Here I Go Again
Kim worked for David Coverdale in the 80’s when she started working in L.A. trying to jump-start her musical theater career. She was the personal assistant for the band Whitesnake, who came out with the song in 1982 on the Saints & Sinners album. I’ve always liked the song and did even before I met Kim. There is something so familiar and lonely all at once about the lyrics that suggest that we all are destined to walk down the only roads we’ve ever known and usually all alone.
The song is on my mind this morning because of the machinations going on in the global financial markets this morning. In typical and perhaps fortunate fashion, the problem began on Friday when the FDIC unexpectedly intervened Silicon Valley Bank (SVB). The midday intervention was highly unusual and is probably a sign of the times in terms of the pace with which bank runs now occur in the fully connected world we live in. We all know that banks go bust every so often and its usually due to bad lending practices or aggressive trading or some such high risk maneuver that can somewhat be seen coming around the bend. But SVB was a very different sort of banking problem. This was a bank in an admittedly risky niche of lending to tech start-ups, but its problems had little to do with that and everything to do with having dumped too much of their quickly growing deposits into government bonds that had minimal yields and hence were easy to slip up the yield curve into longer duration territory. Putting money into U.S. Treasuries hardly seems like a risky play, but that belies the truth of bond math and bond math especially during the artificially eased environment that the Fed has been forced to promote in the COVID era to keep the economy on track. Many argue that we have over-managed monetary policy to the point of creating a dangerous surreal world where interest rates bear no relation to the real free market economy (if such a thing even exists anymore). Thus, as the Fed has pushed rates up, the portfolio value has tumbled (yields up, prices down). That’s OK if you’re an unleveraged investor, but, of course, banks are all about leverage. In 2008 it was about extreme leverage (20X+). SVB only had today’s norm of 10X leverage, but leverage is leverage and when shit goes sideways, leverage bites like a bitch.
Depositors started to see this (bank accounting does a good job of hiding it like a kid hiding behind a sapling) and the run began. Runs are a form of contagion and in the financial world, overreaction is the norm when such things happen. That is why it is good that it happened on a Friday. It gives market participants the weekend to calm down. It gives the regulators time to get their plans in place to calm the markets (the Treasury, Fed and FDIC put out a joint statement Sunday night at 6:15pm about their stabilization plan as approved by President Biden) and it gives other banks the opportunity to gird their loins for a roller coaster week.
I have lived this cycle before…too many times in my financial career. They are not acts of commission by banking executives most often (they were never so from my hands), but they are acts of omission in that we bank executives are supposed to be well paid to anticipate the financial and market cycles and scenario test ourselves ad nauseam to get out ahead of the problems and minimize them to insure survivability NO MATTER WHAT. And here’s the most pernicious thing, no one can afford a totally risk-free system. You can’t afford a computer that never crashes, an electric grid that never gets overwhelmed or a banking system that doesn’t occasionally hit the skids. That sort of perfect actually simply doesn’t exist and even getting close to it is so damn expensive that it is prohibitive and we all just end up accepting some degree of risk and do our best to be a little smarter than the next guy about it when hell rains down on us. It is like the old joke that you don’t have to outrun the bear, just outrun the other guy that the bear might chase instead of you.
So, as SVB went into the toilet Friday, the sharks in the tank, smelling blood in the water, started to look for the next victim and quickly seized on two, Signature Bank, that has been aggressive about going after the Crypto markets, which are already laying in an FTX-induced heap on the floor, as well as other niche markets like legal cannabis (a tricky little legal arena lodged delicately between federal and state laws). Sure enough, Signature Bank also got intervened over the weekend. But then the sharks, looking for another potential prey, turned themselves on my bank of choice, First Republic Bank. This is a bank that has a significant Silicon Valley presence for sure, but unlike SVB, is really a private wealth management bank, and not primarily a balance sheet lender and risk-taker. That made it a surprising target for the sharks, but sharks in a feeding frenzy are not that particular about their prey and, after all, banks are banks. Do you remember when Gordon Gecko in Wall Street says he wants to wreck Blue Star because it can be wrecked? Well, almost any bank “can” be wrecked if the sharks want to do it. It takes a very nimble executive to get out of the way of a school of hungry sharks.
First Republic did what it had to do over the weekend and its executives got the Fed and their friendly big brother J.P. Morgan Bank to step up and provide it first $60B and then another $10B to $70B of liquidity (on a $213B asset base no less, so a full 30%) to give the market confidence. I even spoke to my banker there on Sunday and reassured him that I thought he would be fine (being the old warhorse of these things that I am). And then this morning, the stock of First Republic has traded down 65% and trading has been halted…not a good thing to say the least. The sharks did not calm down over the weekend and logic as to why FRB was so very different from SVB or Signature was lost on the sharks. Blood in the water is all they understood.
I remain solidly confident that this friendly, client-service-oriented asset management bank will survive and even more confident that my assets are adequately protected and “ring-fenced” to avoid an issue at the end of the day. If it does go down it will be a mess for me and others, but I don’t think that will happen. I give my ability to gauge that a far better than average mark based on my 45 years of experience in banking and banking crises. But then again, I also know that this is a space where there are simply some things you cannot foresee that just happen and it all could still bite any of us in the ass in a worst case scenario. Life is just like that and there are no guarantees or totally safe havens. Stay alert. Stay at the helm. Eyes wide open. Do the best you can to stay off the rocks. That’s all you can do.
Oh, and one other thing. Call up your bankers and friends in the trench, remembering what that all felt like, and give them your support and comfort. They need it and those are the things that they will remember when the dust settles and everything goes back to normal, even if it becomes a new normal. So, here I go again…..