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SVB, Silvergate, Signature, and you

This post is a modified version of an email that we sent to Seaborn clients earlier this week.

I swear – I leave for a convention for one week, and three banks fail. This is why I can’t have nice things.

In all seriousness: I know a lot of you are worried, and/or wondering if you should be worried. Short answer: if you're a Seaborn client, no. Otherwise, see my notes at the end.

Longer answer follows.

What exactly happened?

Three banks failed last week. In a nutshell, Silicon Valley Bank failed because it primarily serves startups, which have been hit hard by the interest rate increases over the past year. The other two failed because they were the primary cryptocurrency-centered banks, and crypto has been having an extremely bad time, particularly in the wake of the collapse of FTX.

While the story is slightly different for each bank, the high level is the same: a classic run on the bank. People lose confidence and start pulling out their money, fearing that the bank won’t be able to redeem their deposits, and soon you’ve got a self-fulfilling prophecy. No bank can redeem 100% of its deposits at once; otherwise, it wouldn’t be able to make any money by lending it out.

SVB and Signature are currently under the control of the FDIC while everything gets sorted out; Silvergate voluntarily started the liquidation process (while keeping operations open), which means that the state of California ultimately gets to handle unwinding them. To give you a sense of timeline: the FDIC shut down SVB on Friday, and as of today people can get access to their deposits and start transitioning out. Yes, the FDIC can move that fast.

(For what it’s worth: I think SVB had a fighting chance and a decent strategy, but was the victim of bad luck and pessimism amongst venture capital companies -- they were fine right up until all the VC's started taking their money out, at which point rapidly became not-fine. Signature and Silvergate simply speculated on crypto and lost. That’s just my two cents, though -- take it for what it's worth!)

How might this affect my checking and savings accounts?

The banking industry overall is in a very good place, liquidity-wise, so it’s not likely the malaise is going to spread a whole lot further. “Not likely” doesn’t mean “zero probability”, though – it could be that an overwhelming percentage of another bank's customers attempt to pull their deposits all at once, in which case, well, that bank will fail. It all depends on human psychology and herd mentality -- see my comment re: SVB's VC customers above.

If this happens to your bank, then what happened to SVB and Signature customers will likely happen to you: assuming you’re under the FDIC limit, your account may freeze for a day or so until the FDIC steps in, and then you’ll have access to your money again.

Even if you’re over the FDIC limit, you’ll likely still be made whole, just a bit later down the line; because the US government is keenly interested in there not being widespread panic, the FDIC has indicated that all SVB and Signature customers, no matter their deposit level, will get their money.

(Note: if you’re a credit union customer, substitute the acronym “NCUA” for “FDIC”; otherwise, the above paragraph applies to you exactly as written, as they’re both federal agencies that ultimately report to the same boss.)

How might this affect my portfolio? Is there an opportunity or threat here?

Remember how I’ve been saying that there’s a 50/50 chance that a recession happens this year? Well, the chance has ticked up slightly over the past week, as evidenced by the ~4% drop in various markets like the S&P500 over that time.

Will it be the straw that breaks the camel’s back? I don’t know; no one does. This is why we recommend you build your financial plan -- including your portfolio -- assuming a recession could happen at any time. This is why we recommend that your short-term goals are covered with cash, and long-term investments aren’t so aggressive that a recession tomorrow would break your plan. So because we always assume a recession could happen tomorrow, nothing has changed just because it's slightly more likely than it was a week ago.

That said, if you're starting to hyperventilate over the news about e.g. Credit Suisse, this might be a good time to review your asset allocation. Tip: if you decide to lean more towards bonds, resist the temptation to move back to stocks when you're feeling better. That's exactly the kind of "sell low/buy high" strategy that will break your financial plan; instead, figure out your risk tolerance and risk capacity, build a portfolio that matches it, and stay the course.

Oh, and if you're looking at this as an opportunity to buy bank stocks at a steal: be careful. The whole reason why bank stocks are tumbling is because they're vulnerable to customer sentiment, which is particularly precarious right now. Even if they look good right now, there's no bank out there that would survive if enough clients walked out the door.

I know you're tired of hearing this, but: the best strategy, statistically speaking, is to stay the course, modulo perhaps a bit of tax-loss harvesting or opportunistic rebalancing if appropriate.

How might this affect cryptocurrency?

I honestly don’t know. Cryptocurrency’s value is currently driven largely by speculators, not investors; as long as they have faith in its long-term value – whether or not that faith is warranted, and I’m not suggesting it is or isn’t – then it will continue to do well. If and when that changes, it won’t. I’m not a good enough student of mass psychology to know what might change that.

So far, it's been very interesting -- despite the fact that two banks failed precisely because they were backing cryptocurrency, the majority of crypto investors seem to be taking this as a sign that Because Traditional Banking Is Weak, Crypto's Time Has Come. Has it? I don't know.

Regardless, because crypto is so driven by sentiment, keep a careful eye on its position in your asset allocation, lest it becomes the tail that wags your portfolio's dog. Sentiment has a habit of eventually biting the hand that feeds it; I don't want that hand to be yours!

So...what do I do?

I've sprinkled it throughout this post, but to summarize:

  • Keep money for month-to-month spending and short-term goals in investments backed by the US government (e.g. FDIC/NCUA insurance or Treasuries).

  • Make sure your asset allocation matches your risk tolerance and risk capacity.

  • If you make speculative investments, limit them to a small enough percentage of your overall portfolio such that if they fail, your financial plan doesn't also fail.

If you've got follow-up questions/comments, don't hesitate to comment on Facebook or LinkedIn. See you there!

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