Markets experienced sudden volatility this week with news that one of the larger, niche banks in the country, Silicon Valley Bank (SIVB) was having liquidity issues. On Friday, FDIC shut down the bank, halting deposits. It is unknown how much of the deposits will be paid out and the bank has been put into Receivership. While the headlines are eye-catching and reminiscent of 2008, it is important to understand the ramifications and lasting effects this may or may not cause across the economy.
In 2021, amid a surge in liquidity, SIVB saw deposits jump from around $60bln to nearly $200bln by the end of the year. As deposits grew, they could not lend the money out fast enough to generate appropriate yield and profit off of the deposits, so they purchased a large amount of mortgage-backed securities for their portfolio. Most had over 10 years until maturity with an average yield of under 2%. As the Federal Reserve aggressively raised rates this year, those bonds were marked down significantly. As we know, if you hold a bond to maturity, you will not lose value, and this would not be an issue if they could maintain their deposit base.
News came out yesterday that they had sold $20billion of their ~$80billion bonds at a $2billion loss and were looking to raise more capital. This was a shock and sparked fears for depositors, causing a run on the bank. Ultimately, they lost enough deposits for the FDIC to step in, secure what assets are left and distribute capital in an organized manner.
Given the nature of SIVB, a lot of their clients were startups, technology oriented or VC backed companies who have not had great success this year given economic weakness and non-profitable growth oriented businesses getting very quickly devalued. We are optimistic that this is idiosyncratic, however time will tell if there were any hedge funds, or private equity firms caught holding leveraged bets on these companies that have yet to be taken down with the ship.
Regarding stocks and market volatility – one of our core philosophies is always knowing our investments well. Focusing on cash flow positive companies within stable business lines is paramount.
Regarding cash holdings at banks – FDIC insurance protects $250k per person, per bank. US Treasuries however are fully backed by the full faith and credit of the US Government and are yielding 4.5-5% for short periods of time.
If you have cash that you would like protected in US Treasuries, please contact your Wealth Advisor.
Sincerely,
Withum Wealth Management, Investment Committee
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