Do you want a wealthy retirement without worrying about money? Welcome to “Retire in Texas”, where you will discover how to enjoy your faith, your family, and your freedom in the State of Texas—and, now, here's your host, financial advisor, author, and all-around good Texan, Darryl Lyons.
Darryl: Hey, this is Darryl Lyons, CEO and co-founder of PAX Financial Group, and you're listening to Retire in Texas. Thanks for tuning in.
I always have to give you the legal disclosure. This information is general in nature only. It's not intended to provide specific tax, investment, or legal advice. Please visit PAXFinancialGroup.com for more information. And please text the word “TEXAS” to 74868, if you need to speak to an advisor, 15-minute complimentary, no cost, and more importantly, no pressure. But if you need to speak to an advisor, that's the best way to do it. Text the word “TEXAS” to 74868. [01:06.2]
Here's the deal, I'm going to do a show about the banking industry a little bit. This show will not be evergreen, so a year from now, it may or may not be still relevant for those that are maybe kind of going through the podcast’s older episodes. If you podcast a lot, you ought to check out some of our older episodes, there's just some incredible content. Some people do that. Some people just check out the latest episode.
So, here we are. This one is going to be about Silicon Valley Bank and I'm going to explain it in such a way that I'm not going to actually apply a lot of numbers, because sometimes when I get into the numbers, I see glassy eyes or kind of people thinking about other things, so I’ll try to use numbers judiciously, and so this will be less about numbers, but it'll give you the context. I'm going to also talk about what it means to have a Silicon Valley Bank die. [01:50.7]
The Silicon Valley Bank—you've heard a lot about it, but I think you're going to get the story here without a lot of numbers. Then, also, I'm not going to get into the political periphery stuff, because, man, some of these talking heads, they really love to go into that angle, and I know it makes for good news and I know there is some of that in here, but from a financial framework, I think I can explain it in such a way that you'll understand really what happened without getting angry. So, I think just taking that emotion out, saying, “Okay, I get it,” then you can go explore all the political ramifications and consequences.
But let me also share with you my banking experience, because it actually has some relevancy for Silicon Valley Bank. When I was going to St. Mary's University, my desire was to not live in a house with wheels. I just didn't want to live in a mobile home anymore.
There was a friend of mine whose parents had a house in Castroville that had a foundation, a nice, thick, concrete foundation. I thought, Man, that's kind of nice. I'd love to have a house with a foundation, because when you have to edge the skirting of a mobile home, you often crack the skirting, and that actually frustrated me, so I wanted a house with a foundation. When I found out that her dad was a banker, I was like, Oh, then I'm going to be a banker, sounds good. [03:01.0]
Once St. Mary's University needed a job and there was a bank right down the road of Bandera/Woodlawn, which if you've been to Bandera/Woodlawn, it's kind of a rough part of town, and the majority of people in that community, their first language is Spanish. But I went to Bank of America Bandera/Woodlawn and put my résumé in somebody's hands and they lost it. I literally went six times. They just kept losing my résumé, it was crazy.
But I kept going back, “I really want a job. I really want a job. I really want a job,” and so, they finally hired me without the résumé. It was based on persistence. I got the job, and making pretty decent money as a teller, I worked there 35 hours a week, all the way through college. It helped pave my way through college.
I started having some success there. They moved me up to a management position. I was opening and closing the branch. I loved banking, everything about banking. I knew the CEOs of all the major banks. I knew about stock options. I mean, I knew banking very well. I studied it. I nerded out on banking. I wanted to be a banker. That was my goal in life, to be a banker. [03:55.6]
Actually, in fact, I actually went and I sent a letter, this was before email, to Dick Evans, who was the CEO of Frost Bank, and I told him about my ambitions, and so he allowed me to sit up in his office in Frost Tower and chat with him about it and he was a very kind man. But then when ’99 happened, there was a lot of turmoil in the banking industry. Nations and Bank of America merged and a lot of my relationships had lost their jobs, so I was concerned about that, and so I went ahead and went this route and I have no regrets to be a certified financial planner today, leading a great team.
But in my journey to become a banker, I learned a lot, and one of the things that I learned was that it's very different than accounting, so my undergraduate degrees in accounting. When I took my accounting course and I told him, I worked at a bank, the professor said, “Yeah, Darryl, you're going to have a hard time learning this.” I was like, What do you mean? Debits, credits, debits, credits. He says, “Things are backwards from banking and accounting.”
I go, Okay, I guess I’ll figure that out, and sure enough, it was backwards and here's why. I will get to the point, so thanks for hanging in with me. When you have money—and this is obvious to you and it's obvious to me today, but at the time, it was a little confusing—when banks have deposits, those are liabilities, right? Those are liabilities. So, if you deposit money into a bank, that's a liability for the bank. They owe that money to you. [05:05.3]
If they owe the money to you, then they have to have the money somewhere in a vault, traditionally, right, to be able to pay that out, or some reasonable amount has to be in the vault and maybe some of its lent out, right? Of course, you’ve got to lend it out to make money on the difference between what you're paying people for CDs and what you're getting from an automobile loan.
Understanding assets and liabilities is an important part of understanding the Silicon Valley Bank issue, because the Silicon Valley Bank had a lot of liabilities. They had a lot of money. You saw in the last couple years, two or three years, there was a ton of money that was coming in there to the Silicon Valley Bank from all these tech startups in Silicon Valley, beautiful area, Carmel, all that area. They were all pouring money into the banks, and so for the bank, it’s like, This is awesome, but it's also a liability. The bank doesn't have that money. They owe that money. They owe that money to those people. [05:55.5]
But instead of putting in a vault like in the old school days, and then, of course, they lent it out to business owners, but instead of putting in the vault, because you don't make money if it's just in the vault-- By the way, when I was working in a bank, the Bank of America, I would carry around baskets and baskets of hundreds of thousands of dollars, as a 19-year-old. That was cool to me, I don't know why. But the vault, you just don't make money when it's sitting in there.
So, what do you do? You invest it? Okay? And so this is where it gets squirrely with Silicon Valley Bank. Interest rates weren't-- Think about a couple years ago, right? Before interest rates went up. You couldn't really earn any money on a money market or CD, so they're going, “We’ve got to earn some money here on this money. We just can't keep it in the vault.” They went on the dry-erase board or whatever and they said, “Why don't we buy government bonds?” Everyone's like, Oh, that’s safe. Government bonds, that's good, good move.
They went ahead and bought government bonds, but then they had to make another decision, like, What kind of bond do we own? You can own a one-year bond or a 30-year bond, and they're like, I don't know. Maybe they threw a dart, I have no idea, and they said, “We're going to own nine-year bonds.” I heard 10 years, but I think it's nine-year bonds. So, they bought these nine-year bonds. [07:12.4]
Now, the government bonds are legitimate. They're not going anywhere. They're backed by the government. There's nothing wrong with those bonds. The problem is this. The bonds are all good, so that's an asset of the bank and then they've got the liabilities.
Now, here's the problem. Somebody on the golf course started talking in Silicon Valley, and I don't know inside information, I don't know if somebody was on the board, I said, “Silicon Valley Bank, they've got some concerns. I'm concerned about them.” Instead of like maybe you and I talking and we get concerned about a bank, we might take out 1,000, 2,000, 10,000, maybe 100,000? A couple of these people got concerned and they started taking out 50 million, 25 million. [08:01.2]
Remember, this is a loan, so the bank has to pay these monies. I mean, just they have to pay it out to the bank. People started taking money out. They go to the vault. They scoop it up, like I would, in their hands and they walk it over, and they say, “Here's your money.” But it wasn't enough, so they had to sell those bonds I told you about.
Okay, so they call whoever is responsible up and they say, “Hey, we've got to sell those bonds because everyone needs the money.”
They go, “You mean those nine-year bonds we’ve got?”
“Yeah, we need those.”
They're like, Um … yeah, about those bonds.
“They're still there, right?”
“Yeah, they're still there, I promise. But, yeah, about those bonds. There's a problem with them.”
“And what's the problem?”
“Well, we can't sell them for what we bought them for.”
“What do you mean? Just sell them back to the government.”
“The government is not going to pay us back for nine years.”
“Then just sell it to whoever will buy them.”
“Yeah … but they're not going to pay what I said they're worth.”
“What do you mean, they're not going to pay?”
“If I sell it on the market, people now are getting 4% or 5% on bonds. They're not going to want this bond that’s paying 1%.” [09:00.8]
“What are they going to give us?”
“I don't know, but it's going to be about 2 billion less than what we have.”
They're all looking at each other in the room saying, “What do we do?” and they say, “Just sell it.” Somebody said, “Just sell it anyway. We’ve got to pay these liabilities,” so they sold it for this $2 billion loss and then they had to pay all these people that were on their yachts and everywhere else, taking their money out. After a while, they're like, We can't keep doing this. This is just not going to work. We're running out of money.
That was that Friday and the stock market halted their trading. Feds came in and people were lining up, and they weren't just lining up. I mean, I heard that they were lining up, but this is all a lot electronic, so they're going to their bank account trying to make transfers. A hedge fund, big companies. So, they stopped everything, like, Stop the panic, let's stop. Thank God it was over the weekend because here's the deal. If it would have happened during the week, this would have spread, so praise God for that. [10:00.2]
The thing about it is Silicon Valley Bank wasn't the only one that did this. They were just the first one that got caught. When I say “caught,” it implies that they did something wrong. Yes, in retrospect, we can say they did something wrong. We can even call it foolish. I don't know yet what to call it.
Now, we're learning about the CEO selling stock before. Those things definitely are integrity violations. I'm not discounting that. But I'm trying to be objective in how they made these decisions and I'm still learning about either the decision-making and I'm being cautious, because information is coming out all the time. But the reality is I'm not yet ready to say that-- It definitely wasn't illegal. Was it definitely foolish? I think so, too.
What you're supposed to do, and we do this at PAX all the time, is stress test things. Like, Okay, if this scenario happens, how would we resolve that? It was foolish that they did a stress test. But, thankfully, it happened on Friday, because a lot of banks did this, and so it gave a weekend of pause, revaluation, and everyone took inventory. [11:11.0]
Now, they did, the Feds did come in and go to eBay and offer up Silicon Valley for auction on eBay. And I say eBay. I’m using that facetiously. But they did an auction on Silicon Valley. Nobody bought. They're going to keep doing that. The feds then came in and said, “Okay, if FDIC, Federal Deposit Insurance Corporation, will cover you up to 250,000, and a lot of people had a lot more than 250,000. So, the Feds came in and said, “We’ve got you. We'll cover anything. We'll cover everything at the bank.”
The reason that's important is because the lot of the people that banked there were business owners, and had they not been able to cover their 250, or they've covered their payroll with their funds, they would have gone under and there would have been a lot of catastrophic events if people couldn't make their payroll. [11:59.1]
The feds came in and said, “Hey, we're going to cover everything above 250, so you're going to be good.” But that's not the end of the story. That's not the end of the story. There's a couple things I want to share with you and then we'll wrap this up.
One, the Feds coming in there and saying, “We’ve got the deposit holders. We're going to take care of you,” has some problems, because the Feds then are going to take everything that they have at the bank, the computers, maybe the rest of the bonds, and they're going to take them. But that's not how the rules work.
The rules, the legal rules are in a default situation, the liabilities of those banking accounts are first made whole up to 250,000, and legally, next, the next group legally should be the bondholders, so anybody that has lent bonds to Silicon Valley Bank and many people around the country, everyone has exposure to this stuff. It's all in our portfolios. It’s everywhere. The good news is it's usually not material. I’ve looked in a lot of portfolios, usually, it's not a lot, but everyone had some degree of these regional banks in their portfolios. [13:04.4]
The reality is, even though the Fed seemed like they're doing a nice thing by making all the checking account holders full and making sure they're good, I hate to say it, but in a certain way, it's kind of illegal, because the bondholders are saying there, “No, no, no, hey, after that 250,000, it's our turn. We get paid back,” and so we're going to hear about that.
Now the stockholders are last in line and they're saying, “Hey, we have zero left.” But the CEO took a bunch of money and all this fraud took place, so those class action lawsuits for the stockholders are coming out, so this is not done yet.
That's one point I wanted to make, and then the last point I want to make is I live by Romans 8:28 and I'm typically a “glass half full” kind of guy. So, here's the “half glass full” kind of thing. We were expecting volatility all throughout the year. When I say volatility, I'm talking about the market going down, and then back up and then down, and then back up. [14:00.5]
The reason it was pretty predictable in that rhythm is because every time the Federal Reserve was going to raise interest rates, the market was going to freak out a little bit. It had happened all last year and it was going to happen all this year. About the end of the year, it was going to settle because they were going to finally stop raising interest rates.
The reason that this may be a “half glass full” kind of thing is because, follow me for a second, the Federal Reserve was trying to slow down the economy. How are they trying to slow down the economy? By raising rates. What does that do? That slows down lending. So, another way to look at it is the Federal Reserve was trying to slow down lending.
What's another way to slow down lending? Another way to slow down lending is to squeeze the banks. Either regulate them, put pressure on them, make them a little bit more cautious, whatever happens. Whatever happens to the banks, every bank is going to just pause for a little bit. It's going to happen, and as a result, lending is going to slow a little bit, and by slowing lending, the Fed is getting the job done in a roundabout way, but through the banking system. Do you follow me? [15:08.6]
As a result of the Fed getting the job done or in a roundabout way through the banking system, there's a high probability that they will not raise rates, and if they don't raise rates, then that's really good for the stock market.
Okay, so that's kind of thematically something I wanted you to be aware of. A lot of content here, and thanks for hanging with me with my college stories at the bank. There's so many stories there. It's hilarious almost. When you have college buddies going through the drive-thru saying derogatory things for all your teller friends and peers and your boss to hear, yeah, it can be comedic.
Yeah, thanks for hanging with me in my banking stories, and I hope this overall helicopter overview of what happened at Silicon Valley Bank makes sense. Now you can take this information and you can understand some of the political stuff and some of the fraud, and the other stuff that took place, but you can't jump into that with emotions until you’ve kind of understood how that whole system broke down, and so, I hope this helped today. [16:08.1]
I want to remind you that your diversification works still spread out the money, very important for things like this. And as always, I want to remind you, think differently when you think long term, have a great day.
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