BAC - SVB Financial's Silicon Valley Bank Has Failed: What The Biggest Bank Collapse Since 2008 Means For Your Money

2023-03-10 13:51:00 ET

Summary

• California regulators shuttered SVB Financial/Silicon Valley bank this morning, one of America's largest banks.
• The action came after a massive bank run on the bank, one of the largest in America.
• Depositors under $250,000 will be paid in full by the FDIC, while those over the limit face some more uncertainty.
• Bank stocks have been hammered across the board this week. My thoughts on what to buy, what to sell, and what to hold.

This morning regulators moved in to close Santa Clara, California-based Silicon Valley Bank, subsidiary of SVB Financial ( SIVB ), marking America's largest bank failure since the 2008 global financial crisis. Silicon Valley Bank was one of America's largest banks with more than $200 billion in deposits. This happened after a massive bank run this week and a failed capital raise, as depositors rushed to pull their money from the bank while they still could. Rumors are spreading far and wide with speculation about which dominoes will fall next, and the broader bank ETF ( KBE ) is down roughly 14% for the week as of my writing this. SIVB's chart is insane, and the stock will likely never trade again.

What Happened And Why?

This was not a crypto failure. Silicon Valley Bank was a revered institution that had been in business for decades. They appear to have made bets on long-duration bonds and venture capital-type lending that went sour. Depositors got spooked, and an old-fashioned bank run started. Despite their track record for stability and conservatism (they made it through the dot-com bust and the 2008 crisis), the bank seems to have run into trouble with loans against nonpublic companies, wineries, venture capital, and investments in long-duration Treasuries. This was enough to do them in.

In 2008, what largely sunk banks were risks that were correlated in non-obvious ways (i.e. subprime mortgages). What happened this time around is similar, in that this bank and others seem to have made bets on interest rates falling in a bunch of different non-obvious ways. Their depositors (liabilities) were largely VC-funded businesses that were getting massive amounts of funding due to rock-bottom interest rates. Their assets also largely depended on interest rates falling, or at least not going up. SVB is not the only bank that has made bets like this, in fact, the failure of SVB came after the failure of La Jolla, Calif.,-based Silvergate Capital ( SI ) earlier this week.

Two former high-flying California-based banks have failed in the last week, while the Bay Area real estate market leads the country in price declines. This smacks of contagion, and investors are treating it as such.

What Happens Next?

The FDIC will pay $250,000 to each depositor no later than Monday and has set up a receivership to liquidate the bank's assets. Depositors over $250,000 (almost all of SVB's customers), will have to wait for their money unless the government intervenes. The FDIC is planning to advance more money to depositors later this week. My guess is that depositors will get the vast majority or all of their money back, but not immediately unless there's more government intervention. Beyond this, we don't know a whole lot about what's happening in real time.

There are rumors swirling about which banks will be next to fail, with some regional bank stocks down substantially. This is an old-fashioned bank panic, and SIVB is probably not the last. However, the largest banks in America are in an exceptionally good position due to regulatory changes after the 2008 financial crisis. Unless you have your deposits in regional or community banks in California, you shouldn't have anything to fear. But if you own bank stocks that aren't on the Fed's tightly-regulated too-big-to-fail list, now is the time to do some serious due diligence on them.

What To Buy, What To Sell, And What To Hold

Normal businesses are not affected by massive moves in their stock price. If Procter & Gamble ( PG ) falls 50% in a day, you can confidently buy what others are selling. In many ways, banks are not normal businesses, however. 50% drops in their stock price make it much more likely that runs on the bank will start, and if that happens your equity is generally worth $0. For this reason, I would be very, very cautious about buying dips in regional bank stocks.

However, the megabanks will be the safest here, and the risk is little to none that they'll go out of business. In fact, these banks may see a rush of deposits as depositors move their money to bigger and safer banks. These are very risky bets, but they could pay off nicely for investors in all but the worst-case scenarios going forward. I still think a healthy allocation to cash looks really nice here at the portfolio level. However, panic selling may create some opportunities ahead.

Buy (Maybe): Common and Preferred Stocks of Too-Big-to-Fail Banks

Bank of America ( BAC ) is down 11% this week as of my writing this. Bank of America will be fine. In fact, they're profiting more than they would normally due to the Fed hiking interest rates. They pay 0% on retail deposits, and they have a broadly diversified portfolio of loans and investments. Ditto for Truist ( TFC ), down 15%, Morgan Stanley ( MS ), down 8%, and JPMorgan ( JPM ), down 8%. You can buy their preferred stocks here as well. I'm confident that none of these banks are going out of business.

Hold: Most Regional Banks

Regional banks are in a pickle here because once the rumor mill starts going, massive bank runs can start where thousands of people show up at your branches to pull their money. However, the Fed and Treasury learned a lot from the 2008 financial crisis, so I don't think we're at the beginning of a major bank crisis. If shielding depositors at SVB from losses preserves financial stability, then the government can and probably should step in to stop the runs. Selling into a panic is never a great option, if you think your bank will remain in business it's usually best to hold.

Sell: Banks Experiencing Runs or Credible Rumors of Runs

I'm not going to name them to protect the innocent, but there are a few other West Coast banks that are already teetering on the edge of failure. If you own stock in these, you can lose all of your money overnight. I'd shoot first and ask questions later with these, either as an uninsured depositor or a shareholder. Don't be a hero in these cases.

Bottom Line

We just had the biggest bank failure in the US since the 2008 financial crisis. It's too soon to tell what the full effects of this will be or what the government response will be. Buying the market, in general, looks extremely risky here and stocks are not even close to cheap, but some large, well-regulated banks that have seen double-digit selloffs could be worth a look for those brave enough. Cash is overall still your best portfolio bet, but if megabanks continue to sell off, there may increasingly be some nice value there.

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