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1st Quarter 2023

April 11, 2023

Inside Financial Connections Newsletter

  • ANATOMY OF A BANK RUN – STYLE 2008 VS. 2023
  • DEPOSITS IN A RISING INTEREST RATE ENVIRONMENT
  • TRYING TO WRITE INSURANCE COVERAGE WITH ENVIRONMENTAL CONSIDERATIONS
  • CPR AND AED TRAINING
  • DEFLATION OF SETTING UP YOUR HOME OFFICE

RAINSTORMS

Due to the rainstorms, many Californians may postpone paying income taxes, filing federal and California tax returns, and making 2022 contributions to IRAs and health savings accounts (HSAs) until October 16, 2023. We suggest that you include a specific note of extension with your postponed IRA and HSA contribution in case the check processor is not aware.

ANATOMY OF A BANK RUN – STYLE 2008 VS. 2023

On September 25, 2008, Washington Mutual Bank was taken over by the federal government and put into receivership by the Federal Deposit Insurance Corp (FDIC). There had been a run on the bank. Account holders withdrew $16.7 billion in deposits over nine days. The mortgage crisis creating the Great Recession was upon us.

Eventually, JPMorgan Chase bought Washington Mutual. This was the largest bank failure in U.S. history.

The FDIC estimates over $40 billion (20% of their deposits) were withdrawn from Silicon Valley Bank (SVB) on Thursday, March 9. On Friday, March 10, 2023, the FDIC took over SVB at 9:00 AM. Usually, regulators take over at the close of business.

Start up and tech companies exceeded the FDIC limits – keeping millions in their accounts. As most of you have read, the majority of the deposits at SVB exceeded the FDIC limit of $250,000 exacerbating the run.

The public waking up to FDIC limits started runs at other banks such as First Republic and PacWest Bancorp to name a couple.

The dichotomy here is an individual or company wants their money but in order for the bank to stay solvent, the money needs to stay in the bank. Do you remember the movie with Jimmy Stewart, “It’s a Wonderful Life”? People took money out of the bank and he didn’t have enough to cover the withdrawals – the classic run on the bank. Another example – the movie Mary Poppins. In fact, you can see a snip of the bank run on YouTube.

https://www.youtube.com/watch?v=xE5klz0yUT0

In the case of SVB, word of difficulty went through social media like wildfire. House Financial Services Chair Patrick McHenry described it as “the first Twitter-fueled bank run.”

Ben Thompson, an analyst of the tech industry wrote, “It was the speed, fueled by zero distribution costs for both rumors and withdrawals that was so destabilizing.”

This is not to say SVB didn’t have problems. They did. But the resolution might have been more orderly. First Citizens Bank has purchased the deposits and loans of SVB. First Citizens also purchased some banks during the 2008 crisis. They seem to be old hands at this.

We aren’t experts in this area but it seems to be a step in the right direction.

DEPOSITS IN A RISING INTEREST RATE ENVIRONMENT

Unless you were around in the 80s, you may not have lived in a high interest rate environment. We bet if you look at many bank executives, they fall into this category. There is enough blame to go around that triggered Silicon Valley Bank, Signature Bank, etc.

Many economist feel the Fed “set-up” the banks for difficulty by raising interest rates so quickly in 2022. Many executives may not have worked in this type of environment and did not invest defensively. Add to the equation that banks buying treasuries improves the total of risky assets since treasuries count as zero in the formula. Treasuries and mortgages are considered no risk. It is not synonymous with duration risk (how long until the bond matures to receive the full face value) and interest rate risk. The bank needs to hold the bond until maturity or else you have to sell it at a discount. Even with low interest treasuries and mortgages, the impact should be on earnings, not solvency.

Another miscalculation on the part of bankers is depositor behavior. With the past 15 years at basically zero interest, banks got used to having deposits exceeding the FDIC limits costing them nothing. Remember that a deposit to the bank is a liability – a debt owed the depositor. Instead of telling a customer they could have their FDIC-insured account but there is a product for the overage, they stayed mum.

Jill went to her bank (Bank of Marin) and asked what are my options if my account balance exceeds $250,000 (no, she doesn’t but this was to learn)? There is something called a Cash Sweep product that apparently all banks have. They “sweep” the money over $250,000 and buy CDs from a network of other banks so your account doesn’t exceed the FDIC limit of all the banks combined. And the CDs in the sweep account are insured up to $50 million.

So why did so few banks tell their customers about this? Perhaps they underestimated depositor behavior. Money market mutual funds, online banks, etc. are paying reasonably good interest. For instance, Schwab Value Advantage at the time of this writing is paying 4.64% interest. Why would you leave your money in an account paying nothing when you have alternatives?

Banks were spoiled by having a large deposit base that allowed them to invest the deposits to make money at basically no cost. Instead of sharing such a product as a cash sweep, they didn’t mention it. One might call this greed.

We have chatted with numerous clients over the years to discuss their cash and bank holdings. If you have more than $250,000 in your bank account, please give us a call to discuss alternatives or ask your bank teller if you need a cash sweep product to fall under FDIC limits.

TRYING TO WRITE INSURANCE COVERAGE WITH ENVIRONMENTAL CONSIDERATIONS

The Wall Street Journal ran an article by Leslie Scism and Rhiannon Hoyle discussing Chubb Ltd. tightening their underwriting of oil-and-gas producers taking into account emissions. Below is a synopsis.

  • Requires evidence-based proof of a reduction in methane emissions
  • Stop underwriting oil-and-gas projects designated as protected by governments, states, etc.

We don’t want you to think Chubb is some leader in this space. Environmentalists have been pressing banks and insurers to stop underwriting fossil fuel projects. Chubb is not doing that. According to Chief Executive Evan Greenberg, “wholesale quitting of sales to producers puts at risk the nations’ energy security, because renewal energy isn’t ready to pick up the slack. We’re trying to balance between society’s two competing interests.”

CPR AND AED TRAINING

In February, we closed shop one morning to be trained in CPR and Portable Defibrillator (AED). We practiced (all COVID compliant) in groups of two with a dummy. Amazing how hard it is to push on someone’s chest. We also decided to buy an AED for the office. We all felt it was time well spent but hope it is never necessary to use our new skills.

DEFLATION OF SETTING UP YOUR HOME OFFICE

Payden & Rygel* writes “Point of View” quarterly. In the 2022 Q4 edition, they included a fascinating look at the difference in labor hours spent to set up a desk in 1983 and 2023. While it is common for us to frequently say, “everything always goes up,” it isn’t actually true. Below are some excerpts from their depiction of the difference between having a desk in 1983 and one in 2023

All told, the average earnings in 1983 was $8.20/hour. Total work hours to set up your office, 943 hours. In 2023, the average earnings was $27.86/hour. Hours to set up your office, 58 hours.

*Payden & Rygel sources were Radio Shack, Ikea, Amazon, Bureau of Labor Statistics and authors calculations.

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