One of the things that our clients value is that we monitoring their finances and the financial situation. During times like now in the midst of the banking crisis that has affected SVB, Signature, First Republic, and Credit Suisse, there is so much information and uncertainty out there, what is one to do?
As I have said in previous challenges, do not panic!! Do not misconstrue this. It is okay to have deep concerns but it is never good to panic. Pure and simple, we rarely make good decisions when we panic. We have to calm ourselves down and objectively think through scenarios.
Whenever, there are challenges in the banking system, people envision the scene in the movie, “It’s a Wonderful Life” where there was a run on the Bailey Savings and Loan and all the depositors want to take their money out at the same time. That is the first concern that it will affect one bank. After that, the concern is will it cause a bank panic where banks are like dominoes and they systematically fail.
Ironically back at beginning of February, I started reading “Too Big To Fail” by Andrew Ross Sorkin (if you like the show Billions he came up with the idea for the show). Sorkin is a journalist and he documented the banking and financial crisis of 2008 which was the worst crisis in virtually all of our life times. In 2008, the investment banks, Bear Stearns and Lehman Brothers failed and it easily could have cascaded to others like Morgan Stanley, Merrill Lynch, and businesses like AIG. The Federal Government stepped in to prevent the whole situation from spiraling out of control. Of course, opinions vary widely on Government’s role and did it do too much, overreach, or made the wrong decision and let more institutions fail. Of course we will never truly know the answer. What we do know is that we largely avoided a much more severe recession and possibly depression.
As we do research, read prodigiously, talk to analysts, money managers, and others, one thing we can say with certainty, no one definitively knows what the long-term outcome will be. It is way too early to tell. Nevertheless, as we talk to folks, here are some key things we have learned:
(1) The banks that had challenges like SVB, Signature, and First Republic here in US were heavily tied to the U.S. technology sector. As the companies that they helped provide financing had challenges due to the inflation and interest challenges over the last year, those firms had cash flow problems where they needed to take their money from those institutions to keep their businesses afloat.
(2) The challenge was that the banks did not match up their investments to time horizon they needed to cover. This is huge because as many of you know we recommend following the bucket plan. Where one has money in three buckets based on the time you need your money. There is the now bucket, which is what you need for next year, soon bucket is what you need for next 2 to 10 years, and the later bucket which is 10 years and beyond.
(3) What happened with banks is that they had a lot of US Treasury bonds that were 10 years and longer. US Treasuries are backed by full faith and credit by US so credit risk was good. However, because they were 10 year bonds, the banks exposed themselves to interest rate risk. When interest rates go up bond prices go down. However, if you hold the bonds to maturity, you will get your par price. This is the challenge, depositors wanted their money but the bond prices were down and nowhere near the maturity date. The bank’s assets were not enough to cover the cash that depositors wanted and hence the crisis and run.
(4) For us, it just shows how the bucket plan not only applies to us as individuals and couples but for risk management of businesses. If you have short term needs, particularly for your now and soon, within a 5 year window, you should have money in cash, short-term bonds, bank cds and possibly fixed or indexed annuities.
The big question is will this banking crisis become a much bigger issue. As we talk to our partners, one big difference between 2008 and now is that in 2008 it was much bigger national banks. The bigger national banks are under more restrict regulatory requirements and most likely are better capitalized. The question is should smaller regional banks have more restrictive regulatory requirements?
Most of the research we have done and professionals with whom we are working are monitoring the situation but do not recommend people make major changes to their long-term plans.
The Treasury and Federal Reserve have stepped in and said they will protect depositors. At one level this is really good. It has caused others to worry that by doing this, banks in the future will continue to not have proper risk controls if they know the Government will step in. There are no easy answers.
For us, at this point, we really reemphasize to try keep one’s cool. No one definitively knows what will happen. However, it is important to know that we design plans knowing we will go through crises. That is why the time segmentation of the bucket approach is powerful. Having guarantees either in performance or income is an awesome tool to keep us emotionally stable. Investing as we have said before can be emotionally taxing even for the most knowledgeable. However, it is crucial to keep one’s head and not make rash decisions.