High interest rates mean banks can’t bank.
Today, I saw that Silicon Valley Bank failed. The FDIC swooped in and closed them. The system worked and everything turned out just fine. Not really.
The depositors are insured up to $250,000 and 90% of the depositors had millions there. Janet Yellen said she would not be “Bailing Out” the bank.
Your Relationship changed
A couple of years ago, your relationship with your bank changed and you probably didn’t know it. It used to be that when you put your money in the bank, the bank agreed to hold your money for you until you wanted it back. For that service, the bank had the right to use your money to make investments and make some money.
Not anymore. The big, quiet change is that when you put your money in the bank, you are lending your money to the bank and they agree to pay off this loan whenever you ask for your money back. Doesn’t sound like much of a change, does it? Well instead of the bank having to return your money to you, you become just another creditor if they can’t pay it back.
If the bank becomes insolvent, you (and your money) are on the long list of creditors that the bank has to try to pay back, usually for pennies on the dollar.
But the FDIC will cover it
The FDIC will cover their commitment of $250,000 as they did in this case. But can they cover their commitment in all cases? If many banks fail, they can’t cover them all.
A “Bank Run” is when a bank has its assets tied up in investments and too many people want their money too fast. The bank has to come up with the depositors’ money. They can do what Silicon Valley Bank did. The CEO Greg Becker tried to get people to quickly invest in the bank – no takers. So he sold $3.6 million dollars of his personal bank stock so he wouldn’t take a loss, then called the FDIC and told them he’d screwed up and they better take over his bank. Depositors are without money until the FDIC can straighten things out.
Now, what if there’s not a bank run on one bank, but a bank run on many banks? This is in effect a bank run on the FDIC. Just like the banks, the FDIC doesn’t have an amount equal to the deposits it’s insuring. They have about 1% of the money they are insuring.
In good times, your local fire department can handle the fires. The local hospital is not over-whelmed. And you can just drop by the bank and make a withdrawal. My concern is what about unusual times?
Diversify, Diversify, Diversify
“I’m diversified. I have some of my money in my sock drawer. Some in the garage. Some buried in the backyard.”
The Big Recommendation
Your Brokerage account. Keep only your operating money in a checking account and keep only your emergency money in your savings account. Everything else should go into your brokerage account. Brokerage accounts are insured by the SIPC, which is a similar company to the FDIC except that they insure your cash deposits up to $100,000 and your investments up to $400,000, for a total of $500,000. You can buy some short-term US Treasuries through your broker and that money is counted on the investment side.
Should you ever need the money, you can just transfer it back to your bank accounts but in the meantime, it’s safer and can be much better utilized.
Your Money Much Better Utilized
Is the market going to go down or up? Yes. You can see the direction of the market.
You can short some companies, or you can buy some put options. Or . . . you can buy some companies you always wanted for cheap or buy some call options when you see things coming back to the middle ground.
It looks like things are going down for at least a few weeks, then should come back. Then the crash should hit in a few months. What bargains there? And just in time for the long-awaited CBDC rollout scheduled for July. We just need a crisis to kick-start it.
When this TBD crisis comes, will you be poised to take advantage of the chaos in the stock market? Or will you be one of those people in the line running all the way around the block, trying to get your money out of the bank?
