Yesterday I had the privilege of actually going to a Silicon Valley Bank branch. I ended up in the news for doing so, but I went to a Silicon Valley branch. This particular Branch up in NorCal in Palo Alto is actually Menlo Park was where the address was, happened to have a Hex.com sticker on it as well. Uh, and folks, what we've got to talk about is the lack of panic.

There was a lack of panic and maybe that's actually exactly what the point was. Maybe the idea was that during an economic crisis, we shouldn't let Banks fail or any deposits be at risk because what would happen if any deposits even remotely had a one percent haircut. What would people do? They would flee from smaller Banks and end up consolidating into the top 10 or top eight. Banks Certainly the top four.

Banks I Think some of the biggest recipients and beneficiaries of this crisis are almost certainly going to be the top four to top eight Banks As people consolidate over to those, but the question is what happened was what happened? a bailout and was it necessary? Let's think about that together. first. what happened I Think the easiest way to understand what happened is the following drawing now: I Spent a lot of time making this drawing because well, I mean, as you can see, the quality is pretty dang high right here. and so this is actually a sheet directly from the Federal Reserve and even though it talks about that, uh, well, you know Saint Patty's Day coupon for next week.

uh that you could use. Now for the programs in building your wealth, it talks about the terms for the borrowing that Banks can do to make sure they could be a participant in essentially the Federal Reserve bailout and one of the key elements it says here is collateral valuation. The collateral valuation of assets that are borrowed against will be at par margin will be 100 of par. So that's a fancy way way of saying.

the Federal Reserve is going to look at the value of your asset, not based on what it's worth today, but rather what the note says it's worth. So think about that for a moment. If you bought a car for twenty five thousand dollars and today it's worth ten thousand dollars in the market, the FED is basically looking at it, going and saying well, the retail price is 25 so we'll just assume it's worth 25. Now that might not be the most Fair example because at least these bonds or paper assets that the banks have actually have hope of being worth 25 in the future.

Uh, whereas a car might not. But anyway, here's my drawing to sort of explain this. So on the left side we have a broke bank and the broke Bank says here's an IOU which remember an IOU is just a piece of paper I Think sometimes we over complicate what a like what a bond or a loan is like. Those things sound really complicated.

Really all alone is is a piece of paper that is. You hand me let's say a check for ten thousand dollars and I hand you a check back. That's an IO or a piece of paper back and all it is is an IOU IOU Ten thousand dollars back plus X in interest right? that? that's that's all it really is. So anyway, the banks, uh have an IOU which carries value and so the bank say hey, look I have this piece of paper that says somebody oh owes me a hundred dollars but today the market says this paper is only worth forty dollars and the Federal Reserve comes along and says looks like a hundred dollars to US because your IOU says a hundred dollars So here's a hundred dollars in cash.

and then the politicians say yep, not a bailout because the fed's doing it So in other words, you have this kind of contorted system going on where basically the FED is overvaluing the assets that banks have the toxic assets banks have and there's a reason for this. It's really important. You have to ask yourself, why would anybody else want those toxic assets? What company is going to come in and buy Like what private company is going to buy Silicon Valley Banks toxic assets if the Federal Reserve will give them a hundred dollars for all their toxic stuff A private Enterprise If everything is worth, let's say 50 cents on the dollar. A Private Enterprise won't even pay 50 cents on the dollar.

They'll have to have a margin of safety built in on top of that. So they might only be able to pay 30 cents on the dollar. So that way they could potentially make a profit by buying the bank, right. So a private Enterprise wouldn't be stupid enough to buy this because they would basically be signing up to lose money unless they were getting a big discount.

But if they were getting a big discount, then there wouldn't be enough money to give the depositors. Whereas if the bank is able to say hey, we have all these toxic assets, can somebody just give us money based on those? Guess what? Silicon Valley Bank can actually do. They can actually pay all of their depositors. see: remember: Silicon Valley Bank was insolvent as of December assuming the market valuation of their assets.

Remember, they had about 91 billion dollars in assets that were written down to 76 and potentially even lower and market value. But if they actually had a full market value of all their assets, they were not technically insolvent even after you took out intangibles and all the other goodies. The fact is, if somebody paid them a hundred percent on basically par value, the bank has all the cash it needs to cash depositors out and this is where I believe the Federal Reserve looked along with Biden and Yellen and I believe what they did is I believe They picked up the phone and they called The Bureau of Labor Statistics and said hey, uh, we got a labor crisis uh, or a banking crisis over here. Uh, we're gonna need a little bit of heads up on what that inflation report is going to say and we already have a hint from Joe Biden What did Joe Biden say right before the inflation report? Inflation will be good on Tuesday In other words, the CPI report will be good on Tuesday Okay, so that basically gave Yellen the Fed and Biden the license to essentially overpay for these assets because in theory, as long as these assets are held to maturity, they are worth what they are.

The money is actually there. Now technically the backstop for that program. which a backstop is just a fancy way of saying. Well, what if those assets end up being toxic and the FED loses money on it, right? So the backstop to that is something known as the treasury equal a treasury.

It's like a treasure. I know I forgot what the word is. Darn it. it's like the treasury Equalization program or something like that.

But basically the backstop is this program that was created in 2008 and refunded. That is that as more money was put into it during covid. It's basically this program that has somewhere around 100 billion dollars and the program allows the treasury to essentially compensate the Federal Reserve for losses. Well, guess where the money comes from in that backstop program from taxpayers.

So even though technically right now, the money isn't coming from taxpayers, it's coming from the Federal Reserve's money printer. They just digitally create the money. Sometimes when I say that people are like, but Kevin I didn't think the fat printed money I thought the Treasury printed money. So the FED digitally prints it.

the treasury physically prints it crazy, right? Anyway, so the FED turns on the money printer. If they lose money on their guarantee, who pays for it, Taxpayers via the Treasury's fund that backstops this program. Or there's also a second uh, By the way, that program is the Treasury Exchange Stabilization Fund which is backed by taxpayer Appropriations Appropriations Fancy way of saying tax dollars that Congress is like oh, look at all this money we have oh, where should we put it Walter and Nancy where should we put it? Let's put it over here. That's what.

Appropriations They're appropriating the money, right? Anyway, So that's one way that money can be backstopped. The second way is through higher FDIC fees. Now this is straight up socialism. When you say One Bank sucks ass and had bad risk management and then you say but don't worry whatever losses we suffer because we bail out and help that bank, we'll just go ahead and raise the fees on everyone else to compensate for that.

That's socialism. Now it's Bank Socialism. In this case, that's not Bank Capitalism Bank Capitalism would be let the bank fail, right? Uh, But and the bank did fail In Fairness In Fairness. The bank did fail.

Uh, You just had somebody artificially come in and over value the banks leftover toxic assets at basically not toxic levels. Uh, and then use that money to probably pay the extended salaries because salaries were increased about 50 a day before the FDIC receiver or actually upon the FDIC receivership. That's actually normal. You raise salaries to keep people on staff for 45 days.

So you raise everyone's salary 45 or 50. So people are incentivized to stay while they wind down the bank and they find new jobs that's actually normal. What's not normal is all the stock bonuses that were issued just the day before the FDI receivers show trip or the millions of dollars in stocks. The CMO CFO CFO by the way, who used to work for Lehman and CEO paid out.

That's not normal. But anyway. Uh, if if higher FDIC fees are necessary, which the reality is, they may not be necessary because of the Fed's backstop. If higher Fdic's are necessary, we would expect that other Banks would end up passing those onto the consumer in the form of higher fees or the Third Way.

The consumer pays is via inflation because the FED turned back on the money printer. So no matter which way you slice it, this is a deposit bailout. and in a capitalistic, in a purely capitalistic system, it should not have happened. The bank's assets should have been sold at market value and then whatever was left which may have only been 70 or 80 cents on the dollar.

Whatever was left would then go to depositors as a dividend. So anybody who's within the FDIC Insurance limits which you should always know what those limits are and you could do that by typing into Google FDIC calculator, you could calculate what your protection is. anyway. After you know that anything above that level, which is known as an unsecured or uninsured deposit, you receive a certificate for and then you get dividends.

In other words, once the FDIC starts liquidating assets, they're like, all right. Here's you know, another extra hundred grand We found. All right. Everybody gets ten dollars, whatever and they just keep doing that until the bank is entirely liquidated.

So the point of that is, uh, to basically break down that yes, this is a deposit bailout. This is not a stock bailout or a bond bailout. Those people get wiped out. Yes, the executives get fired.

But there is still a question of if you backstop all depositors 100 with basically funny money, Do you create moral hazard? Moral hazard is the incentive for banks to say let's have risky lending products but it's also the Dual incentive of the depositor saying I want risky lending products and I'll go ahead and put my money at the risky bank because the Fed's just going to come in on their white night and bail us out anyway. So who cares if I'm above FDIC Insurance I'll put my money at the risky Banks because the Fed's just gonna bail them out anyway. Now to some extent, everybody should have that mindset. To some extent, every single one of you should be thinking, well, if there's more than a non-zero chance that a small Bank goes bankrupt, I may as well go bank at the top four Banks or the top eight Banks because those will always get bailed out Now to some degree that is already a massive set of moral hazard.

The fact of the matter is when I hopped on the Twitter spaces. uh, that was going on around this contagion crisis or somewhere or twenty thousand people there. uh and uh I mean I think the uh, some Vice power some presidential candidates were there. some Congress folks were there.

it was really interesting space. but anyway, when I talk in it uh I I said look, the fact of the matter is because they asked me what due diligence do you have to do on the top four Banks And this is a form of moral hazard so I'm being clear about that I Recognize this is a form of moral hazard I Said the reality is, you don't have to do anything more than knowing that they are guaranteed by the Fed so you actually don't have to trust in the top four or top eight Banks All you have to know is their de facto guaranteed by the FED. In other words, the money printer will always turn on for those to some degree that is a moral hazard, right? Chase could technically be more risky because of that. However, the FED Reigns that moral hazard in by having really, really tight regulation.

Now we used to have that tight regulation for smaller Banks like Silicon Valley Bank as well. but back in 2018 and it's not just Republicans Democrats voted for this as well. Pretty much everybody voted for deregulating smaller Banks Trump Republicans and many Democrats The only people who didn't vote for it were Progressive Democrats Like you know you know the Bernies of the world and uh, and Elizabeth Warren uh and even people like Layl Brainerd not that she was in Congress at the time to vote uh, but she was just working at the FED now she works at the NEC But anyway. uh, back in 2018 and 2019, she said quote: I see little benefit to the banks or the system for the proposed reduction in the core resilience that would justify increased risk to financial stability in the future because a liquidity crisis at a bank in that range or higher would pose substantial risk of loss to the deposit.

Insurance Fund The FDIC She raised concerns the change is quote weaken the core safeguards against vulnerabilities that caused so much damage during the last financial crisis. So in other words Fair gain The person with some of the people who were anti the regulation loosening in 2018 and 2019 were actually the ones saying look, this is going to potentially lead to a 2008 again because if we have those bank failures, then we end up with agent where basically everybody leaves the small Banks they realize hey, it's it's risky to be at the small Banks Let's just go somewhere where there is basically no chance the banks can fail and then you end up with less banking competition and potentially less banking Innovation Now there is another way the Federal Reserve could solve this. the Federal Reserve and and our government could basically say forget about the top eight Banks look this was something I proposed let's let's guarantee. Uh, let's basically bring the top 100 Banks or or top 30 Banks or top 50 Banks Let's just bring many, many more Banks Under The Umbrella of basically too big to fail but then put them under the umbrella of much more scrutiny and much more regulation.

But that's exactly what banks like Silicon Valley Bank didn't want. So in other words, in this case, who wins? Well, overall, markets win because we got stability from this bailout. Yes, to some degree, taxpayers are bailing this out. In this in essence via the fact that they enable the Federal Reserve to bail this Bank out with funny money, the taxpayers are enabling that.

That is a bailout backed by the taxpayer. Technically, the taxpayer doesn't have to pay today, but they are backstopping it if something goes wrong. Fine, But what is the benefit Now to the taxpayer? Well, technically we have a stable Market We have a market that didn't go to hell on Monday We actually have uh, you know, indices that that were quite stable, if any, anything positive. throughout the day.

Yesterday, we actually have 10-year treasuries that became down and so the two years substantially. And while they're moving slightly up today, you've actually through this stability lowered. uh, the likelihood of the FED continuing to hike. You've also lowered the cost of credit.

So to some degree the taxpayer here is is somewhat winning from the stability we have. So looking at the stability we got, remember: I went to a Silicon Valley Branch yesterday and the stability I saw was actually fantastic. I mean look, this was my little short little clip from being outside the bank and there are like five reporters standing behind some cones and that's it. That's it.

There was no Panic Uh, like the news media, we're driving around basically just trying to find any bank that was making people queue up outside the bank. And I mean at most you had maybe like five or ten orderly people standing in lines to go. You know, deal with whatever they needed to at the bank, presumably withdraw money, but you didn't actually have Panic So you didn't panic. Yes, the taxpayers are backstopping it.

Uh, but now credit is is like costs are falling so the consumer's winning the question. Now the only question that really remains now is what kind of new moral hazard did we create via not even having but a one like not even a one percent haircut for depositors? Well, you've basically said don't worry, you can stay at all small Banks Because we are de facto extending FDIC Insurance to unlimited amounts of money. this actually now makes it and that's not necessarily true I mean there could be another bank tomorrow, a small bank that fails and the Fed's like, yeah, sorry, we don't care. But then again, they opened their lending facility for all banks.

So technically all banks can go get clown Funny Money Uh, which we've already described. What that clown Funny Money looks like. It looks like the FED saying hey, you know we see your assets worth forty dollars, but on paper it's a hundred so we'll give you a hundred bucks for it, right? That's that's a de facto funny money that ends up being backstopped by by taxpayers. So the the question is, is there now Moral hazard that we have extended FDIC Insurance to all banks possibly now, even though share like when shareholders bot holders get wiped out at a bank, you do somewhat limit moral hazard because what shareholders would authorize a bank to take risk that would allow them to potentially fail, right? Well, I mean probably a lot of shareholders because shareholders really just show up because they want to make money.

So I Think the idea that shareholders really know what the hell is going on the bank doesn't really work. I Suppose the executives know what risks they're taking, but then again, you know sometimes if you really want to win, you take risk. So I don't know that we've really reduced the moral hazard by punishing executive shareholders and bondholders here. Really, what you've done is if you've told every business owner or the one percent that, hey, don't worry if you want to bank at smaller Banks and take out riskier debt, you can do that and as long as it's decently large enough, we'll bail it out even above the FDIC limits.

And then that, of course encourages riskier lending. Now is that necessarily a terrible thing? Uh, possibly in the short term, but I would expect over the next probably years because it takes a lot of time to do this. I Would expect new banking regulation to actually bring Banks the size of Silicon Valley Bank plus or minus back into the 2008 style 2009 Dodd-Frank style protections that we had and that then would potentially limit that moral hazard. So in other words, bottom line: out of all of this: I Think it is absolutely right if you're part of the 99 and you're pissed off because you think this is a taxpayer backed Funny Money bailout of Silicon Valley The fact is, that's exactly what it is now our taxpayers actually going to lose anybody maybe not, or new regulations going to come that could potentially prevent this in the future to eliminate any remaining moral hazard.

Maybe so. maybe Michael Burry is right when he says the Silicon Valley Bank event is really a nothing Burger That's entirely possible. It's entirely possible that all of this ends up just being a nothing. Burger Is it like were we ever and I changed my mind a lot? But were we ever really concerned about the big Banks or this being a systemic crisis? No, it's the same thing I said last week.

It's the same thing I've said for the last year and it's the same thing. Kathy Wood Told me at dinner on Friday there's no systemic issue at this point and of course, if we see red flags of that, you'd all be the first to flip-flop I mean I got two cups of coffee to keep me awake and I'll flip-flop as much as I need to. but we've been pretty consistent here. that, uh, there is moral hazard and this is a Bala will It ultimately be funded by taxpayers TBD Will there be better regulation to fix this and prevent this in the future? TBD But if maybe it's just not as terrible as originally feared and maybe maybe just maybe the government actually did the right thing.

Maybe because even though it's a pisser, the reality is, this week would have been an Sh-9t show if everybody had to go to every one of their Banks and start moving to the big Banks And we technically don't have that disaster right now. In fact, even First Republic Bank Keep in mind I Drove to a First Republic Bank yesterday. there's literally one right next to Silicon Valley Bank and uh I flew up to San Jose and I drove around Okay, I had meetings as well so it's not like that was the only reason I flew there I had some meetings with developers and VCS but anyway, First Republic Bank fell to 31 yesterday. Right now in pre-market this suckers up 65, which puts it at about 51 bucks in pre-market I Think now there's sort of this sigh of relief that okay, we're not going to see mass panic at the smaller Banks and maybe just maybe this is a big signal to the FED that hey, it's time to start slowing down.

With rate hikes, we've started breaking things. and generally once we start breaking the Fine China of the economy, what do we do? We pause or we start cutting. So uh, with that, of course. Remember that we have amazing programs on building your wealth.

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