SBNY - Silicon Valley Bank Implosion - How CashFlow Hunter Got It Right

2023-03-20 14:00:00 ET

Summary

• CashFlow Hunter got it right on Silicon Valley Bank (and Silvergate) while almost everyone else got it wrong.
• What's the best way for retail investors to navigate this disruption in the financial system?
• As liquidity goes, so goes the economy.
• Is Charles Schwab a worthy investment right now?

Editor's Note: Due to time and audio constraints, the transcription below may not be perfect. We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify .

• Financial industry implosions - what got us here (2:20)
• Foreseeing the breakdown in Silvergate ( SI ) and Silicon Valley Bank ( SIVB ) (6:10)
• How does banking sector shake out? (17:25)
• Thoughts on David Tepper reportedly buying bonds of SVB Financial Group (23:40)
• What's the best way for retail investors to navigate this disruption in the financial system? (28:00)
• Is Charles Schwab ( SCHW ) a worthy investment right now? (30:30)
• Reviewing Signature Bank ( SBNY ) (44:45)

Recorded on March 18, 2023

Transcript

Rena Sherbill: CashFlow Hunter , thanks for making the time in these crazy days. Thanks for coming on the Investing Experts Podcast.

CashFlow Hunter: Thank you for having me.

RS: We're talking the Silicon Valley Bank ( SIVB ) story. And I think also highlighting the really cogent strong analysis that we have on Seeking Alpha, and I think you're getting a lot of love out there in the marketplace, showcasing what strong analysis can do. I'd love it if you caught us up on where we are in this moment. It's March 18, mid-afternoon Eastern Time, as long as we're keeping things current, because there's so many changes every day .

But given where we've come and gone in the past, let's say a week or so, how do you think it best serves investors to describe this moment in time as it pertains to Silicon Valley Bank and all the repercussions we've seen thus far.

CH: I would say violent is probably the most appropriate word to start. And I have not done the historical analysis, but I think this might be the fastest bank failure ever. The bank was -- stock was at $265 on Wednesday, before the -- the day before they made the announcement. It was at $285 that Monday. And by Friday morning, it stopped opening -- it didn't even open for trading, and they filed for bankruptcy officially yesterday. So just a tremendous amount of value blown up very quickly.

And the repercussions of that failure, and the ferocity and speed of the failure, obviously, have reverberated throughout the financial system, particularly the regional banks, which have a couple of regional banks that I don't think we were in anybody's crosshairs until Silicon Valley really had a problem, are really -- potentially in a lot of trouble. I mean, First Republic ( FRC ) stock's down 80%, and bonds have been crushed.

We focus a lot on the bond market. My background originally is a bond trader actually. And so my firm is a bunch of people that I've known and worked with for 20 years plus. And so we have a very deep fixed income market background, which definitely helped us in the analysis of this story. But a company like First Republic, which really was -- I don't think it was on anyone's radar screen is down 80% from last Wednesday. Bonds have been killed, Western Alliance, same thing, down, not 80%, but down call it 50%. And to add fuel to the fire, Credit Suisse ( CS ) decided to have some problems of their own this week.

So it's caught up a lot of financial institutions, far and wide, big and small. Even people were questioning Schwab this week. And that stocks a good 25% or a little bit more from where it was when Silicon Valley had struggled? And I don't -- look I don't think we've seen what the implications are for the economy yet. But they're coming. I mean, you just can't have this type of chaos in such a large group of -- fairly large financial players or cogs in the financial framework of this country without some relatively large implications.

RS: Yeah. Just the other day, the All-In podcast , which is a big podcast in the investing and financial world, and certainly has gotten a lot of play since the story broke, was discussing the article that you wrote six days before Christmas in 2022, about Silicon Valley Bank. And they were saying it was written as though somebody had gone into time machine to warn investors.

Given the fact that you saw it so clearly, what would you point to, or would you allocate blame in different corners of the marketplace? Would you put it on the Fed, we've seen the most rapid Fed tightening in many eons, a huge spike in interest rates that came very suddenly, a lot of kicking of COVID consequences down the road.

Would you -- there's also people talking about blaming the VC community, specifically in tech, how would you look at where we've gotten? Is it regulators? Is it all the things that I've just mentioned? How do you think about it?

CH: Yeah, look, I think there's a lot of blame to go around. Some people like to lay blame at the feet of some places that make for convenient punching bags, but really don't necessarily deserve it. So like, if I were to blame two parties the most, one would be obviously the management of Silicon Valley Bank. Not that they invest in -- placed capital in the wrong -- the wrong types of instruments, but they placed their capital in the wrong instruments here at the end of the day. And I'll parse the difference there.

And then, obviously a lot of the fault falls with the Federal Bank of San Francisco, Federal Reserve Bank of San Francisco, and the OCC, I mean, those are supposed to be the two people who are really watching what was going on, what goes on at banks. And they didn't just have one failure on their hands, they have two, there's Silvergate also.

And so what -- if we want -- you want to talk about what initially got me looking in this direction?

RS: Sure.

CH: So I've written a number of articles that have -- will reveal my skepticism over cryptocurrencies . And look, I don't hate all cryptocurrencies per se. I struggle to sign a true value -- concrete value or framework to value them. But if some people have decided that they want to own cryptocurrencies and want to pay a lot for them, who am I to say that they're completely insane? I mean there's a lot of absolutely terrible artwork that I would say, right, I mean, that people will pay a lot of money for. So does that mean that it's worthless? Well, if some people are willing to pay for it, maybe it's not, what do I know, right?

It's just my opinion of an asset. But that being said, there was very clearly a lot of bleeding in the crypto space last year, an awful lot of money that had rushed in, that was then rushing out. And so what happened was Silvergate ( SI ), that was a very clear -- and I didn't write about it on Seeking Alpha. In hindsight, I should have because I would have gotten a fair amount of credit, I guess. But I was short it. And one of the reasons we looked at it -- and this is a very similar profile to Silicon Valley Bank is Silvergate's deposits really kind of exploded in 2021, from their crypto exchange network.

And you would think that if a bank has some sort of irrational explosion in deposits that they would not think that the good times -- that those deposits couldn't leave as fast as they came in. So you'd think that they would just invest it in some sort of cash, at least short term very liquid cash type instrument, T bills or something like that, that they didn't want to hold on to cash. And then the those -- if they deposits flew out that they'd be able to service them and you would say, okay, well, we're going to go back to what the size of our business was before. And thanks, guys. We made a few extra bucks here and there. And that was great.

And frankly Silvergate had done something along those lines, it probably would have been fine. But they went up staffed at like an incredible rate, they increased their staff at an incredible rate, and they bought longer dated securities that they that caused them an awful lot of losses in their balance sheet as those securities decreased in value with the increased interest -- with higher interest rates.

Now the securities themselves are very high credit-rated securities. So if you hold them to maturity, you're going to get your power back. You're going to get your capital back plus the interest rate. But so what -- I mean, I don't necessarily fault them for buying -- I mean, they bought a lot of securities that the Feds and the regulators told them to buy. But I don't know if the federal -- the regulators -- the regulators should have said, hey, why are you guys going farther out on the duration curve, where you're going to get much more the value of your securities is going to be affected much more by the rise of interest rates.

Just stay in the one to two year buckets, and the securities won't move up or move up and down in value by much. And if your deposits leave, and you have to sell the securities, you can fund those deposits. So again, it's not exactly the securities they bought, it's just like the -- where they bought, where in the interest rates, where in the duration curve they bought them that caused the problems.

So I was looking at Silvergate, and I said, all right, well, let me see if anyone else had a similar profile in terms of scale of the spike of their deposits. And Silicon Valley Bank really stood out like a sore thumb. And as I believe I wrote in my article, you can trace Silicon Valley's Bank -- Silicon Valley Banks growth, in its deposits almost -- it's almost a mirror -- it's almost exactly tracks the growth of VC investment in the United States that occurred between, say 2018 and the end of 2021.

And so again, just like Silvergate, you would think that if you are taking in deposits at such a insanely rapid clip, really faster than anything that anyone's ever seen before that and particularly with the case of Silicon Valley Bank, so many of the depositors are companies that burn cash. You would think, okay, well, if the good times stop, and all of a sudden, these money burning companies need to pull need to withdraw their deposits to fund their losses, that we'll have to service those things.

And instead of -- so therefore, instead of taking that money and investing it in longer duration assets for an incremental, let's say, 40 basis points of yield, when they put or when they invested a lot of those assets and hold to maturity, that again, you would invest it in one or two year paper T-Bills, three months paper. Because -- and therefore when the T-Bill people come to withdraw their deposits, okay, you've got the cash. You can do it, you don't have to take massive losses in the portfolio. And the real like I shouldn't say criminal, because that's a very technical term, legal term.

But in terms of just the absolute shame of the situation, is so much of these of these assets were non-interest bearing. So if you have assets in the door, it's free money, even if you're only earning when interest rates were really low, even if you're only earning half a percent. So what you're earning half a percent, it's free money. Why do you have to take a major risk to earn like 1%? Like, what are you doing? And so that's really what led me to initially start looking to Silvergate -- Silicon Valley Bank, I get them confused, I apologize.

And then they had other problems. It wasn't just in their high quality liquid quote-unquote, asset portfolio. As I started looking at this in November, December, and by then it was very clear that the bubble, the tech bubble had burst. You had some very high profile, tech-oriented hedge funds were down 50%, 60% on the year. Venture capital dollars were very clearly pulling back very violently.

And I looked just at the loan portfolio that Silicon Valley Bank had? And like there -- I'm sure there is some -- there's some very high quality backed loans, but a lot of their loans are also to these early stage companies. And they classify them different ways. But in really in reality, I think you can probably throw about 21% -- or could have thrown about 21% of the loan portfolio into early stage/fairly risky, non-cash generative companies. And I looked at it and said, all right, well, that part of the loan portfolio could be really impaired.

And it was so large that just that component of the loan portfolio, that every dollar they lost, there would be $1 off of book value, and importantly, regulatory capital. And so I said, wow, this is a situation where you -- there are two different ways to win. One is if they have to take -- if they have to monetize losses, in their higher quality liquid part of their portfolio. And then two if they take losses in their loan portfolio. And neither case is a good place to be.

RS: Yeah. So let me ask you this, given what's happened, how do you see A, banking shaking out in terms of big picture? I know that a lot of investors have been dissuaded by anything bank related, but how do you think it looks big picture? And how do you think investors approach it? And then also, I'm curious about what do you -- do you think this does anything to the regulatory side? Do you think this wakes them up? Or this is another shock moment and they're going to go back to sleep?

CH: Yeah, I really have no idea what the regulators are going to do? I'm generally blown away by some of the priorities that I see out there, people -- look, I think diversity and inclusion are really important things for a company to want to deal with. But if you're a regulator, let the companies deal with that kind of stuff. And you focus on soundness. That's your job is making sure a financial institution is sound.

And clearly, the regulators just failed miserably in this, in making sure that these financial institutions were sound. And it's not -- I'm not being political there. I think that's regulators job is not to engage in any kind of -- in any political view. They're just supposed to make sure that the walls are sturdy, and the roof won't collapse. And they failed there.

In terms of what the changes are going to be for the banks, look, the irony right now is the front end of the rate curve is a lot healthier than the back end of the rate curve. So to the extent that banks end up having to hold there -- any liquid investments, without going too far out on the duration curve, and stay in the front end, and it's not going to really hurt them this time around. If we go to a more normalized yield curve, where lower -- shorter term rates are lower than longer term rates, that'll cost them some dollars.

So you might see a fundamental change in the earnings power of regional banks, at the very least. And my sense is that regional banks which have faced looser regulations versus the money center banks, the banks that were deemed too big to fail, I think all banks are basically going to be subject to the same regulations, because the regulator's, various government agencies that they just can't afford to have a bank -- such large banks fail, and then have to step in and guarantee deposits above $250,000, which -- look I can understand why they did that in the case of Silicon Valley Bank and Signature. I think there's all kinds of potential problems with that -- with guaranteeing those deposits though, that leads to all kinds of more hazard in the future.

So I don't know how they're going to deal with that. I don't know. But that's fraught with risk, what they've done there.

RS: What would you have advised them or think that they should have done? Or is that just the inevitable reality of making a tough decision?

CH: Like I said, I mean, I think they're probably putting them between a rock and a hard place if they didn't say that, okay, if you've got to -- if you got a bank account bigger than $250,000, we will backstop you, in the case of these two financial institutions, which is Signature and Silicon Valley Bank, that they might have had a bigger run on the bank at -- for large deposit holders and other financial institutions, like First Republic or something like that. And the people, the account holders that have accounts bigger than 250,000, they're typically not individuals, right? They're corporations.

So there's probably going to have to be a change in how corporations, if they keep their cash at regional banks, there's going to be a change in how the regional banks, where they put that cash, right. And my sense is that if they want it to be protected in some way, shape or form there's going to -- it's going to have to be in something that the banks really can immediately access, really without much risk to liquidity risk or mark to market risk. So because, like we've seen, if you let a banker just take risk without -- with other people's money, and if they lose it, don't worry about it, the government's got your back, bankers are going to go far out on the risk curve, right? They just don't -- I mean, don't blame a tiger for eating a steak if you put a steak in front. And that's what is going to happen.

So there's going to have to be some sort of change to that, I think. Otherwise, why would a business keep more than $250,000 of cash in any financial institution? And most businesses need to have most -- businesses of any size need to have more than $250,000 in cash, or cash like instruments?

RS: Yeah, there's so many different ways to think about what's happening right now. Something else that happened on Friday that I wanted to ask you about in terms of looking at what's happening and in terms of how investors should be thinking about things. David Tepper , the famous hedge fund, David Tepper bought bonds of SVB Financial Group, which is the parent of Silicon Valley Bank, hoping that the value of that -- what's that?

CH: Was that officially announced that he did that?

RS: It was reported.

CH: Or was that just a report?

RS: Report, report. Good, important to take me to task. Reportedly, David Tepper bought bonds of SVB Financial Group. And I think the play there is that that value will increase as Silicon Valley Bank, the parts of it are auctioned off. What do you think about that approaching it in that way, speaking to your background as a bond guy?

CH: Yeah. Look I mean we -- by firm we refer to certain investors who are very big hitters, and there's certain investors who are such big hitters that they're almost planetary in size. And then there's maybe one or two guys who are effectively like the sun. And I think Tepper probably qualifies as somewhere as like the sun in terms of in terms of his impact on credit markets. He's as good as they get.

So the question is on the bond value, again, it depends where he bought them. The one thing that seems unknowable right now is what happens to the cash at -- what happened to the cash flows at the holding company. Silicon Valley Bank was an operating subsidiary of SVB Financial, which was the HoldCo, which was the -- which is where the stock was, and the bonds were issued out of there. So to the extent -- so what's not quite known yet is how much of the cash that was at the HoldCo, which was about $2.2 billion. Plus they had about $500 million of securities. I know they own stock in Coinbase ( COIN ) and stuff like that.

How much of that stays at the holding company versus what the FDIC decides that they are going to pull down into the operating component of the bank, the OpCo of the bank to shore up depositors, because depositors get paid back first. So if the FDIC determined that there was enough -- there are enough assets at the bank, at the OpCo level of the bank, that all depositors can be made whole with the liquidation of those assets, then the cash that stays at the holding company, plus the securities that they own, plus the value of the other businesses that are at the holding company, they have a wealth management business. They have an asset management business, they have an investment bank.

So I assume that those will be sold for whatever the company can get for them. And then there will be some value to the net operating loss or the analog tax refunds that the company gets from all of the losses that are going to be crystallized from the liquidation of the company's assets. That's a big unknowable too. But if those assets stay at the holding company, then there's a lot of recovery for the bonds and even probably some recovery for the preferreds. It's just not known.

My guess is that Tepper looked at the situation and said it was a better than even bet that there would be some assets at the HoldCo that would be reflected in the bonds. And he's a tough guy to bet against.

RS: Yeah. So if David Tepper is the sun, maybe retail investors are stars. I don't know how far to extend that metaphor. But speaking to the retail investors, how do you think is the best way to navigate the marketplace, given everything right now?

CH: It's going to be volatile, because like I said, I don't think you can have this type of disruption in the financial system without some reverberations. I mean, I would expect almost all banks, given that they don't know the stability of their deposit bases are going to pull back on loans, making loans, which is going to crimp the -- is going to crimp economic activity, right, full stop, right? If you need to get a need to get a car loan, you need to get a mortgage, to the extent the banks can't just securitize that stuff right away, and they have to hold it on their balance sheet, they -- it could be -- they might be hesitant to make those types of loans.

Now I think the Fed will be encouraging them to keep making loans, but who knows. Regional banks make a lot of loans in this country. And if they don't have a clear idea of what their -- the stability of their funding then those loans are not going to be dispersed so quickly. And that is coming on top of, I wrote an article this week, of what looks like to be a fairly material slowdown in at least some pockets of the industrial components of this country. The Empire State Manufacturing was terrible, really bad dump number that came out this week. And Philly Business Outlook, really bad number.

And those are typically leading indicators of what's going on. But if you have a pullback in lending from financial institutions, and then you -- on top of an already softening backdrop, it's generally not good for the economy.

RS: Yeah, and you also wrote in that article, how it would affect housing as well, in terms of mortgage rates and -- do you think it extends to pretty much every facet of the economy?

CH: Yeah, I mean, look at as funding, as long -- as liquidity goes people getting -- being able to access credit goes, so goes the economy, right. So if there's any kind of interruption of the flow of liquidity it's going to hit the economy pretty bad.

RS: And in terms of specific investments or how to best allocate capital and kind of design your investors portfolio. You also wrote an article recently about Schwab ( SCHW ) in light of the Silicon Valley bank implosion. Can you speak about maybe stocks or different, trading vehicles equities that you feel like investors would be wise to look at either and you can feel free to go on the long or short side here.

CH: Yeah, look, I mean Schwab, there's going to be a component of Schwab that going to just be a little unknowable, right? It's going to say, all right, well, how many of their accounts, get nervous, even though they really shouldn't be nervous. The bulk of Schwab's accounts, the vast bulk of Schwab's counts are under $250,000 of cash. And most of the mechanics of that is just money that gets swept between trading and securities and money market funds.

I mean there's -- in my own brokerage account for years and years, I kept very little cash in it. I just had a money market account, and when I needed to write a check out of it, I wrote a check and the money market account automatically got deducted and converted into cash. So Schwab has access to hundreds of billions of dollars of liquidity. I really don't think that they are going to have what I will be called a traditional run on the bank. And Schwab's bank doesn't really make that many loans, whereas Silicon Valley Bank had about, I think it was like $209 billion of -- $175 billion of deposits. They had $209 billion of assets, only about $71 billion of that was loans at Silicon Valley Bank.

So that was about, I said about 35% or so. I mean Schwab's like 10%. They really don't make too many illiquid type of loans with their capital. And they're just such a central cog in the machinery of this country. I mean, they have 34 million account holders, a lot of those are retirement account holders. Now all of those should be bankruptcy remote, I believe. If Schwab goes down, the holdings in those portfolios, -- in those accounts should be -- should just transfer over to another brokerage. But there's so many -- Schwab is so integrated into so many other parts of the financial system that really most -- a lot of people just don't even have -- had no awareness of that.

If you're a Schwab account holder, you buy a mutual fund. Schwab has relationships with those mutual fund companies and Schwab gets a cut of that money that gets deposited into a mutual fund. And otherwise, if they don't, then their account holders can't buy that mutual fund. I mean Schwab is also custodian for -- is the largest independent custodian of our -- registered investment advisors who put their money with Schwab or with Fidelity because they are really confident that Schwab and Fidelity are going to be -- are very, very liquid and very sound financially now. Now, Schwab has some leverage, but it's -- I think it's about it's like 1.34x That's its equity. I mean, it's really not very high.

So but that now, that all aside if the Feds were going to step in to try to do something to help Silicon Valley Bank, Signature Bank they would bend over backwards to keep make Schwab make sure Schwab was okay.

I hate hanging my hat on, regulators doing something -- doing the right thing. But you want to talk about an ugly scenario, if Schwab goes down, I mean, the whole -- they'll cause -- the whole market definitely tanks. So that's why I said if you want to buy Schwab and you're worried about some sort of Black Swan event, just buy some puts in on the S&P or buy some puts on the Russell because it's going to be -- that's going to be a very dark day if that happens.

RS: I heard Bill Gurley talking South by Southwest calling the whole Silicon Valley Bank implosion a Black Swan event. Would you agree with that?

CH: No.

RS: I also didn't agree with that.

CH: No, look, there is a tremendous amount of arrogance within the tech community that built up over the past 10 years. A lot of very good companies generated an enormous amount of profits, generate enormous amount of cash and grew to be quasi monopolies that are -- it's hard to say that they'll never be displaced, because obviously that -- you can't say that about anybody. But they're very big companies. And then there was the secondary and tertiary companies who grew up in that space, that maybe never really actually generated huge amounts of profits, but they attained enormous market values.

I mean, look at Carvana. I mean, Carvana was worth, I think more than -- at one point it was worth more than every single other car dealer in the country, combined. And it was a money losing business model. But there were a lot of those types of business models that all you had to do was put AI in the story, or some sort of disruption in the story, and these things got multibillion dollars, in some cases, tens of billion dollars of market values. And you can see that in the amount of -- in the amount of venture capital dollars that got invested in the United States.

I mean I think I put it -- I put the chart in the original article about Silicon Valley Bank, but maybe I'm getting these numbers a little bit wrong, but I think like going back to the tech bubble, the dot com bubble, like U.S. investment, the U.S. VC investment was something like $20 billion in 1999. And it went up to $60 billion in 2000. And then it didn't get back up to 1999 levels, really, truly until 2014. But there were an awful lot of very, very arrogant dot commerce back in the day who was very -- would look you straight in the eye, and say, yeah, a company should be valued based on eyeballs, remember that one?

But what happened in from 2018 to 2021 part of that was driven by the by COVID. But a lot of it was just stuff that was already building. I mean, it was exponential, the growth in U.S. venture capital that went -- so we were at maybe $4 [ph] billion in 2014. I'm sorry, $20 billion in 2014. And we went up to like over $300 billion, I think in 2021. And that was almost double where we were in 2020, which was almost double where we were in 2019.

So the idea that you can invest that type of capital back quickly and not be -- doing it in a relatively irresponsible manner is laughable. I mean, look at the losses at SoftBank. I mean some of the -- I mean yeah, the guy had incredible early hit with Alibaba. All right, fine. But then he dumped money into like WeWork and he lit billions of dollars on fire. And that I think fed through the entire Silicon Valley Tech type system, which I think also fed into the arrogance of the management of Silicon Valley Bank. They saw -- they didn't see this spike in U.S. venture capital dollars. They saw it, it was oh, my God, this is going to keep going. It's going to keep growing, not as oh, my God, look at this bubble that's bursting. And we better batten down the -- look at this bubble that's growing inflating, and let's batten down the hatches for the other side of it, which is -- was very clear that we're on the other side of it by the summer 2022 at the least.

RS: Yeah, such good points, such good points.

CH: So I don't think is a Black Swan. I mean, I think it was, to the extent was the dotcom bubble burst in a Black Swan event. Was Lehman Brothers blowing up a Black Swan event? I mean, they were unusual, but they were excesses that were that were visible, if you were took off the rose colored glasses.

RS: Yeah. Any rose -- Any color of rose in how you're thinking about First Republic Bank? Is there any kind of positivity to be gained? And again anything that you care to point to in terms of specifics in terms of what investors should be or could be looking at?

CH: I think it's was a really bad data point that the 10 banks inject $30 billion into the company on Thursday, and the stock still dropped a ton on Friday. That was pretty bad. That doesn't give me a warm and fuzzy feeling about the rest of the banking system.

RS: And I imagine the dividend suspension didn't give investors much faith.

CH: I mean, the stock was down 80%. If you thought that they weren't going to suspend the dividend, I mean, what are you smoking right? One other thing. I think this -- I think I told you before we started this podcast, but you know, we actually had our biggest short in Silicon Valley bonds, not in the stock. The stock was incredibly volatile. And there were just some real true believers in it. And it's funny. So the stock, I think hit $800 at one point at its all-time high in 2021. And by the time I started looking at it, it was in the low $200, which was still above book value.

And the joke of the matter was they missed earnings. I think there were a decent number of places that were betting on the company missing earnings. And the earnings miss, I wrote about this in my January follow-up article , the earnings miss would have been even worse, except somehow those guys marked up the value of their warrants in the fourth quarter. Now there's going to be some real questions, in terms of their potential criminality here. I think that would be a good place to look. I don't know how they marked up the value of the warrants in their investment portfolio.

I mean, that is just mystifying to me. But even with the miss that again would have been even worse, had they not marked up the vital warrants, the stock still jumped up to like $330, at one point in January, February. So it was it was a spicy meatball to hold on to the short there. You really had to do it primarily with options, which is -- primarily, which is really the way we play the short on the stock. But the bonds were really, really interesting and a much easier short to hold on to because I want to say that the 10 year bond -- bonds traded at a spread over treasury, at least investment grade bonds that were -- and I'll get to that in a second. But these were investment grade bonds, and they were trading at a very, very slight premium over treasuries to money center banks like Bank of America. I think we initially put this short on -- it's somewhere around -- a little over 200 over the 10 year treasury, whereas Bank of America was only trading like 175 or 180 at the time.

So we were only -- those bonds, were only demanding less than a half a percent premium to where Bank of America was for 10 year risk. And those are the bonds that really got -- those bonds really got clobbered, and they never really moved that much higher even when the stock was ripping higher. But one of the reasons I bring that up, not to pat myself on the back is, that Moody's had this bank rated at A3 on Wednesday, that...

RS: You don't say.

CH: A3, I mean that's pretty high. That's pretty -- that's very high investment grade. And it's just like where were those guys? Because I have to believe an awful lot of investment grade bond portfolios just got slaughtered. And thinking that oh, we've got an A3 rate of bank, we're totally safe.

RS: Yeah. So speaking to this, as we're winding down here, I could get you for another hour. But I hope that this is just the first conversation we have and we can get you for longer.

CH: Happy to come back.

RS: Awesome, thank you.

CH: I'm a little verbose. So I apologize.

RS: No, no, this is the place to be verbose, verbose and edifying is the combination we're looking for. So speaking of all this arrogance, and how it gets investors and investing communities into lots of trouble and into bad investments, and speaking to the humility that I think you -- that -- that I think that I was very touched by when we first talked about this crazy prescient call that you had on Silicon Valley Bank, and you've seen it very clearly. And then in the next breath you mentioned your call on Signature Bank ( SBNY ).

So I'd love for you to share with investors A, the up and down nature of what investing is and how to learn the lessons and move forward in the right way.

CH: Yeah, look, we do try to pair a lot of our longs with shorts or shorts with long. So I was short Silicon Valley Bank, I was short Silvergate. I saw Signature Bank had a similar business that Silvergate had and that the stock was getting beaten up because of the decline in Silvergate. And the more I looked at Signature Bank, I said, look this is a pretty traditionally -- a traditionally a conservatively run bank. They made money in 2008 and 2009. They had a very low efficiency ratio, which is -- that's the lower the efficiency ratio, the more efficient a bank is run.

So these guys had a -- I think it was in the low 30s. So I said, okay, look, this is a well -- expense conscious bank that doesn't go far out on the risk curve on their loans that they make. And they took on a business in there crypto, the crypto exchange network, I think it's called Signet, that was really just a fee view. It's just a fee generating vehicle. They really didn't, as far as I understood, they didn't make any loans to any crypto companies. They didn't take any crypto risks. But clearly, I under underestimated the taint, that, that business brought to the franchise. And I still not entirely clear why the regulators shut them down.

They got -- look, if First Republic got caught in the vortex of this regional bank storm, then -- again, if Charles Schwab got caught in this vortex, it's really not surprising, I guess, in hindsight that a regional bank like Signature , which also had this crypto exchange network, that it would be not viewed in the kindest light by the regulators. Part of me wonders if the regulators had so much egg on their face that they just decided, okay, we're just not even going to take any risks. We're just going to shut these guys down.

Although it's still very bizarre to me that the same announcement on Sunday where they guaranteed the deposits at Silicon Valley Bank that theoretically would take care of any kind of liquidity rush against banks such as Signature, that they in the same announcement, that they announced the seizure of Signature. Not that's funny, I shouldn't be laughing. But look, the one thing I'll say in my defense is that the entire ground changed, shifted under the feet of every regional bank, including Signature, and there was definitely time to de-risk the name on Thursday and Friday, as the entire regional bank world was being lit on fire.

And for us, it was a smaller position versus a much larger short in Silicon Valley Bank and Silvergate. And we do try to pair things up a lot. But it's still not entirely clear to me, why Signature went down. It seems to be not in the news for the exact reasons of what exactly happened there. I think, of course the postmortem will be will be really interesting. But really none of the things that I saw in Silicon Valley Bank or Silvergate were present at Signature.

If there was something else under the hood that crept there over the past couple of years that wasn't a readily available and publicly available information then clearly that sucks. And it's something to keep you humble. And look, it's one thing I've learned in doing this for a living for now over 20 years, and it's the markets will always keep you humble.

RS: Yeah. No, I appreciate that honest take. I think life itself will always keep us humble. So it's important to recognize that we can do our best to pay attention and be aware, but then also stuff happens beyond anybody's control. And that's part of it, unfortunately. Yeah.

CH: Yeah.

RS: Yeah. So as we're winding down, and again, thank you so much for joining us and sharing such really deep insights. And I found this very edifying. I imagine, all investors listening will as well. What can you share with the Seeking Alpha audience, and perhaps those listening that aren't yet the Seeking Alpha audience, what are you up to, or what do you have coming up in terms of your writing and analysis?

CH: A lot of my analysis, I mean, my handle is CashFlow Hunter, to play on the name of a Yankees pitcher from the 70s. It was sort of an idea of my age and my sports affiliations. But I really like to focus on cash flows and balance sheets. So if you're looking for the next hot tech stock, you probably don't want to read my stuff. If you're a little bit more of a conservative investor, and you are looking for buying -- I like to buy dollars. I don't like to pay $0.95, I like to pay $0.50, that's sort of my favorite.

I like to get assets on the cheap. And I also like to capture what I think are very safe cash flows at very high yields. So I've been writing regularly about a handful of MLPs. If you ask me, those are still -- I mean, those have traded a little bit off with the weakness in oil and natural gas recently. But I think those are just tremendous values. And they are actually relatively easy to understand these days, which is a nice change from the past. So I'll keep writing about those. And I think I will be -- this explosion in the financial has created a lot of detritus or shrapnel, however you want to describe it, in the banking space. So I think there's going to be a lot of places to pick up value.

But you're probably going to want to see where things shake out. There's no reason to go far out on the risk curve here. I think you -- people want -- you want to be careful. And I'll compound that with the economy definitely -- not definitely, nothing is definite. I think the economy's in a relatively vulnerable spot here, from what I anticipate to be a relatively material pullback of credit availability and liquidity on top of what is already a relatively slowing economy, in my opinion. And therefore that's going to cause all kinds of dislocations in companies, business models and their profits. And so you got to be careful.

RS: Yeah, absolutely. Detritus is a great place to end it on and a great word to use. Normalize good vocabulary, normalize smart investing. CashFlow Hunter, thanks again for taking the time. Really appreciate it. And like all good conversations, I'm looking forward to the next one.

CH: Same here.

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