Janet Yellen Just spoke on bailouts Jerome Powell gave his opinion on bank bailouts and the lagging effects of the Federal Reserve's interest rate hikes are finally hitting with the collapse of a Silicon Valley Bank and Silvergate just last week. Now the largest bank failure via Svb since 2008, folks, buckle up and get ready. Svb and the FDIC have 8 500 employees now getting paid 1.5 x their salary at Silicon Valley Bank for the next 45 days just to help the bank actually survive during the liquidation process. Silicon Valley Bank is expected to open under FDIC receivership on a Monday We expect a lot of people to be in line at banks around the nation for and quite frankly, around the world, given that Svb also has International facilities looking to withdraw their money from Svb.

But it's not just Svb, it's also the potential contagion risk of people not knocking on the door of banks like First Republic or other local Regional Community Banks potentially even Credit Unions As even Credit Unions people are likely to be clamoring on the doors of banks demanding to get their money out of the banking system. At first, we expect the bank run to only be limited to smaller, less likely to be systemically important on banks. those are most likely to see the largest withdrawals in that classic Bank Run that we haven't seen since 2008. Despite the fact that this is exactly what Donald Trump actually predicted might happen during the 2020 election Now back then and it doesn't matter if you're on the left or right, you might have thought it was hyperbole.

I Think almost everybody did, because back in 2020. I Don't think many of us were thinking a massive recession was coming in, that there would be bank failures much like 1929. And so whether or not he was making that up or he has a crystal ball, that's what's happening. Now you're seeing the prominent lender for wineries disappear.

So Winery Credit lines being frozen. Companies like lemonade having money tied up in a Silicon Valley Bank Roku Having 25 of their available cash tied up Rocket Lab 38 million dollars of cash tied up. There's a particular a sofa, even has a 40 million dollar lending facility tied up by. Silicon Valley Bank And usually money that's drawn on those lending facilities that isn't used in working capital has to be left deposited with the bank as a lending.

Covenant though we're not sure of that detail so far. Of course, I'm bragging that their money is safe, but of course we've never heard anybody lie to us before about how safe their money is. hint, hint sandbankment free just two days before. Don't worry, everything is fine.

Or how about Block Fi the same morning? Don't worry, everything is fine. Just eight hours later. Oh no, everything's not fine. We are now bankrupt and we can't process withdrawals anymore.

The worst thing that you want to hear from a bank is, don't worry, everything is a fine in a bank run. Unfortunately, that's just the way the game is played. Banks have to fight for their own Survival So they say what they will to try to soothe people with money in Banks So what should you do and what do we think is going to happen because right now, fears of contagion are running rampant. Larry Summers is warning of severe economic consequences if Regulators don't smooth it Venture Capitalists who have a lot of money tied up in startups that could go bankrupt if they can't get their money out of Silicon Valley Bank are scrambling on Twitter saying it's The Regulators who were asleep at the wheel that it's the regulator's fault that Silicon Valley Bank was able to get away with terrible risk management procedures that led to the collapse of Silicon Valley Bank Quite frankly, there is a ton of finger pointing.

Even 180 tech companies sent a letter to Jeremy Hunt the Chancellor of the Exchequa in the United Kingdom begging Jeremy Hunt to intervene And guess what he said in the United Kingdom for sale silicon Valley's branches there. sorry we ain't bail India out. So what do we think is going to happen in America Is it possible that the loss of deposits by consumers at the Silicon Valley Bank have the potential to the entire sector and set the ecosystem back 20 years? And Destroy potentially 10 years of innovation in America As the CEO of Y Combinator wants you to believe, Is it possible that the 16th largest bank in America will end up leading to a disaster financial crisis in the United States And ultimately, whose fault is it? Well, let's get into all of this and more. We're specifically going to refer to history.

We are going to refer to what is happening with hedge fund buyouts. We're going to refer to: Jerome Powell Janet Yellen We're going to talk about a potential backstop fund. We're going to talk about where Rokana gets his information wrong, and we're going to talk about what you should do. If you are associated with the banks, this is very important.

What you should do will be coming up as well as always. This channel is only sponsored by the Programs on Building Your Wealth. Those are linked down below. If you haven't checked them out yet, learn from my perspective.

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What's happening right now with startups is startups are realizing that they have statements that say hey man, look, we got a statement and our statement says we have 10 million dollars at the bank We need that working capital Monday Otherwise we're going bankrupt and what are some hedge funds doing? They're coming in and saying write us all of the rights to this account that has 10 million dollars. We will give you six million dollars. Right now that is called a hedge fund buyout where a hedge fund literally swoops in and says, here's six million dollars, write your entire account over to us. The benefit to the startup is they get at least some access to their Capital without having to wait potentially weeks or months to find out what happens once they're above the uh, the 250k, FDIC limits or the other limit depending on how your accounts are structured.

Now, the benefit to the hedge fund is if they end up getting a larger bailout. say a 70, 80, 90, or even a hundred percent backstop. The hedge fund gets that other up to four million dollars. Just in this example, those hedge fund buyouts are happening now because businesses are actually panicking that they might go bankrupt if they don't have access to at least some of their capital.

And folks, this has happened before in history. Obviously, this has happened back in the 2008 financial crisis. There's no doubt about that. And in nominal terms, we have seen this happen recently as well, because consider that in nominal terms.

We've had just a wee bit of inflation here. So when we compare the current banking failure of Silicon Valley Bank to banking failures of 2008, it looks a little scary. It's not something you want to look at, but I'm going to show you anyway. Look on screen now.

look at Silicon. Valley's 209 billion dollars asset failure which almost Rivals the 307 billion dollar bank failure of Washington Mutual also known as WAMU that ended up being bought up by JP Morgan Chase I was actually part of that because I personally had banks at WAMU that ended up being converted to JPMorgan assets, which JPMorgan today is the largest bank in the country with over 3.3 trillion dollars in assets. It's absolutely insane. But what does history tell us? Well, the first thing we could do is we could look at the history of 1991 and 1991 gives us some insights into not only Jerome Powell's opinion on bank bailouts, but we also learn what actually ended up happening in 1991..

let's go ahead and start with Jerome Powell take a look at what Jerome Powell did and said back in a book written by Hawks Ado or actually titled Talks, Doves and Jaybird. Anyway, take a look at this page here. What you find here is a Harvard academic whom Powell reported to came down firmly on a one side. Now this is this is a Harvard academic here and this individual whom Powell reported to in other words, Powell's boss came down firmly on one side Powell's boss hated bailouts and Powell huddled with the federal Governors uh or these various different Governors at the treasury Department about uh, where we had the uh boss of Jerome Powell pounding the table insisting that depositors take a haircut and pay for the sins of the bank if we always run to the rescue.

He said it creates a moral hazard. So in other words, Jerome Powell grew up his financial knowledge when here in 1991 when he was just beginning his career in in essentially monetary and fiscal policy and his boss told us that Banks should not be bailed out and neither should depositors. The reason for that was it creates the impression that the government will always run to the rescue and it creates something known as moral hazard which is a term the insurance industry uses to refer to people who take risks knowing they're protected against larger losses. Now what I think is fascinating about this is: think about this yourself.

It if you have accidental damage protection for let's say your iPhone you're much more likely to take your iPhone on the roller coaster and video yourself because if you damage it, you're insured anyway. This is the same thing obviously on a different scale that also happens in our economy. When Banks believe that the government is going to come in and save depositors, then what happens? Banks are more likely to take on risky debt and make risky loans because at the end of the day, the depositors will end up getting protected anyway whether they have more money than the FDIC Insurance limits or not. And this is where Jerome Powell's boss insisted that depositors end up taking a haircut to pay for the sins of the bank.

And this is important because this is the same kind of discussion that is very likely happening today. We don't think that people who have more than 250 000 at uh, the Fdi's or over the FDIC limit at Svb are going to lose all of their money. But consider this. Let's say that the bank Silicon Valley Bank has seven has enough money to cover 70 deposits above the FDIC limit.

Let's say you're a startup with 10 million, two hundred and fifty thousand dollars at the bank. Well, 250 000 gets covered by FDIC So let's kill that and say you have 10 million dollars above the limit and now potentially through an FDIC guided liquidation of the bank. It's possible that the individual or the business with 10 million dollars could get seven million dollars back. This is an example of receiving a haircut on a deposit at a bank.

Now some people say why is it the responsibility of an individual or a business to take a haircut? Well, it is that individual or business whom technically received the benefits and choice of working with that bank and in a capitalistic environment. whether it is right or wrong, a depositor who share and the benefits of the bank may also have to share in the risks of the bank. And this is exactly the kind of discussion that's going to be happening now because if Federal Regulators bail out every deposit or to a hundred percent. It reiterates that hey, as long as you're in the top 16 of banks, don't worry, the government will just come in and bail you out even if you had terrible risk management procedures at the bank which Silicon Valley Bank did.

We'll talk about those in a different segment, but here's what we think, uh, will happen and this went on here. So other folks in the discussion argued that if uninsured depositors take a haircut, there will end up being a run on every American Bank when they open on Monday and all those Money Center banks will be at our door. Do you really want to run that test? And ultimately, without dissent, Powell and crew chose to bail out banks in 1991. Now that's actually really interesting.

but because the discussion showed there was a thought that depositor should take a haircut and not everything should be bailed out. And we just got some hints from Janet Yellen about what our government might be thinking about doing today. But let's go ahead and jump into this first. This is a piece from 1991.

this 1991 piece from The New York Times shows us the following: Acting to avert a run on one of the nation's largest banking companies, the Federal government today sees the Bank of New England and two Affiliated Banks and said it would protect all depositors until the bank could be sold. The rescue is likely to cost taxpayers 2.3 billion dollars. Listen to that. If the government bails out Silicon Valley Bank it's likely to cost taxpayers money.

Now there's been some talk that maybe it wouldn't Don't worry it will. It will cost taxpayer money. Taxpayers money. And we will talk about it here now.

JD Young did just say we're not going to do that again referring to bailouts, but she gave some hints about what they're potentially going to do. Let me first continue on with 1991. in 1991, there was a bank run of 1 billion dollars being withdrawn over two days. on Friday In America 42 billion dollars were withdrawn from Silicon Valley Bank on just the Friday Think about the magnitude of that.

Back in 1991, you had just 500 000 per day withdrawn and that led to the government essentially creating a too big to fail bailout. on Friday We had 84 times the bank run of that and that is why many are scratching their head going. Wait a second. Usually usually when the FDIC takes over a bank, you know what they do.

they wait until 5. PM on Friday they take the bank over, they operate over the weekend to officially take over the bank and then what they reopen Monday Now when did the FDIC take over? Silicon Valley Bank at about 8 52 a.m Pacific time on Friday In other words, Regulators went into this bank early Friday morning and potentially late Thursday and said this is so bad we're not even going to wait until the day is over. We are going to shut the doors of the bank just 52 minutes after the bank opened and potentially in some cases Banks don't even open until 9 A.M So potentially this bank got shut before it ever even opened that day depending on the branch. So anyway, so we talked about uh, Powell's boss.

We talked a little bit about uh, a potentially Janet Yellen. We'll talk more about that in just a moment. but take a look at this: Bank of New England was the 33rd largest bank in America at the time. the Silicon Valley Bank is the 16th largest bank in America Big difference.

So the bank is twice as big as a ranking Factor as uh, the New York or the New England bank that was bailed out was in 1991. But there are also banks that did not get bailed out. And look at what happened to them here in 1990, The Freedom National Bank of New York in Harlem one of the nation's largest minority-owned institutions was not bailed out. and as the bank collapsed, the FDIC ended up deciding to only make good on 50 cents on a dollar for all accounts larger than the then FDIC limit.

A 50 Cent haircut was created for banks in 1990. that's actually surprising. It is something that could happen today. But here's something else that happened in the early 1990s: Governors Like the governor of Rhode Island ended up swooping in and actually preemptively shutting down local banks and Credit Unions for Fears that they might not be solvent.

So in other words, you could literally have Regulators come in and just close every local bank. Potentially, if not saying they will, but it's possible you could potentially have Regulators come in close every local bank and say, give us a few weeks We need to figure out what's going on. This is why it's incumbent upon you to probably get your money out of local and Regional and credit union banks that are local I Understand, credit unions are different. We'll talk about that in a different segment, but most people do not differentiate between credit unions and Regional Banks they just go Uh, not JP Morgan not Bank of America not Wells Okay, let's move, but honestly, even Bank of America and Wells are trending on Twitter for people frustrated that their Bank does not have enough cash on hand for them to actually withdraw money Now, even though those banks are deemed to be too big to fail and stand under the Bazel.

3 Statutory requirements of substantially stronger stress tests and so technically you shouldn't have to withdraw your money from those large Banks People are freaking out that branches are actually running out of cash Now do keep in mind, branches do not have an unlimited amount of cash. so the best thing you can do to guarantee that you can get your money out of a facility is come in with a bank account and routing number and two forms of ID and ask that it be wired out of your account. It's like an electronic funds transfer that can happen same day. Usually if you go in your bank before 1 Pm Pacific time and generally since it's probably going to take time, you'll probably have to show up at like eight or nine to actually get it done.

You can initiate your wires online, maybe that's even easier, but what did Janet Yellen Just tell us? Well, let's jump into exactly what she just said because well, we need to know about it. Not only do we need to know about it, but we want to know about it because ultimately, Janet Yellen so Janet Yellen Uh and and this she had about a 10 minute clip on with Face the Nation this morning. I'm just gonna sum it up for you because I I respect your time. I'm also going to sum up what Rokana said about the Silicon Valley Bank uh uh, right after that in the collapse.

so we're going to go through both of those. But what did Jen Yellen say this morning? Janet Yellen Told us that they are paying attention to exactly what's happening at Silicon Valley bank and they are coming up with a plan Now This is really interesting. She said that they will not bail out Banks like they did in 2008, but there is a Nuance there generally now. especially if you look on Twitter or in the financial news media, you're going to see the word bailout be different from a protection of depositors, especially the Venture capitalists who are getting screwed.

They're making this very clear distinction. Hey, a bailout is when you bail out the owners of the bank like shareholders, bondholders, people who have Bank preferred stock. basically people who are associated with the profits of the bank that's deemed to be a bailout these days on social media, whereas protecting depositors is what people are clamoring for. And the idea here is that if as long as there's no quote-unquote bailout of the profit holders, hey, we could protect depositors.

So what did Janet Yellen say When she was asked about protecting depositors, she said quote, we're working timely on a solution. She was specifically asked: will you have a solution before the Asian markets open today Sunday Sunday Afternoon she said we're working Timely Well, what kind of plans are you working on Janet Yellen What was the answer? The answer is, we're working on some kind of solution to prevent contagion. That's what she said. She did not say that they would protect depositors.

She made it very clear that they would not bail out this bank. So let's write this down and try to picture this a little bit more clearly. So on the full left side, you have what's known as basically a full bailout. This is where you come swooping and you really? you try to protect shareholders, bondholders.

Anyone associated with a bank in the middle, you have what's known as protecting depositors, right? People who have deposits on hand with the bank. Protecting them is sort of the middle approach. However, the middle approach is likely to cost money, right? This costs tax money. And obviously so would the full bailout cost money.

So what is she potentially considering? A contagion fund? That is what's being talked about right now. A Contagion Fund So what is a contagion fund? A contagion fund is basically a way of saying this. Look here's Silicon Valley Bank Let the FDIC liquidate the bank and give people whatever they can from the liquidations of the bank. If that's everybody, with up to 250 000 gets a hundred percent of their money and everybody else above that gets 70.

Then you know what? Maybe so be it. Let Silicon Valley Bank fail. Now you eliminate moral hazard. You create pain.

Depositors take a haircut. But you risk contagion. Contagion means you risk the potential that people go to other Banks and start taking their money out. So what could a contagion fund do? Well, a contagion fund could say the following: It could be the Treasury Department Saying hey, we are confident the following ex-banks uh, will have will have their deposits backed 100 percent and it could basically be a list of maybe the top 300 Banks as a thesis, right? Because what the Treasury Department doesn't want to do is create contagion to where everybody just goes to the top four.

Banks Even though that's probably what you should do, it is likely that the Treasury Department does not want to create an oligopoly. An oligopoly is basically where you have like oil companies or TV companies like Charter or ATT or whatever controlling very few options for you to actually receive goods and services. in this case, banking, goods and services. So if the treasury Department creates a fund a contagion fund and says hey, these top 300 Banks let's say accept Svb are good.

Just an idea here and we are confident with an x billion dollar amount of backstop that you won't lose your deposits at these Banks Fantastic! Now you could limit people fleeing those top 300 Banks And basically the other ones that are not listed could potentially go into some form of temporary receivership. Now this is not guaranteed. This on the right Here is just an idea. Janet Yellen has not given us an idea uh or or has not given us a a very clear guide in terms of what the treasury is going to do.

She has just said we want to limit contagion and we will not bail out Silicon Valley Bank This is what we know. This idea about a treasury contagion fund is what is being talked about and it is my speculation that they could come out and say hey, we're going to backstop and promise the top X Banks It could be the top 300. It could be the top 30. it could be the top 20.

who knows. The point is the the last thing we want is people going into every single bank and trying to rip their money out. You don't want people lining up a JP Morgan trying to Joint their money out because all of a sudden they're afraid of banks, right? That's what you don't want to happen. But it does look like a bailout for Svb is unlikely.

Could there be a backstop of deposits? Yes, But that is likely to cost taxpayer money? Rocana this morning on Face the Nation said oh no, no no no, we can backstop 100 of deposits without spending a dime of taxpayer money. He said that because he doesn't seem to understand financials. Now that's okay I don't know if he's looked at the financials. maybe he's only been told about these I actually happen to like Rocana I think he's a very reasonable person.

He's a California Democrat I know a lot of people don't like California Democrats But of the Congress men and women, now, there are the crocanas. One of the the people with a good heart uh and and actually some reasonable opinions I Just think he's wrong about what he say. The reason I think he's wrong about what he's saying is because in my opinion, it's very simple. Okay, I'm gonna make this very simple for you.

Here is the financial statement for Silicon Valley Bank as of December 31st, 2022. And let's look at exactly what they told us. We've done this before. So I don't want to sound redundant.

but I want to make it extremely clear. Let's go over here. Total Liabilities: What do we have folks? We have: 195 498 Okay, sounds good. What do we have up here? Total Assets: 211 793 Oh, but wait, hold on a second.

We need to look at these hell to maturity Securities which might be liquidated. We actually have to Discount this number. So 91321 Minus 76169. That leaves us with a reduction of assets of Fifteen, One, Five Two.

Now, in addition to reducing assets by 15 billion dollars 0.152 you also have to add the following discounts: These financial statements are 72 days old, which means the losses are actually probably substantially greater. In addition to that, that you have to consider the liquidation prices of the rest of the assets. Which means, for example, look at this: see this item right here that's called Goodwill Sorry, dude. Goodwill of 375 is going to be subtracted as well.

What else is going to get subtracted? Other intangibles, Things we can't sell 136 is going to go away. What about this lease? Nobody gives a crap about the lease. You can liquidate a lease. Let's get rid of that.

How about all this equipment that they have? Well, you're going to get Pennies on the dollar for that. So let's say let's take a 350 off on that. We'll leave about 15 percent left on that. Well, what about all of the leftover loans and the other losses that they're going to have? Just by the time that went by, you're probably going to have I Would guess another at least at least a 10 reduction on your maturities.

At least that. So all of a sudden, when I take 211 793 uh and I subtract another 1.5 bill I subtract Uh, 375 I subtract 136 I subtract 335 I subtract 350 And this is me being generous with another 10 over here. On on top of this one of this 15 bill, this is generous that generously puts you, uh, at a position where uh, now this 211 right here actually looks a lot more like 15 152. There we go.

It actually looks like 195 139 Which is less than the total debts the company has. So in other words, as of this old statement here, the company is upside down. Now do we think that the company is only upside down by this? Let's pray because if the company is only upside down to this tune, the company could probably pay out somewhere around 99 on all deposits over 250k. This would be a dream scenario.

What I've just described is the dream scenario. Okay, so this idea that taxpayers won't have to pay a dime is a dream and it ain't gonna happen. Okay, even even in the Stream scenario, there's still gonna be sometimes getting paid. But anyway, wait a second.

What we did is just set an extra 10 losses on the 15 they already have. Let's start over for just a quick moment and show you how nasty this gets you ready for this. Let's erase all this stuff that we just drew right here and Let's go over here and look at all their maturities that they have. Well, they have 76.1 billion dollars.

Let's just look at those 76.1 billion dollars of health and maturity. Securities Plus Available for sale 26 billion dollars. They have 102 billion dollars of maturities. If those need to be written down another 20 to 30 percent in a fire sale, let's go with 30 for Giggles.

That means you're actually down another 70 or another 30 billion dollars on top of what we showed over here. That means you're potentially sitting at only 165 billion in assets compared to about 195 in liabilities. That in that example, represents about 15 cents on the dollar of deposit or money evaporating. So the point is, this bank is insolvent.

If the government bails out Silicon Valley Bank they will be paying money to bail this Bank out. The taxpayer will pay for any bailout of Silicon Valley Bank And that is why I Think Rocana is wrong with you? Say maybe I'm looking at it wrong I don't think I am. So what's next? What should you do? Well, the first thing you should do is if you have exposure to Silicon Valley Bank you should consider going to the Fdic.gov website just Google FDIC Calculator Google it and you'll see where you can actually calculate what your exposure is to the FDIC limits if you have more than 250 000 in deposits. The next thing that in my opinion people should do is get out of the small Banks I Hate to say it.

and yes, I am including Credit Unions I am including fintech apps who invest your money into small banks on your behalf. If you're fintech like a chime, an acorns an M1 Finance or whatever is depositing money into another small Regional Bank That is a risk in my opinion. Even so, fight to some extent is a small Bank That in mind, it is a bank. It is a small Bank though.

so just keep that in mind personally. And I'm not trying to create fear I'm trying to prevent the loss of money for individuals who watch and support my channel. That's my goal. That's why of course is on building your wealth.

The goal is to help everybody build their wealth and I would not risk having any of my money at a bank that is not a systemically important Bank What is the cutoff for a systemically important Bank In other words, too big to fail? Well, thanks to Donald Trump we have that answer: Donald Trump actually changed with Congress the laws of systemically important banks by requiring that Banks be considered systemically important, not at 50 billion dollars like they used to be. Instead, they listened to CEOs like those at Silicon Valley Bank who lobbied for that limit to be raised and now the limit for a systemically important bank is 250 billion dollars in assets. In other words, under the Trump admin, the bar first for a systemically important Bank was raised to 250 mil, Silicon Valley Bank was at 208 and Silicon Valley Bank lobbied to have that level raised because they didn't want the additional regulation. So the people on Twitter clamoring and screaming and saying oh well, The Regulators were asleep at the wheel wrong Congress and the presidential Administration LED Regulators to be pulled away from Banks like Silicon Valley Bank at the request of banks like Silicon Valley Bank and that CEO is the same person who just dumped millions of dollars of shares just weeks before this collapse.

But don't worry, their Chief uh, managing officer with their CMO either marketing manager their CMO that worked at Silicon Valley Bank happened to have a very strong and robust history of also working for Lehman Brothers back when they collapsed. You can't make this stuff up, So to be crystal clear, I would not have a dime of my money in smaller Banks Certainly not if I had more than 250 000 some. If you want to maintain a relationship, hey, maybe you keep a few thousand dollars and I know this is offensive to a lot of smaller Banks and I know a lot of people think hey, that's just going to create more more fear, uncertainty, and doubt. But here's the reality.

It costs you nothing to move your money. It could cost you a lot of money. Tens of thousands to potentially millions of dollars depending on how much you have deposited on behalf of your business or yourself. By not acting.

the lazy thing to do is not act. The smart thing to do is, in my opinion, consolidate where there is the least risk, Where you know Jpow is on your side. We always say don't fight the Fed and where is the Fed with the money printer. They're at the most systemically important.

Banks JPM Bank of America Wells City So on that's my consideration. Ultimately, what you do is up to you. but I hope no matter what you think, you subscribe to the channel, support the channel and share this video.