Paul Appears on the News to Address the Silicon Valley Bank Crisis

Dan Mandis: No doubt one of the biggest news stories of the day, of course, we’ve been covering it for you on Nashville’s Morning News, is the failure of Silicon Valley Bank. Signature Bank in New York is also having issues. 

President Biden just had a press conference a few moments ago, Ken. Basically, Biden wanted to instill some confidence in the banking industry. What we don’t want is a run on multiple banks.

Paul Winkler, the investor coach, is joining us right now. Paul, I know that you’ve been watching this very carefully. So let’s talk about a few things, because there really is a lot to unpack here. 

We’ve got various people saying, “Okay, so the woke policies of Silicon Valley Bank are to blame.” Other people are saying, “Well, it’s all about the rising interest rates,” and there’s a lot to unpack here. 

So I guess question number one, Paul Winkler, again, thanks for joining us, is, why did this bank fail?

Paul Winkler: A big issue was duration. When you’re dealing with a bond portfolio, when you lend money, when you buy a bond, you’re going to be paying $1000. Typically what a bond will sell for, and then it will mature for $1000. 

If you look back, in 2020, you had 10-year treasuries selling for very little. The interest rate was only 0.89%, so it was very, very low. Fast-forward to today, and now it’s over three, almost 4%. 

So you go, “Wow, you had a big increase in interest rates.” Now, let’s go back to the bond example. Let’s say I buy it for $1000. It matures for $1000, and let’s say the interest rate is only 1%, to use an easy number. 

Then I’m going to get $10 every year until it matures. Now what happens is when it matures, I get the $1000 back.

If the interest rate of bonds in the marketplace goes up to 4%, new bonds will be paying $40. Nobody wants your $10 paying bond at all out there. And what will happen is if let’s say you have a situation where you have bonds with a duration of 6%. I read that this bank had a duration of 6%, that means that for every 1% increase in the interest rate, those bonds go down 6%.

So you look at that and go, “Wow, we didn’t just have a 1% increase. We had several percent over that period of time.” A long-term treasury bond fund went down 30%, so it was huge.

When you have demand deposits where people can come in and go, “Hey, I want my money back right now. I don’t want to wait till the bonds mature.” That’s what happened. 

This stuff went way down in value. They didn’t have the assets to back it. It’s kind of like It’s a Wonderful Life. Your money isn’t here, it’s over in Joe’s house. That was what happened.

DM: Right. When you talk about interest rates, we know that interest rates are being raised to combat inflation. A lot of people, and I do the same thing of course, are pointing fingers at which politician or which party is responsible here. 

Interest rates are raised to battle inflation. Is it fair to blame President Biden because the stimulus programs that infused all of that money into our economy when we didn’t necessarily need all of that stimulus. Is it fair to blame Biden for this issue?

PW: That is a loaded question. It’s hard to say who is to blame.

DM: That’s what I do, Paul.

PW: Yeah, I know it is. I get it. It’s hard to say who’s to blame because you had a hot economy. You’re coming back from people being in lockdown and then people’s attitudes changed. 

When they came back, they said, “Man, I want to go out and do stuff. I want to live.” And they had heart changes during that period of time where they thought, “Who knows when the next lockdown is going to happen? Who knows?” 

So they got out and rebound spending occurred. All of a sudden now the demand for goods and services went up and then it didn’t slow back down again, it kept going. 

People were buying houses. They were going out and shopping. They were going out to coffee shops. They got out because they were locked down for so long that they wanted to do something other than sit around their house.

DM: One of the questions people are asking is if there’s the woke policies of Silicon Valley Bank contributed. It’s a big story. 

I don’t necessarily know if their woke policies contributed to their failure, but you could say that if that was one of their priorities, and it does seem like it was, is it fair to say that their priorities may not have been in order? Or is it just one has nothing to do with the other?

PW: They were actually getting into a lot of things besides these bonds. I’d actually read that they were getting in venture capital and some of these things that they don’t belong in. Anytime you’re dealing with the bank, you want to make sure that you have absolute safety of those deposits because you never know when people are going to come back in. 

So that was the biggest issue, they didn’t have safety in the deposits. And when people wanted their money back, they were going to get their money back.

There is so much talk about ESG, I think it’s really a separate issue just because of the fact that ESG has two actual different meanings, neither one of them I like. 

One of them is where you’re environment, social and governance investing and you’re getting into the, as people call it, woke investing. 

Then the other one is where there are companies out there that will actually go and look at the companies to see if there are any kind of issues as far as possible lawsuits down the road because they’re violating environment standards or they’re involved things that they shouldn’t be and they could be subject to a lawsuit down the road, which makes them a greater risk.

The problem with that, although it sounds good that they’re making sure that the companies aren’t subject to those types of things, you end up not diversifying as much when you do that. 

This bank didn’t diversify. There were all kinds of things that they were doing that were way outside of any academic principles that I’ve ever taught.

DM: Now regulations, are there any kind of regulations that would have given an indication that this bank was in trouble?

PW: Yeah. When you look at what the regulators are doing right now, they’re going back and saying, “Hey, is there anything that we can change?” One of the things is making sure that they’re not stringing themselves out that far, because they were trying to get higher interest rates. You remember the interest rates were super, super low. 

When you’re looking at 0.89% interest on your money for a long period of time, you’re going, “That’s not enough for a 10-year bond.” So what you do is you actually go further out on what’s called the yield curve.

When you look at long term bonds, they pay a higher interest rate because there’s more risk. If interest rates go up, then all of a sudden you’re strung out there. 

That’s exactly what they were doing, which they shouldn’t have been doing. And this is why the Fed, the FDIC, and the Treasury all had to step in to bail this thing out. 

DM: It’s a loaded term.

PW: Yeah. They’re putting special assessments on banks, and that’s why bank stocks are going down. Because if you have a special assessment, in other words, “We’re coming after you for the money to bail out these banks,” that drives down your profitability in the future, which can drive down your stock price. That’s really what happened here.

DM: Paul, the biggest question everyone is asking regarding the failure of Silicon Valley Bank and Signature Bank in New York as well, is this a precursor of things to come? The President just came out a few moments ago and he wanted to reassure the American people that the banking sector and the banks are safe. What say you?

PW: Yeah. I was reading something this morning, Dan, and it reminded me so much of TARP. Remember TARP from 2008? 

They had the Troubled Asset Relief Program in the banking system, and everybody was up in arms going, “Oh my gosh, this is terrible. They’ve got $800 million that they’re going to be buying the assets of these banks, and this is going to be terrible.” 

People forget what ended up happening, the government actually made money on the deal. So what’s happening is they’re going in and buying these assets and they’re going to be able to wait.

The government can wait for these things to mature, whereas the general public doesn’t necessarily do that. So in essence, people are worried, “Is this going to be a contagion?” As long as you have the government stepping in, and like I said, the Treasury, the Federal Reserve, the FDIC, and they provide the confidence that, “Hey, everything is going to be okay.”

Back to that It’s a Wonderful Life example, you didn’t have that back then. You didn’t have any entity coming back in there and telling all those people that they were going to be fine. 

You didn’t have a backstop. What happened was the panic was real. We used to have bank failures all the time back in that period of time. 

But now what’s happening, and it’s the same thing that happened in 2008, the Treasury stepped in and said, “Hey, don’t worry about it. We’ll backstop you. Your money’s going to be here. It’s not an issue because you’ll get your money back.” 

They had said, “We’ve got this special assessment that’s going to come out there and we’re going to make sure that everybody gets their money back. It may be a little bit of a wait.”

I saw one thing that was talking about people getting receivership certificates, where their deposits were above the FDIC limits. Yeah, $151 billion above the limits. 

They’ll have to wait, typically it’s 6 to 12 months before they might be able to get their money back. But they’ll be able to get their money back, so you don’t really have a reason for panic as it being a contagion down the line.

DM: The FDIC insured $250,000, so should people, and I’m clearly a layman, because I don’t have this kind of money, but if you’ve got $350,000, do you put $250,000 in one bank and then $100,000 in another bank to make sure that all of your money is FDIC insured?

PW: Absolutely, yeah. That is one thing that I would recommend, is not having too much money. Now, not a lot of people in the listening audience are above that in their banks, because the reality of your bank money ought to be for emergencies. 

A lot of people don’t have emergencies that are that large. People are looking at higher interest rates right now and going, “Oh wow, the interest rates. There’s some CDs out there paying 5%,” and they’re putting their money there and they’re not remember that the inflation rate is exceeding that, so they’re still losing money.

If you do have amounts above that, I would recommend it. Let’s say that you could have an emergency that’s large, and there are some people that are business people that do have emergencies that are that large and have that much money in cash. I would spread it out between banks, absolutely.

DM: A lot of people say, “Okay, so bank local.” Well, local banks are smaller banks. And so you’ve got the Bank of Americas and some of these other banks that have been around for a long time, and then you have some of the local banks maybe that haven’t, whatever. Is there a safer way to bank, big bank or a smaller local bank?

PW: Well, they’re all insured, so I don’t necessarily worry about the size of the bank as much as just making sure that you’re below the FDIC limits. That’s going to be the bigger deal right there.

DM: What should people look forward to as the news cycle continues today? What should people be looking for as far as the next aspect of this particular storyline?

PW: Well, one of the things to watch out for is not to go into panic mode and start to change investments. If your investment portfolio is properly diversified across all different asset categories, and most people aren’t, you’re fine. 

This is the one issue that I always have, and I’ve always talked about. A lot of people don’t have bond portfolios that are properly set up and making sure that their duration is low. This bank got into trouble because their duration was long. Guess what? It can happen to you too.

Making sure that those durations are lower, shorter, below five years is typically what I recommend. Then make sure that it’s diversified all over the place, because this is going to have all kinds of crazy effects on the markets. 

They’re going to go up, they’re going to go down, because people panic and then they ask questions later. They sell, then they ask questions later. 

Then all of a sudden when the markets recover, they’re not there and they’ve lost, they’ve locked in those losses. I would just be aware that you don’t want to put yourself at any greater risk by going and messing around and moving things around at wrong times.

DM: Okay. So I’m going to ask you this question because I’ve received this three or four different times. Should we take out a majority of money in cash and put it in our safe at home?”

PW: Yeah, that would be something I wouldn’t want to do, because your money in your safe at home is not insured. If you look at your insurance policies, your homeowner’s insurance policies, they will typically cover a very small amount of cash. 

If something bad happens, you’re in trouble. When you’re looking at the banking system, like I said, just stay below the $250,000 and you’re fine.

DM: All right. Paul Winkler, thank you very much as always for joining us in shedding some light on this important topic.