Monday, March 13, 2023

SVB Revisited - and Panic Debunked

Expect to see a lot of "short sellers" crying doom and gloom.  But yes, this is a sign of recession.

A reader writes, noting that a lot of "innocent" companies in Silicon Valley are going to be hurt in this bank collapse.  And he may be right about that, too.  It is sad, but these financial shenanigans (of all sorts) usually end up hurting "the little guy" the most.  Depositors, of course, are covered by FDIC insurance up to $250,000.  But commercial accounts are not - making it hard for some companies to pay their bills, pay suppliers, and pay their employees.  Innocents will be hurt.

My late sister opened up an IRA with Lincoln Savings and Loan.  She lost her $1000 deposit.  My Grandfather had a lot of stock in Republic Bank of Texas and some of it was given to us when he died.  I sold my shares right away.  My sister thought it would be a good adjunct to her portfolio (see, Lincoln, above) and of course, lost it all when the bank went bust. She really had a lot of bad luck in life.

Many more will be hurt as well.  Small investors caught up by the siren song of high rates of return and instant riches will discover that their "tech stock" portfolio of money-losing companies will crater even further.  SVB will be the wake-up call to Silicon Valley that, yes, Virginia, profits do matter.  You have to make a penny more than you spend, in order to keep the lights on.  A company can't just keep losing money forever and ever, amen.

Some argue that SVB is just the tip of the iceberg and that this will have a "ripple effect" across the economy.  And as I just noted, it will.  But whether it is a ripple or tsunami, remains to be seen.  There are people who are buying "shorts" on bank stocks even as we speak, on the hopes that the market, like a herd of spooked cattle (which is all it ever is) will stampede off a cliff and sell, sell, sell! all their bank stocks.  And yes, it would be odd if bank stocks didn't start off Monday morning in a plunge.  But by the afternoon, the smarter investors will scoop up bargains as some banks will no doubt be unfairly scoured by this aberration.  Well, let's hope it is an aberration.

The chart above illustrates that the SVB bank failure is the second-largest compared to Washington Mutual.  I had a CD with WaMu when it went bust.  Fortunately, it was insured by the FDIC and I was able to extract my money (all $5000 of it!).   This sort of thing is why I keep two bank accounts and why my IRA is with one company and Mr. See's is with another (and why our life insurance polices are with different companies as well).   "Put all your eggs in one basket and watch that basket well!" Mr. Buffet is purported to have said.  It is shitty advice and he doesn't follow it himself - Berkshire-Hathaway has its hands in a number of baskets.

So yes, I feel sorry for the "innocent" companies caught up in this mess.  Then again, if they put all their money into one bank are they "innocent" or just stupid?

But getting back to the chart above, I was concerned about this "second largest bank failure" talk being bandied about as it might fall into the "Pepsi used to be a nickel!" mentality that you hear a lot, particularly from young people.  "Back in your day, a Pepsi was a nickel, a house cost $15,000 and you could buy a Z28 Camaro, new, for $3000!"  But of course, back in the day, minimum wage was $2.35 (and before that, nonexistent) and if you adjust those numbers for inflation, well, as I illustrated before, it pretty much evens out.

But the chart above is corrected for inflation and indeed, this is the second-largest bank failure in recent history. What about the Great Depression?  Aha!  Trick question!  You see, back then, banks were largely local - lending out money at 6% and paying 3% in interest on deposits - so-called "bank interest" and it was a stable system for a long time.  There were no mega-huge nationwide banks like we have today.  All banking was Mom&Pop and when a small bank had a "run" (often induced by panic) it pushed them over the edge.  They had no cash on hand to pay depositors, as the money was lent out to mortgage holders (who often weren't paying their mortgages).

So hundreds, nay, thousands, of small local banks collapsed in the wake of the 1929 crash and that was arguably a larger failure than even WaMu - by a country mile.  We survived that.  We also survived WaMu and the 2008 recession.  We will survive this one, too.

But the chickens are coming home to roost for these money-losing companies.  And a surprisingly large number of "Silicon Valley" companies have never made money or made money for only a few quarters here and there.  The founders drew hefty salaries, though. And by hyping the stock price to the rafters, the founders (and venture capitalist investors) were able to sell shares and make millions - if not billions - in the process.  The idiots at aptly named r/wallstreetbets lost thousands each, but there were millions of them.

It was only a matter of time for people to realize it was nonsense that "GameStop" was going to somehow beat the trends and become a wildly profitable company - or that, even post-pandemic, AMC theaters was going to be worth more than General Motors. Think about the theater experience - you go to see a loud and annoying explosion movie based on a comic-book franchise (the whole genre of which is finally sputtering out) and there are nothing but teens and 20-somethings in the theater, behaving badly and talking and texting the whole time.   You want to spend $20 on that?  When you have a 60" television at home?  No, no, "back to theater" has about as much legs on it as "back to office" I think.

So yea, the collapse of SVB, which in part was triggered by the collapse of the bullshit Silicon Valley economy collapse of 2022, will trigger further collapses as people start to wake up, as from a slumber, and realize that no, Elon Musk isn't going to save Twitter (and no, he isn't going to buy SVB either - must he insert himself into every situation?), nor is Uber or AirBnB ever going to make money, even as they squeeze their customers for every last cent.  And those folks who mortgaged themselves up to the hilt buying houses and renting them on AirBnB?  Expect a wave of foreclosures.   And yes, this means, the over-inflated value of your house is going to drop back down.

No, my house is not "worth" $800,000, even if someone paid that much for a similar house down the street.  I know this, as just a year or two ago, it was only "worth" $500,000 and houses just don't appreciate by 20% a year for no reason - particularly in a market where the population is stalling.

It was a helluva party - now is time for the hangover.

So how does one best handle this situation?  Do you pull all your money from the bank and put it into "Crypto"?  Or do you cash in your IRA and put the money in your mattress?  Both are stupid responses because they are panic responses.  But some folks will do both, of course.  And no doubt, "crypto" will go up slightly due to demand increase, which will cause more idiots to "invest" in it, and we will see the same pump-and-dump happen yet again.  Kinda brilliant, if you think about it - crypto is the grift that keeps on grifting.  Most cons peter out after a while and are never heard from again.  Not Bitcoin!  This time, for sure!

Of course, the best solution is to not be leveraged in the first place. Companies - and people - loaded up with debt will find it hard to service those debts - and many already are - as interest rates rise.  If you are debt-free or at least keep your debts logical and manageable, then you will survive this recession in better shape.  What we saw last time around in 2008 was people who were over-mortgaged in order to get a tax deduction on the interest, and at the same time, their money was tied up in a 401(k) or IRA (again, to get a tax deduction) but was untouchable, without paying onerous taxes to withdraw it.  So people were "wealthy" on paper because their houses were inflated in value and their mutual funds were inflated in value.  And feeling "wealthy" they thought, "why not have fun with our money?" and spent it.  I bought a vacation home - what did you waste money on in 2006?

Today, I am less worried as I am debt-free.  Even if I "lost it all" I would only need to earn $36,000 a year to maintain my lifestyle.  That would not be hard to do, considering that Social Security alone would pay a hefty chunk of that, if not all.  A part-time job would cover the rest.  But that being said, the odds of "losing it all" are pretty slim, when your portfolio is diversified.   Sadly, a lot of people with deposits in SVB were not diversified.

Sadly, too, Peter Thiel withdrew all his money from SVB last week.  If there ever was a guy everyone was rooting to go bankrupt (besides Musk) he was that guy.  What a first-class jerk!  But I digress...

Reading the Wikipedia entry for the SVB collapse, it isn't hard to figure out why the bank went bust:

SVB was a commercial bank founded in 1983 and headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest bank in the United States, and was heavily skewed toward serving companies and individuals from the technology industry. Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB. Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have been clients of the bank. In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs. Prior to March 9, 2023, SVB was in "sound financial condition," according to the California Department of Financial Protection and Innovation, though an increased number of short sellers began to target SVB earlier in the year.

As of the last call report of the bank, filed on December 31, 2022, it held 209 billion in total assets, with 175.488 billion in total deposits, of which the bank estimated 151.592 billion were uninsured (86.38 percent).  Emphasis added in italics.
And in reading this, it is kind of hard to feel sorry for the parties involved. These are the same people who turned silicon valley into bullshit valley, replacing real silicon hardware with bullshit "apps" and schemes to make money, usually by monetizing shit jobs like driving a taxi or delivering food - often flouting local laws and regulations, not only in the US, but worldwide. "Sure, we'll just run a taxi service in Bombay without any sort of licensing and then siphon off 50% of the money to us. What could possibly go wrong?"  India was not amused. Most localities were not amused.

If you think about it, there is really no difference between SVB and some little insolvent bank in the Midwest, circa 1932.  That Mom & Pop bank lent money to local farmers, who were having trouble paying their mortgages.  If the bank foreclosed, well, no one had the money to buy the property at auction - and the bank lost money.  The deposits in a pre-FDIC era (thank you again, FDR!) were all uninsured, so if people got nervous about their savings, and started to withdraw cash, well, there was no FDIC to back up the bank, and a "run" and eventual insolvency was assured.  Monoculture at work.

In many ways, SVB was a unicorn - or a throwback to an far earlier era.  Most nationwide banks have a plethora of depositors, most with balances far under the $250,000 FDIC limit.  The average Joe isn't going to lose money, unless he does something stupid like take out all his cash and buy "crypto" or stuff a mattress with it.  On the other hand, as I noted before, most IRAs are in mutual funds and not insured by the FDIC as a result.   Like I said, I did have a CD with WaMu in my self-directed IRA and the money was paid back to me (including interest).  I suppose a few people with self-directed IRAs might dump their stocks and mutual funds and plow money into CDs, which would have the effect of bringing down interest rates.

It's going to be a bumpy ride.  The "labor shortage" may quickly go away (as it usually does, as such labor shortages usually precede recessions) as people are laid-off and start appreciating their jobs more.  In turn, the wild spending on stupid things like $20 food delivery fees will disappear overnight, bringing down prices as spending is cut back.

Last week, I went out with my hedge trimmer and once again chopped away at the ligustrums.  You have to do it - prune a plant every so often - otherwise it gets unwieldy and even sickly, as it becomes overgrown.  The next year, after a good pruning, however, it will bloom and grow and look beautiful.

Silicon Valley needs a good pruning.  So sorry if you are on that branch!

UPDATE:  Since I wrote this, events have moved quickly.  The Fed has promised to make whole all depositors, starting today, even if their balance is far above the $250,000 limit or they are commercial customers.  Some Silicon Valley startups had all their money in the SVB as a precondition of obtaining loans from the bank, so they were utterly screwed if they lost all their money.

I had a similar situation when I had callable notes on my office building and investment properties.  Why would a bank do this? Well, they want the business, to be sure, but they also want to have a handle on the solvency of their borrowers.  The best way to do this is to have their banking business, so they can monitor the health of their borrowers on a day-to-day basis.

Janet Yellen says that taxpayers aren't "bailing out" the bank, but instead the FDIC insurance fund is paying off depositors.  Hmmmm..... maybe the money isn't coming directly from taxpayers, but it is coming from government coffers.   In the end, we all end up paying for this, somehow.

Quite frankly, I think they did this to avoid a panic.

That being said, shareholders and bondholders of the bank are wiped out in the deal.  In a traditional "bailout" the shareholders or bondholders would be protected in part, although the bailouts of other companies, such as the car companies, were predicated on the government receiving stock or other equity interest - which allowed the government to be paid back (and then some) in some instances.  And in the case of GM, shareholders were told to take a hike.  Yea, I lost five grand in that deal.

Also of note, two banks specializing in the "Crypto" business have gone bust.  Didn't see that coming, didja?   Again, monoculture.  and in this case, monoculture that was a total scam.

Yet, the "true believers" are still "holding" their Gamestop and AMC shares and "investing" in crypto.  Well, to hear the shills online tell it, that's what they're doing, they say.  No doubt, some idiot out there actually believes it, too.

The party ain't over, yet. SVB collapsed because Venture Capitalists pulled back from "tech" and that is going to cause a lot of money-losing "tech" companies to be pumping a dry hole in the next few months.   Money-losing companies have to rely on loans or investments from VCs to stay in business.  When that money dries up - and interest rates climb, well, do the math on that.

Quite frankly, I think most Americans are rooting for much of these "tech-that-is-not-tech" companies to fail.  We realize now that social media and much of this online crap has not made our lives better, but far worse, while enriching a privileged few who really did nothing but land in the right place at the right time - but to hear them tell it, it was all bootstraps!