Hey, this is Tom and this is what we know so far, one of the largest banks in the US was closed by The Regulators in one of the largest failures of the American Bank of all time. Now we also know that the Federal Deposit Insurance Corp. The FDIC was named as a receiver and ensure customers would get their money, would get access to their accounts as soon as Monday morning. Now, the collapse came after billions of dollars in withdrawals caused the bank to have insufficient liquidity to meet its obligations, which made the bank unsafe and put it in an unsound condition to carry on its business operations.

Now you may be shocked to find out that I'm not talking about Silicon Valley Bank here. No, No, no, Well, I just read to you was a 14 year old article from The Guardian about the collapse of Washington Mutual in 2008. Word for word Now in 2008, Washington Mutual was the largest Savings and Loans Bank in the US with over 300 billion in assets and it faced a bank run similar to Svb and much like Svb, it ended up collapsing. JP Morgan ended up buying up the bank, but to this day it Remains the symbol of the Great Recession and the failure of the U.S banking system in 2008 along with bear Stearns and Lehman Brothers Shout out to Jim Cramer.

Now let's go back to Svb. We just witnessed the second biggest bank collapse in the U.S and it happened in 24 hours and now we're hearing concerns that the contagion from this collapse might spread broadly through the U.S financial sector just like it did in 2008.. So is this the same type of situation we had in 2008? Is there risk that Banks like Chase Wells Fargo Bank of America Can they collapse? Should you get your cash out of your bank as soon as possible? Well, to answer these questions, let's back up a bit to where this whole thing started. You see, Svb is a unique Bank Its main focus is Venture debt and it's the biggest of its kind in the entire world.

Make no mistakes about it. This is no chump. Oh, what SBB was doing was actually pretty. Innovative They were providing loans to startups and early stage companies with virtually no history.

no track record, no real collateral. You would be shocked. but big. Banks Don't like giving money to 30 year old first-time startup.

Founders They want to see your track record. They want to see you proper collateralize. They want to see great credit history. You know things that 30 year old startup entrepreneurs don't usually excel at.

Let's put it this way now. enter Svb the White Knight They gave these guys credit lines without any of that. Now these loans were simply collateralized by the shares of the newly formed startup. the one that's boring the money.

but in reality these were not really collateralized loans at all. Because these companies, you know if they couldn't pay their debt. Usually this means that their Shares are pretty much worthless and usually their Shares are worthless even to begin with. But that's a whole different story.

But somehow, by the grace of God, this thing worked. And it worked great for 40 years. And it worked terrific as long as interest rates were very, very low, money was cheap, valuations of pre-revenue startups skyrocketed, and that led to half of the U.S startups using Svb for credit lines and Loans. But like in any fairy tale, we always have the Evil Witch.

In this case, this was the Federal Reserve. As high interest rates were implemented by the evil Fed in 2022, this changed everything and the way it happened is going to blow you away because you see for every Bank a big chunk of their profit comes from the difference between the interest it pays to borrow which is pretty much nothing and the interest it perceives from its bonds, which is usually two, three, four five percent. In normal times, the problem is that 2022 in 2023 are not normal years by any stretch of the imagination. 2022 catfished the entire financial industry.

Now when tech stocks and star evaluations were soaring back in 2021. Venture Capital Firms were salivating. They were funding lots of new, exciting companies with a bunch of money like hotcakes, and that funding flowed directly to S VB and became tasty yummy deposits. Now this was working so good that in 2021, Svb's deposits increased by 90 percent.

You get this: 90 a single year. and when the FED started actually raising interest rates, the main clients of Svb, the startups and early stage companies they got, absolutely destroyed. The valuations fell flat and investment activity from Venture Capital pretty much slowed down to a screeching halt. and that stopped the flow of new deposits into Svb.

Now, Svb was stuck with no new deposits and multiple money losing clients that were burning through cash the same cash that was a deposit just yesterday for Svb. As a result, SBB got more and more shortened capital. In other words, they ran out of cash. Now In addition, it had its money tied up to government bonds which went from being a safe play to an anchor that dragged the entire Bank down.

And I'll explain exactly how when Svb bought these Bonds in 2021, the interest rates were low and the price of bonds was high. You see the lower the interest rate is, the more expensive the bond. Think of it as paying twenty five thousand dollars for a brand new Porsche Now in 2022, the FED dramatically changed the rates, implementing the biggest interest rate increase in the past four decades that crashed the price of the bonds Svb was previously holding. Now that Porsche that they bought for twenty five thousand dollars a year ago and was worth a hundred thousand dollars when they bought it.

Now it retails for fifty thousand dollars, but it's still a great brand that new Porsche You can still enjoy that drive it every day. it's still the same Porsche Same for Svb and these bonds SBB could technically hold these bonds to maturity and get everything. That loss will only be realized if Svb decided to sell the Porsche or in this case sell these bonds. Now if they sell them at market price, then they'll take the loss.

But why would they? It's crazy, right? Well, you know what they say. We plan God Laughs Now, during 2022 and 2023, the Svb deposit Hall became so big that in the middle of last week, the credit rating agency Moody's actually woke up from its Slumber called Svb and let them know hey, we're coming for you. We're about to downgrade your ass and you better do something about it. now.

That started the whole fire in Svb internally. they were all running around like headless chickens. Eventually, Svb sent a team to New York to meet with Moody's and resolve the issue. The solution they came up with was brilliant: Sell more than 20 billion dollars worth of low yield bonds and reinvest the proceeds in assets that deliver higher returns.

Problem solved. Now the transactions would realize that unnecessary loss which I was just talking about. but hey, it would be enough to avoid a multi-notch downgrade by Moody's which is an absolute death sentence for the bank. But as we now know, that plan collapsed, the war got out and scared the big clients like Pirutil which withdrew their money and their company's money out of Svb immediately and triggered an absolute pandemonium of a bank run.

Now, it didn't help that Greg Becker the CEO of Svb and other Executives sold millions of dollars off their Svb stock two weeks prior, which was very uncharacteristic and also very strange given the fact that he told everybody to stay calm. That's a whole different video on its own. Oh, by the end of Thursday customers would do a staggering 42 billion dollars of deposits from Svb. That happened in a single business day.

Now that was just too much and that led to the bank going into Fdse receivership. As we now know now. Look, the truth is that no Bank on this planet is always 100 liquid. Banks run on Trust Banks run on reputation and for 40 years Svb was to go to bank for half of U.S startups.

But once that trust was lost, the bank collapsed in 24 hours. So what happens to deposits? What happens to clients? Well, the FDIC standard insurance will cover up to 250 000. We know that these clients are okay. They'll get their money on Monday depositors with higher amounts are expected to receive certificates to when the FDIC is going to break it apart and get their money back.

meaning that they would be among the first creditors in line to be paid back when funds will be recovered while the FDIC holds Svb in receivership. Although let's be honest, they will not likely get all of their money back. That's the whole definition of insolvency. So that's okay, right? People won't get screwed unless they have more than 250 000 in their accounts.

And you know how many people have more than 250 000 in their account, right? Well, it's worse than you think you see. 96 of deposits in SVP are greater than 250 000 and for good reason. It's not because these are rich frickers that have more than 250 000 in their accounts. It's much worse.

Half of the U.S startup industry and early stage Tech is relying on Svb for credit facilities. The US has 130 000 startups, 65 of them rely on Svb credit lines and deposits to pay salaries. These accounts are responsible to pay people's salaries and 65 000 companies in the US. But it's not just a small garage.

Starters we're talking about here. It's much bigger than that. For example, video streaming company Roku which Kathy would loves. They got eight billion dollars of market cap and 500 million in cash sitting in Svb, which is about a quarter of their entire cash reserves.

Roblox. You know about them, five percent of their money is an Svb bill.com A great company. Seven billion dollar company, 300 million sitting in Svb. It's a lot of money.

now. What about the smaller cab companies? Let's imagine a 500 million cap tech company with revenues not coming in for another two years. Revenue is not coming in for another seven years. That mother lover Burns through 15 to 20 million dollars in a month and it needs that Svb credit line to survive.

At this point, the U.S startup and Tech sector seems to be the first line of contagion here. Or in other words, they're royally screwed. and that's going to be extremely bad for both the economy and this stock market. Now, the extent of how bad this is going to get, nobody knows it will depend on what happens next with Svb.

So the question here is, can Svb be saved And can this mess be avoided? Well, at this point, Svb needs a white knight to come and save the bank. A deal like that might involve selling the bank in its entirety or chopping off the pieces, selling it one by one. The problem is that this is a 200 billion deposits worth of assets sitting around and somebody's gonna have to swallow that. And that leaves pretty much no one on the table except the super Banks, the Goldman, Sachs the Wells Fargo's the JPM the Bank of America.

Now having said that, these Banks they don't like what they're seeing, This bank Svb is full of startups and not profitable risky debt that is not the style that super banks in the US are looking for. Asking these super bags to take a bad wheel and add it to their perfectly working 18-wheeler semi truck. Even at a discount, it's a bit too risky for their taste. Why this is definitely possible, but seems unlikely.

Now on the other hand, if Svb will be chopped up to little pieces and sold piece by piece, guess what? Everything will be sold except the startups and the early stage tech companies which nobody wants. So with that dire of an outcome I Don't know if it's likely that this is the path they will choose. So the reality here is that the size of Svb means that the only ones that can swallow this massive big whale are super Banks But as I mentioned earlier, it's unlikely they would want to. and obviously we'll have to wait and see how this thing plays out.

But talking about super banks are there even okay. I Mean should you take out your cash from your bank right now look in 2008 Washington Mutual went under we just talked about it is Svb is a kind of similar Washington Mutual moment here. Now look, despite the click bait you will see on YouTube over the next few days talking about the Contagion on the banking system, the short answer is that JPMorgan Bank of America Wells Fargo Goldman and all of these guys, all the super banks will most likely be fine. A broader contagion for the major U.S banks seems unlikely at this point, but there's a tier of medium-sized Regional Banks which might be in trouble in the near future due to similar issues that played Svb.

Think about the regular people in medium and small. Regional Banks that have never heard about Svb. They listen to the news. They get nervous.

Some decide to pull cash out of their local banks. Now what happens if 5 million, five million decide to do that? 5 million small clients and local small banks around the US Do that. It won't be good for these Banks They'll have to scramble. Now What about this startup industry in the US Is it finished? Well, It's certainly going to take a hit.

No banks will give credit to small startups with no profits, no track record, no history, no earnings. No. nothing. In this economy, some will get funding, but most of them won't And maybe that's the darwinian way of separating the good from the bad I Don't know, but in my opinion.

I Don't think that the banking industry should be making that decision. But hey, what do I know? And what about the startups? I Mean obviously, the startup industry in the US will certainly take a hit. No banks will give credit to small startups like Svb did without history, crack, record, or any collateral besides their own. Equity I Mean some will get funding, but most will struggle.

The concern is that startups that had Svb credit lines will be unable to pay employees. Venture Capital Funds are going to struggle to raise capital and this is going to be a further declining factor of an already battered Tech and growth sector. Beyond that, if U.S startups will struggle to get funding and Innovation will suffer, this is going to hurt long-term the growth of the US economy in the US GDP So what's the bottom line here after all this mess? Well, 50 of U.S startups are sitting right now waiting to see what solution they come up with because they're operationally dependent on Svb and unless Svb functions in some capacity or other under the FDIC receivership or a new ownership, they will be in a world of trouble. Super Banks on the other hand, not so much concerned.

I mean Super Bank contagion is possible, but very unlikely. At this point some smaller Regional Banks as I said will have to scramble to handle this, but in general the banking industry seems to be okay now the Fed. The FED is going to take some hit for being the culprit in the collapse of Svb because of raising interest, and they will be under pressure by politicians to slow down the rate hikes or maybe even reverse and reduce rates. But will the FED cave? We shall see at the end of the day, there will be some level of contagion, some level of government involvement, and some level of Fed back paddling.

but nobody really knows how this will play out. So if you hear people shouting about a total contagion or total lack thereof, probably best to stay away from these idiots and listen to the actual information. Without this, now this is just my opinion. What do I know? If you haven't yet, make sure you subscribe to the channel, hit the bell and click all so you get notified every time.

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