The title of our 100th episode is also the Jeopardy answer to the question, “What type of bank do I hope my money is in right now?” The big 100th episode celebration takes a back seat to the big questions, like Why did this happen? What will happen next? And what, if anything, should you do about? You’ve got questions and we’ve got answers on this informative episode of Plan For Life Now
Steve:
All welcome to Plan for Life. Now, episode 100, Dave, people been waiting for this episode and I’m afraid to disappoint people, but we’re not gonna do some of the stuff we talked about because this, I don’t wanna ever say emergency episode cause I don’t think there can be anything emergency about our podcast. Uh, but it’s, this one’s sort of in response to what’s been going on, right? And we felt like we needed to do it.
Dave:
Yeah. This is a podcast that is actually, I think it may be fitting for the hundredth episode. You know, there’s enough going on right now. I, I hate to use emergency or crisis. That is what the media’s calling it. I mean, we’ll get into that, but you know, this is more to inform you and it’s more serious. And we do have some clients who’ve been concerned about this, most importantly.
Steve:
Yeah. Right.
Dave:
So we wanna address what we will, what, what do they, I will call it the banking crisis,
Steve:
Ah, for lack of a better term. Let’s go with that. And yeah, it’s, you know, when we see three or four clients emailing, calling, asking questions about it, that means that at least 10 times that many are thinking it, but just haven’t gotten around too. Or, or sometimes like people say, well, I didn’t wanna bother you guys with these questions. They say, well, isn’t, isn’t it our job to be, you know, bothered quote, unquote by clients? I mean that, that’s the whole idea is that you can come to us and ask these questions.
Dave:
Yeah, that’s exactly was my, once you have three or four or five clients or anybody coming to you about something, it means that’s the tip of the iceberg. And people don’t like to bother us, even though that’s the number one thing we want to be, is bothered by clients. Cuz you’re thinking about it, you don’t quite understand it. But the reality is, a banking crisis would make the average person, uh, a little worried when they hear banking crisis. And then the media goes off on that and then you, you start to read the articles, but it starts to get convoluted. So, right. I I, let’s start to explain, I’m gonna start off, I know you’re very good at editing what I say and coming in with facts. No, go ahead. I’m gonna, I’m gonna come in with my feeling on what this all is from what I’ve read, and then just gut feeling.
And then I want to see how you react and what you’re feeling about what all this is. So basically what this is, is there was the financial crisis in 2008 where truly the very biggest financial institutions, including the biggest banks in the world, which most were situated here in the United States, were falling apart from everything you already know about the 2008 collapse. In response to that, and importantly, and I know this is a generalization, but as a general rule, democratic administrations, uh, tend to do regulation harder than Republican. So during the Obama, uh, administration, which was all of the regulation, you had the Dodd-Frank Act, which basically said, we are going to put into effect all these regulations, all these rules, all these restrictions that says a bank where you keep your money cannot fall apart because of all these rules. Or I, if it were, it, it’d be an extraordinary situation.
That’s how tight those rules were. Now, as time went on and, and those rules are fantastic, as time went on, we got into Trump administration and they are Republican administrations tend to deregulate. And what they did was, and in all fairness with a, a lot of Democrats also on board, I I was gonna say it was bipartisan support. Yeah, no doubt about it. So cuz it’s not as always, these things are not, money’s usually not political. And in this case, I, this is not really a political, both sides are on this. They decided, you know what, these restrictions are working great, but we don’t really, it’s not fair to smaller, smaller banks. Right? So the bottom line is if all these restrictions will be on for banks with assets of 250 billion or more, but if you have less than that, we’re gonna release some of these restrictions just so these smaller banks, smaller, there’s a lot of big banks in the smaller can compete.
Now, throughout all of this, and during, from the beginning, you came up with a really important phrase for now and that is too big to fail. So basically if you were banks, assets are 250 billion or more, which is the top base right now. It’s about the top 12 banks in oven. God only knows how many banks. The top 12 have well over 250 billion of assets. You are still under the Dodd-Frank regulation, and you’ve come up with this phrase that it’s too big to fail, right? Meaning not only are all these regulations in place on you, you’re just not gonna fail. You’re too big to fail. We we’re never gonna have a financial crisis because the, the reasoning was even though we’re, we’re like going back there on Dod Frank N 90 or whatever percent of the deposits are in the top 12 banks of the two big to fail. So in in general, the, the system can’t collapse even though, well we’re, we’re doing this routine. And,
Steve:
And just, just so you know, the, the threshold before this bipartisan repeal in 2018, the threshold was 50 billion, right? So it went from 50 billion up to 250 billion. So like you said, you know, that that allowed a lot of these quote unquote smaller banks, but they’re still you’re still pretty big, uh, to not have to deal with the, the Dodd-Frank regulation, which is essentially a very rigorous stress test where, you know, what happened in the financial crisis is all these assets went down at the exact same time and nobody had modeled that out. I mean, amazingly they’d said, well, national housing can’t go down all at once. Well, the Dodd-Frank regulation and the stress tests are designed to put these banks through these process where you say, what if this happens? What if this happens? You know, will you be okay
Dave:
Right Now? The other thing I I, you might know this, I don’t know when this one effect, but the other thing that happened, I guess along with this originally was the, your deposits are now safe up to 250,000. It used to be a hundred thousand. I don’t know when that happens,
Steve:
Do you? That was in the financial crisis as well.
Dave:
Okay. So that’s in there too. And that’s a big deal. So with all that going on, everything was fine basically until this Silicon Valley bank had their issues. Now one of, forget about their issues, cuz that starts to get complicated. The bottom line is there was a, maybe we’ll talk about why there was a run in the bank. Oh
Steve:
Yeah. I mean, let, let, let’s start with, you know, or start , let’s, let’s go with some basics here just on banking and, and I don’t want to get geeky, but on the fractional reserve banking, you know, nature, what, what is that? And this is just very in general, and I think most of us know this, is that when you put your money with a bank, they don’t just sit there and hold onto it. Now I remember learning this in second or third grade. I, I was just baffled by it. I, I thought that if I deposited my money in a bank, you know, they stuck it in a little box. They put Steve, Kelly, Annie on it, and then if I wanted to get my money out, they would go into that box. Well, that’s not at all what banks do. You know, if banks take in a hundred billion in deposits, they might keep 10 or 15 billion readily available.
And what do they do with the le the rest, uh, they loan that money out. You know, this is what, what banks do. So they’re gonna loan it out and mortgages and auto loans and credit card loans, or if they can’t make those kind of loans or don’t want to, they will buy bonds. You know, it’s essentially what you’re doing when you’re buying a bond, you’re loaning money. So what happened with Silicon Valley Bank specifically is they were doing just normal banking practice. You know, take money in, take in all these deposits, loaning money out, buying bonds, things like that. But the problem was that they were heavily concentrated in, as the name implies in Silicon Valley and a lot of these tech startups and things like that. Well, in 2000, 2021, those companies were getting funded left and right. I mean, it was so easy to get financing that, that they were getting all of this money and they didn’t need, you know, when our startup gets funded, just make up a number.
Say they get a billion dollars in funding, well they don’t need a billion dollars all at once. They, they’ll need, you know, couple whatever, couple million dollars a year for quite a long time. So they deposited in a bank. Well flip the script that what happened last year is no companies were getting any funding and they were burning through cash. So now you’ve got this very concentrated deposit base that’s burning through cash. And what happened was Silicon Valley Bank realized that they were going to have to sell some of their bonds. So essentially the loans they were making to make sure they had enough reserve requirements and you had essentially a classic run on the bank. I mean, this in theory could happen to any bank where if all the depositors decided they wanted all their money at once, well the bank’s not gonna have that. Like I said, they only keep 10 or 15% on hand. But in the world of the internet in a highly concentrated deposit base, , they had, I don’t know what the number was, I think it was something last Thursday, they had 42%, uh, you know, of the, the deposits were requested. So obviously they’re not gonna be able to make that, uh, make that happen. And, and here we are.
Dave:
Yeah. Well here’s also, by the way, they also made a bet with a lot of, when they had a lot of, when they were sort of cash heavy, they bet a lot on long-term bonds.
Steve:
Wow. Yeah.
Dave:
And, and one of America’s greatest financiers, if they were advising them, would never have allowed that. That of course being you, you’ve always been against, we were, when I say we, but it’s just your mindset was always don’t put money in the long-term bond thing cuz interest rates are gonna go up at some point,
Steve:
Right. So I, I mean, to give you a sense, you know, uh, January 1st, 2021, if you bought a one year government bond, you bought a one year government bond, you were getting paid 0.39%. So you’re getting paid almost nothing. You know, today, I haven’t looked today cuz it’s been moving a lot, but four and a half to 5%. So what happened to, to finish your part of it here and, and why they failed and why they, you know, hopefully are not like a lot of other corporations is they bought these longer term bonds, interest rates went up much faster than anybody anticipated. So they had massive losses, you know, no, no one , if they had to do the, the stress tests in the Dodd-Frank, uh, and, and you know, some of those things they would’ve seen, you know, interest rates go up, massive losses, you know, we could be in trouble there. Um, so I mean, you know, at the end of the day it’s, it was bad risk management, concentrated investor deposits, uh, you know, just a lot of things that they did wrong there.
Dave:
All right, so here’s now my, now my takeaway, getting all away from explanation way back into forest from trees. These bank, if you looked at the assets of the top 12 banks, they are all top 12 are way more than the other ones. Like the difference between S V B, which was like number 20 and the top 12 is at least twice as many assets that they had, right? The two big, so you’re, you’re basically in two categories, right? So this are people what one I’m worried about banking in general, all right, , you have a choice now, too big to fail as the name implies too big to fail, right? Under all the regulations there, or a, a category of every other bank that I put in, in as a new category called da, I’ll get back to you on Monday, . So where should I put my money?
If you’re worried about, I’m going, what’s the other thing first, there’s the F D I C guarantee. How many people have more than $250,000 in any one bank? You’re worried about it today if you, you have to believe in the F D I C protection, right? And that’s 250,000. But I think my gut feeling is a lot of people are, you know what? I get the F D I C thing, I just don’t want my bank bank going under, forget it. I don’t wanna see in the newspaper. I don’t, I just don’t wanna see that kind of fragility in my bank. So my feeling would be a, rely on that $250,000 deposit. Yeah. And b, if it’s me, it doesn’t have to be you. And I’ve been, this, this was me before, not, I like the too big to fail. Why? Because it’s too big to fail and it’s not going to, and the government’s already said that, besides all the regulations have to do versus, and this is your choice and I’ll get back to you on Monday,
Steve:
, that’s, uh, that’s a good characterization. You know, and we should mention that, you know, Silicon Valley Bank was not the only one, uh, signature Bank also failed. Not the same story, but a similar sort of story in the sense that, you know, they, they got heavily into the crypto world. You know, we know what’s happened with crypto in the last 18 months. You know, it’s gone from being this fantastic party where everybody’s getting rich and there’s all this money to everything collapsing, all kinds of fraud with, um, you know, FTX and Sam Bankman freed and all that. So, you know, signature Bank sort of had the same thing. That very concentrated deposit base, people started to pull money out. And frankly, you know, from what I understand that they weren’t even in a situation of insolvency quite yet. But the regulators, I read this somewhere, the regulators were so unimpressed with the management that they took over the bank.
So, you know, a very similar thing also, you know, in that category of the less than 250 billion. So they did not have to do the same sort of stress tests there. Now, apologies for my voice. I’m still getting over this cold or god knows what it is. Um, you know, of course we wanna pull this back, you know, for those of you that love the details and all the nerdy stuff, the last 15 minutes were probably great, but for those of you who say, okay, just tell me what this really means from my situation. So I sort of broke this down here, Dave, into, you know, four different big assets and I know we could, you know, dice it and splice it in a million different ways. But, you know, how does this relate to my stock investment? Well, I, you know, , the answer that I wrote down on paper is, I don’t know, but I don’t think it really changes the narrative compared to what we have been talking about, which is that we might go into a recession.
It certainly seems like the economy is slowing down. You know, it, it seems more likely than not that we will go into a recession. So, you know, is this one more factor that might tip it that way? Yeah, but you know, as we’ve always said, we’re not investing in stocks for later this year or next year or even the year after. You know, we’re investing for in stocks for the longer term stuff. Um, so, you know, I I don’t think that it’s going to impact necessarily how we view investing in stocks, you know, this week versus a month ago.
Dave:
Yeah. I’m gonna throw in though, from a couple short term feelings I have. One is, and remember this. Now what I’m about to say is, this is long, probably long gone when you hear this podcast, but you know, we’re the stock futures. This is, uh, Tuesday, Wednesday, what day is today? I forgot what day today is. Wednesday morning,
Steve:
Baby. Where are the IDs of March?
Dave:
Right? So credit suis, is that how you say it? ? Yeah, that bank. Anyway, right now they’re having problem. I will, you know, what’s, what are we talking about? There’s too big to fail. There’s, eh, I’ll get back to you Monday and there’s, eh, we’re totally reliant on the Saudi government . So this one right now, the Saudi government saying, eh, , I don’t know how much we’re gonna support you right now. There’s stocks plummeting, it’s so a short term right now. I’m just looking at the s and p futures right now. They’re really down a lot with this. So you’re gonna have incidents, I think, in the stock market that could be real short term blips like this during this crisis. But what’s, I’ve been Mr. Silver lining in the last few podcasts. I’m actually gonna come up with a silver lining here for stocks with all of this going on.
And that’s silver lining is because of all this what’s going on and all this turbulence, the Fed may be in a position where, yeah, I don’t know about continuing Tori raise these interest rates. Yeah, with all this go, we may have to like, I don’t know, maybe this quarter we won’t raise them. Now what’s that gonna do? That’s gonna give a, again, a short term rise, most likely to your stocks as Yeah. Or possibility. So I think in the short term, you’re gonna have some possibilities for some positives in stocks. If, if the crisis and if the crisis dissipates and they don’t feel that, well that’s good cuz the crisis dissipated. If it doesn’t, then you actually might see as stocks did during, uh, covid, you know, crisis, but not really for companies looking for those interest rates to, to stop going up.
Steve:
Well that was what you just said is precisely what I wrote down for the effect for bonds, which is, you know, the, the market was, uh, originally expecting the Fed to raise rates three times, three quarter point rate hikes. And then it went to, well maybe, and this is, you know, everybody’s always trying to read the t leaves when, when Jay Powell says anything, but it went to maybe some of those rate hikes will be a half a percent instead of a quarter of a percent. Well, after this occurred, , those expectations went down again. And bonds had the best two or three day rally in, I don’t know if it was in history, but it was in a long, long time. You know, see this phenomenal rally there in bonds. Um, so, you know, I wouldn’t think that, you know, if you’re holding a high quality bond portfolio, and still we would prefer to be on the shorter end of things.
I, I don’t think this really impacts the way in invest in bonds. Um, other things that I wrote down here, CDs, you know, we have been utilizing those for some clients. Um, you know, only thing I would say is, you know, it’s gotta be less than that 250,000, you know, not that we ever would go above that, but you know, you, you don’t want to be overly concentrated, even if it is one of those too big to fail, what’s the point? Why are you, you know, why are you throwing caution to the wind and, and gambling there when you could easily diversify into multiple companies? And then Dave, the last thing that I put down here is annuity contracts. How, how, what’s your take on, you know, failures of banks and then compare that to failures of annuity or life insurance companies, I should say?
Dave:
Uh, so I forgot to write that. I actually wrote notes for today’s show because I had thoughts and I forgot. I was thinking last night about that. My thought is it’s just getting old. Because always you’ll see there is this bias, you know, you always know people listen to us for a long time, know our field, everything is just a tool in the toolbox, whether it’s annuities or bonds or stocks or your cd, whatever. So right. There’s always, oh my gosh, for whatever reason I’m worried about the financial secur of my annuities. For example, things that are backed by or sold by a life insurance company, which have always a, have always had their own backdrop, which I don’t feel like getting into. We’ve explained it a million times on this show. Yeah. But b they’ve always shown to be stable. This is just historical. You’ve never seen these crisis issues with life insurance, bro, with annuities. You’ve never seen a run on annuities, a run on any of this stuff during the great recession, during anything during the tech bubble, during this.
Steve:
Yeah, and I mean, I’ve said
Dave:
This, there’s never been an issue yet for some reason it’s brought up, it hasn’t been brought up during this crisis yet, but it’s brought up all the time during financial crisis, especially by, I think anti annuity people for whatever their reason is or anti-life insurance products, they say, well, you don’t, you don’t know about the stability. I don’t know from a historical point of view, you do know about the stability and there’s a lot of backdrops and protection state regulations that, that have led to those stability. So when I look at those products, I look at the, I personally never say never about anything, but I look at them in my own portfolio and, and with clients as things that I feel extremely good about and, and don’t worry about it. And that’s from a historical perspective and the backdrops that they have.
Steve:
Yeah, I mean, you just don’t have the, the failures and you know, I always say it’s, it’s not, you know, do you, do you really think that the, the people, the men and women running the life insurance companies are smarter than the people running the banks, right? I don’t think so. I think they’re the, the same sort of people. I think it’s the regulations, it’s the requirements. It’s the reserve requirements where life insurance companies have to keep, you know, these reserve requirements. And so that’s why you saw, you know, I don’t know if, I don’t even want to say that nobody in, in the financial crisis, no life insurance companies went under. Cuz I think there were one or two really small, and I think there was some fraud involved there. But you know, the numbers on banks that went under were in the hundreds, you know, so, but
Dave:
Look at the other re I mean if that’s one reason, and then there’s the technical reasons, but there’s also the obvious emotional reasons. These bank issues are not if, if, and this is, if svb, if Silicon Valley banks, whoever chairman didn’t say, Hey, publicly, instead of raising money behind the scenes, we have a money problem. If you keep your money here, we’re good , right? And everybody said, oh, I’m taking my money out now, . But it’s an emotional thing. Like you said, a run on the bank is emotional, people get emotion, there’s never there a run, oh my God, there’s a run on my monthly annuity payment. Oh, there’s a run on death benefits. What? So
Steve:
It’s not crisis,
Dave:
This country that’s far more important than your money. So
Steve:
They’re not on demand deposits,
Dave:
. So there’s an emotional aspect to these other products that you’re not gonna see the systemic failure, mainly because you don’t have emotional runs usually on these kinds of products as well.
Steve:
Yep. All right. I think that, uh, just about covers it unless you got anything else you want to throw in there?
Dave:
No, all I wanna throw in is, again, some people worried about it. I, you know, in our opinion, I, I would say it’s business as usual, take the necessary steps to make yourself feel better. But, you know, we live in a country where you can take those necessary steps. If you feel like, you know, a, it’s no-brainer is the $250,000 F D I C guarantee. That’s just of course something to make yourself feel better. And b, you know, if you feel like you don’t wanna see this kind of scenario in your bank, in, in the newspaper, I guess there are no guarantees, but the thing we have is too big to fail. And if you start to do a little research, you’ll realize, wow, I feel pretty darn good about having my money. If that’s my concern. And a lot of people might just feel the 250,000 is enough. I mean, you know, that’s up to you. But to me, this, this is not something from the short term or the long term by making what seemed like the obvious moves to panic about, to worry about, and, and you shouldn’t worry about it.
Steve:
All right. Thanks for joining us for this special episode. We’re gonna save our 100th episode, reminiscing for the hundred and first episode,
Dave:
Right? Where not only will we have this crisis, you won’t have a cold, you now have the hiccups, you won’t have any of these things going on. So we can focus hundredth.