in a low-interest-rate environment. I mean this isn’t Finance 101 stuff, but if you run a bank, you should know this isn’t smart. Duration and interest rates are indirectly correlated, every 1 percent move up in interest rates drops the value of your bonds by its duration. So, if the duration of the portfolio was 6, with the 10-year Treasury moving up ~1.4 percent in 2022, the portfolio went down by probably 8-9 percent, which wipes away their equity cushion.
3. FDIC Insurance
While I have sympathy for the employees of these venture capital start-ups that got affected, it boggles me how high the percent of uninsured deposits Silicon Valley Bank had. FDIC insurance was created in 1933 to protect deposits from bank insolvency during the Great Depression! How did so many “smart” depositors not understand they only had $250k of protection?!?! Especially with plenty of ways to get more protection outside of a singular bank account.
4. Boring Is Beautiful
As humans, no one typically wants to be considered “boring.” We have this desire to feel “cool” and part of the crowd, which unfortunately leads to short-term herd behavior. I’ve always subscribed to the statement that slow and steady wins the race. Be the tortoise, not the hare. When it comes to investing and finance, being part of the crowd typically ends in disaster in the long run, though it might feel great in the short term. Don’t be afraid to ask questions and learn from others, even if you feel like an anomaly. And, if someone accuses you of being “boring,” thank them, as you are probably making long-term progress.
For what it’s worth, all the numbers I laid out on points 1 & 2 on Silicon Valley Bank were all from page 49 on the annual report (10k) they filed on February 24. It was all there for people to see … the CEO and CFO saw it, the CFO sold ~$576k, and the CEO sold ~$2.1M worth of shares three days later, on Feb. 27.
I lay this out as a way for all of us to learn and gain some knowledge. Not to pass blame or worse anger, as at the end of the day, we are all in this together, and we all have things to learn and grow from.
If you want to learn, I laid this out and some more information on my latest podcast.
To getting better together!
Jason Blumstein, CFA® is the CEO & Founder of Julius Wealth Advisors, LLC (www.juliuswealthadvisors.com) a registered investment adviser. He is also the host of The Big Bo $how podcast available on Spotify and Apple Podcasts. Jason has been investing and educating himself on personal finance since the age of 10. His company’s mission is to empower people to live their best financial lives, while fostering an ecosystem of integrity, knowledge, and passion! Jason currently resides in Englewood with his wife and two kids. He can be reached at (201) 289-9181 and/or [email protected]
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