What's up everyone? All right? So in today's episode I'm going to share with you why the banks are collapsing and what I'm doing now to help mitigate risk. As a Trader a day trader, specifically, my job is to hunt for volatility, but I also have to manage risk and this event that's going on right now in the banking sector is certainly dominating interest among. Traders it's dominating the news headlines and the media. I mean this is a big thing that's going on right now.

We just had the biggest bank collapse since 2008. So I want to talk about and help answer the question that so many Traders have been asking me: buyer Banks collapsing right now and I'll share with you what I'm doing in response to this both individually but also certainly as a Trader So I've put together this slide deck and we'll we'll jump into it I think One of the things that's important here is um, to talk about the sequence of events leading up to the collapse. It helps you understand uh, context and I think it'll also help you understand perhaps why Silicon Valley Bank is atypical in the way they were running the bank, but it also I will share with you and expose what I think are some systemic underlying problems within the banking sector, which leaves me to feel very cautious right now as a Trader All right. so let's go full screen here.

So the secant sequence of events leading up to the collapse. um I Think first. it's important to understand the banking system in general and there's this concept of fractional. Reserve Banking and the inverse of a fractional Reserve Bank And the opposite would be 100 Reserve banking.

So what is reserve banking? What does all this mean? Well, uh, the idea here. and and this is what we do in in the United States is Banks keep a fraction a fractional reserve of the deposit they receive in the case of a 100 Reserve Bank That you would give the bank money and they would keep all of that money in a big safety deposit. But you know they would keep all that cash and they wouldn't loan it out in the form of mortgages or personal loans for cars or anything else. They would just keep all of that right there.

But that doesn't stimulate the economy. So in this country we have fractional Reserve Banking And it means that banks are allowed and encouraged to invest the majority of the deposits they receive. but they are required and regulated to keep a fractional Reserve available for the liquidity of meeting withdrawals. So if customers come in and ask for money, they of course have to be able to meet those withdrawals.

So this banking method encourages the banks to go out and invest that money that they've received as deposits in the form of loans, mortgages, things like that. But they are certainly regulated in the type of Investments that they are allowed to take because of course they are investing on, well, really borrowed money. Now the customers typically will receive a small percentage of interest on their accounts, you know your savings interest rate and then the bank goes out and they try to collect. You know they have.

They do a mortgage at the current interest rate and then they get to keep uh minus the percentage they give to the ultimate depositor. They get to keep the profit. So that's how the banking sector has become. Of course, so profitable is really through lending through interest rates and through the profit from certain Investments that they might make.

This method works well as long as confidence remains high in the bank and you don't have a run on the bank because some of the long-term Investments may not be liquid. it may not be easy to unwind all of the mortgages that the bank is holding. They might be able to resell them to an investment banker, but they could end up taking a loss on them based on the current Uh Market sentiment and value the market, which would be also based closely on interest rates. Interest rates have been a big topic and this ties in absolutely 100 with what's going on in the banking industry right now.

So in Uh 2020, the Federal Reserve board met and they reduced the reserve rate to zero percent, the fraction to zero percent. Wow, That's crazy. So this allowed Banks to inject a lot of money into the economy in the form of loans. and Investments But the obvious drawback here was that if there were a run on the bank, the banks were not required to have the fractional liquidity that they had previously been required to maintain.

But that's all good because there's no reason for running the bank right. Of course, not. Well, actually. Uh, but we found out that's not the case following uh, or at the same time as the Federal Reserve board reduced the reserve to zero, they also began buying.

They said they'd be buying at least 500 billion dollars in treasury Securities another 200 billion dollars in government guaranteed mortgage-backed securities. So what a lot of investment bankers did? Knowing that the Federal government was going to be backing up those Securities Is they bought into those? Securities right? If you know that the Federal government over the next couple months is going to be buying 500 billion or 200 billion dollars in this asset, if you get in now, they're going to be buying it up right behind you. So that kind of was like a no-brainer I Suppose, Uh, except uh, with no-brainer uh, investment decision. Sometimes there is a drawback, which came in 2020.

So the interest? 2022.. So the interest rate hikes in 2022 were the furthest thing from anyone's mind. In 2020, right? In 2020, Every I mean the market had dropped 30 percent. There was Panic The economy was coming to a screeching halt.

We didn't know what was going to go on. So the Federal Reserve was trying to stimulate the economy. Now what it seems like in retrospect happened, is they just you hold up the economy and made it so hot. They I mean okay, and look, the result was all of the money that was created and then the the rise in inflation, right? that? So in fact, they probably did a lot more than they needed to do in 2020.

And then the result. Inflation. So much money all around that created demand, the ability for people to buy all these things and then prices go up. and now they're in the position of trying to cool off this really hot.

Um, inflation was that Initially they thought that it was transitory. This is a supply chain issue. It's short-term it's transitory. And what seems to be the case is that the increase in inflation was the result of so much money in the economy.

The super Super low interest rates that allowed people to borrow money and you know, buy big houses and pay higher prices. And this and that. and it was like free money because the interest rates were so low. I mean they were ridiculously low.

I I did a refinance in 20, 21 or whatever it was. and I mean the interest rates were stupid low. It was like this is a no-brainer to do. in this case, a refinance at, you know, 2.7 or whatever it was 2.9 Super super low.

So anyways, what ends up happening is um, inflation fears inflation spikes up right? All of a sudden, we're having the highest inflation we've had in decades and now the Federal Reserve is trying to figure out Okay, you know what do we do to cool down this inflation And they were slow to react because initially they had the hypothesis that it was transitory. So trying to cool the economy and inflation all of a sudden 2022 we see these huge rate hikes and the fact is, this is like a 400 basis point rate hike in one year, this is the biggest rate hike. I I Don't know. the last time there there was a rate hike that was this big this quickly this was historic and you're not going to have a 400 basis point rate hike.

Um, without seeing an effect on the economy. In fact, the rate hike was designed to cool down the economy. But of course people have been talking for the last year. Are we gonna have a soft Landing Or you know, is this going to push the economy into a recession? And during testimony, um, a week and a week and a half ago or so, um, the FED Chairman was talking about how you know they want to see unemployment go up to a certain percentage and Elizabeth Warren was like well, doesn't that mean you want 2 million people to lose their jobs And it's like, well, you know the rate has to hit this well.

Then that does mean 2 million people have to lose their jobs so there. So it's a in a certain way. It could be a manufactured recession caused by Central Bankers deciding to increase the interest rates. But obviously they're trying to unwind.

Maybe a decision made in 2020 that fueled the economy and made it too hot. So this sets the stage for, um, an unprecedented year in 2020.. what ended up happening in 2020 was the stock market went down. and usually when the stock market corrects or goes into a bear market.

Usually that's when the Federal Reserve decreases interest rates to try to stimulate the economy. But in fact, they were increasing interest rates and so what is usually a safe place to put your money? Bonds, They actually decreased in value. So this created, uh, a year where both stocks and bonds went down. There was no safe place to hide in 2022.

So any Securities that had exposure to interest rates declined in 2022. a 20-year treasury bond had a 1.4 interest rate. In 2020. In 2022, it went up to four percent.

So the value here this is and this is the problem is that a bank that bought, let's just say a hundred billion dollars or whatever it is of Treasury Bonds in 2020 at 1.4 percent, they could turn around and sell those or they could hold them until maturity If they hold them until maturity, they're going to get that same 100 billion dollars back and they'll have collected during the 20-year life 1.4 per year. Okay, so they didn't get the best interest rate you know as you can see now in hindsight, but they're not going to lose money as long as they don't have to sell it. But if they're going to turn around and sell it, no one's going to take a hundred billion dollars worth of bonds at 1.4 percent. When today, you can buy that same amount at four percent.

And so the value of the bond decreases, its face value decreases. Which is kind of funny because you know at the end of its life, it it's well, at the end of its life, you'd still get the 100 billion back. but you know, 1.4 percent times you know, 18 more years, you're certainly going to earn a lot less and that's factored into the value. So in any case, not a problem as long as you don't need a cell, right? So no problem.

Well, but there is a problem actually. And the problem here is in an accounting practice, um, called held to Maturity. So current accounting rules allow Securities that are to be held until maturity to be accounted for based on the value at maturity. so you don't need to be changing the value intra term.

You know, on a day-to-day or quarterly is you know publicly trade companies would be required to do a filing basis. You just say this is the value of maturity. We're not going to sell it, so it doesn't matter that the current value has fluctuated. But in the case of Silicon Valley Bank according to their 10K that was filed on February 24th, 2023, um, they had 120 billion in Investments and 91 billion were held to maturity and therefore not reported at fair market value.

So they weren't being sorry. so they weren't being reported at fair market value. They did have a footnote and the footnote stated that they were had an unrealized loss of I believe it was 15 billion dollars, but not again. it was a footnote because the big picture was that this was not something that was going to be sold.

it was going to be held until maturity. All right. Well then, uh, this is sort of the timeline of things really unfolding. So in Uh February of 2023, it's worth noting.

Jim Cramer covers Silicon Valley Bank creating the inverse Kramer investors to look for reasons the stock would drop. This is, um, you know it's it, just is what it is. So uh, people start looking more closely at Silicon Valley Bank Um, in March Moody's um, the rating agency call Silicon Valley Bank to notify them that they would be downgrading the bank due to the unrealized losses in bonds. On March 8th, Silicon Valley Bank announces a proposed offering to raise approximately 2.5 billion dollars.

At the same time, they announced the sale of 21 billion in government securities that resulted in after tax loss of 1.8 billion. So the problem was they knew that the downgrade was going to trigger people to start withdrawing money and they knew they didn't have the liquidity to meet those withdrawals if they didn't sell some of the bonds. But if they sold the bonds, they'd be selling them at a loss. So they needed to fill that gap.

which they did were they tried to do with this secondary offering that was not successful. So investors saw through that. and um, so Moody's downgraded the bank and certain Venture capitalists and other prominent influencers uh, and and startup investors began urging their companies that had funds with the bank to pull them out. Withdraw them on March 9th customers try to withdraw 42 billion dollars.

The stock declined 60 percent. March 10th California shutters the bank it's assigned to the FDIC receiver. The stock is halted at 39.40 the all-time high was over 700. So that was a very rapid collapse and in a way and there are certainly you know former regulators and um, investment bankers who are chiming in.

You listen to the news and they're chiming in on you know, where was the risk manager at Silicon Valley Bank When they started to see the interest rates going up, You know, why didn't they do something sooner And you know, So it's it's And the fact is, Silicon Valley Bank grew Um, from something like holding uh, 40 or 50 billion dollars to holding over 200 billion dollars within two years. Why? Because 2021 2020 2021 was such a huge year in the tech space. there was a huge influx of capital for these Tech startups because it was such a hot Market But they took that money. They invested in a place they thought was safe and then Federal Reserve comes in, starts increasing interest rates in 2022 and that was a game changer.

They were not able to sell those Securities at the same value that they bought them at. Even though they felt they were safe, the value changes, interest rates went up, and this is also true with mortgage-backed Securities Because of mortgage today. Uh, to sell it to an investment banker is not worth the same as it's worth a lot more than a mortgage that was issued in 2020 at three percent, right? Interest rates right now are five six, seven percent. For mortgages, they the Federal Reserve rate, but then profit for the bank.

So I So one of the things that's specific with Silicon Valley Bank is the fact that more than 90 percent of their depositors had account balances that were above the FDIC Insurance Uh, 250 000 Mark In fact, they had some people that had not just tens of billions, hundreds of bills, not just tens of millions, hundreds of millions, but over a billion dollars in in one deposit account just sitting there on on the at the bank. So that's not very good risk. um, mitigation on the side of the depositors who are leaving that much money in one place. so you know on a personal level.

I Think that anyone who's over 250 000 in their account should be thinking about risk mitigation and having multiple accounts. The other thing that certainly come out of this is that Regional banks are more vulnerable and um, there was a financial uh, a financial group that put out a it was like a a balance sheet analysis of 75 Banks or something like that and it showed Silicon Valley Bank But then it showed you know 40 other banks that based on their balance sheet had even higher ratios of uh held to maturity assets. You know, you know which causes speculation that could there be more banks that that suffer through this period? It'll be very interesting to see what the Federal Reserve does this week with interest rates. It seems that we are certainly seeing the um, the the market responding uh, some cracks in the financial system as a result of interest rates going up 400 basis points in one year.

So while I think that no doubt it was their goal to slow down the economy at, well, cool down inflation which required slowing down the economy there, of course it wasn't their goal to collapse the banking system at large, but Silicon Valley Bank I was a little bit of a unique case. and one of the other banks that closed was focusing mostly on uh, it was like crypto. And then you know. So some of these banks are a little bit, uh, atypical of the banking sector in general, but we'll have to see what happens.

So from the perspective of, uh, you know. So this kind of gives you the timeline of what happened and then well, and then it follows by, um, buy a bailout. And so the problem here with a bailout, at least in my perspective, is that you have. there are no consequences.

So the bank makes bad financial decisions, they make bad Investments may be risky and well, they didn't even think they are risky, but in this case they were just Investments That didn't factor in a change in interest rates and so they lost on it. And then the government comes in and bails them out. So it's like if they take a risky bet and they win, they get to keep all that profit. It's a score.

If they take a risky bet and they lose, the government will come bail them out. So it's almost like there's no downside to taking these risky bets. Now the fact is, the government was saying we're bailing out depositors. We're not bailing out the big Bankers the bank.

Executives We're still going to get to the bottom of what happened here. but we're in a system and this is sort of. The quote of profits are privatized so they get to keep their profits. but the losses are socialized so taxpayers pay for the losses ultimately.

And you know they were also saying this is not going to be a incurred by taxpayers. but you know FDIC this is Federal Reserve I mean all of these the higher interest rates, the higher fees are going to come after something like this happens. Who pays the price of that? It's individual taxpayers right? So we do pay the price. Um so I Think the ramification of these bailouts is the moral hazard that if making Reckless or stupid decisions results in a loss, the government will bail you out.

If making this type of decision results in a win, you get to keep the gains. It's a casino where you don't lose and that I I think that's the biggest. That's the biggest concern. And the fact is I don't know how many more Banks the government's going to be able to bail out.

Of course this, the 2008 Banker bailout was 800 700 billion dollars. but then in 2020 the covid stimulus was 2 trillion. So I mean these These are huge amounts of money that have gone into the market and um, you know the government has, uh, used in a way to sort of run these bailouts. So I don't know Um I I Of course I'm not.

I Don't think that the entire banking system is actually going to collapse I Think that the government would no doubt step in. but then it makes you wonder if at certain point when does the government say we're going to centralize the banking system? Because look, you know it's been a little more than a decade since the last financial crisis which was again investment bankers bringing the banking system to its knees with these mortgage-backed Securities And you know, just as the lending practices and everything that was so wrong. and now here we are again doing this again. So I wonder if uh, it's going to Drive I Don't know some political um movement to try? You know politicians are going to say we should centralize the banking system and consolidate? I mean the fact the level of Regulation already makes it so it's a very regulated system that the government has a lot of control over.

But even in spite of that, there were clearly lapses that allowed for um, you know what? What ended up happening in the case of Silicon Valley Bank and with these other Regional Banks being so vulnerable? Okay, so that's all. Um, so that's all interesting. um and hopefully gives you some um, some context here. And now we've got the question of all right.

Well what are we going to do about this? So as day Traders and of course me being a Trader who's turned 600 into over 10 million No, my results are not typical, but that is real money and by the way, I've got my audit right here. I Always keep it. This was as of 2021 I was at um the end of 2021 I was at 9.5 million. My 2022 audit will be ready soon.

That'll have me over 10. anyways. uh so what do we do? Well, my job is to manage risk and also I'm of course a hunter of volatility. So I look for volatility but I have to manage risk I haven't felt that I could manage risk on these banking stocks and I was very clear about that on Silicon Valley Bank the day the day it got halted I said guys I can't trust this stock and actually um I I could pull it up but it doesn't really matter I showed it in another episode um I have the live uh trading right here where I was talking about Silicon Valley Bank this was from my live trading archive for this particular day.

So I was analyzing this stock and I was sharing why I would not trade it Why I couldn't trust it Why my gut said leave this alone and then just a few moments later it was halted and it will not resume because the bank is out of business. So my feeling initially was that I couldn't trust any of these Regional Banks because I never I just could not tell or know which one of them could get halted. Trading stocks you're dropping is very different from Trading a sector that's going up like the case of oil. Last year we had oil prices going up and we had a lot of great opportunities trading oil.

to the upside uh Trey even the even trading to the downside is risky because of this. You know this reality of government bailouts. You never know when a government bailout's going to come and all of a sudden what does that mean for your short position and I just think that that's taking way too much risk as a retail. Trader So this is the type of Market where as a Trader we have some major events going on.

It creates certainly a distraction. It's going to make it more difficult for us to find, uh, predictable volatility because a lot of Traders will fall into the Trap of over trading these Bank stocks. It's a mistake. I think I think I think there'll be net negative as a result of it if you looked at all the Traders out there.

but the people that are probably making money on it are the big big whales you know and we can never compete against them. So I think it's trap. I'm not going to fall into it. um, at least not right now.

Perhaps if there's um, some type of catalyst that then you know the government says something. I Maybe I would feel there's a backstop there to go long, but I just right now wouldn't trust it. So that leaves me in a position where I'm on the sidelines I'm kind of. you know, battening down the hatches because this is a market and I've seen markets like this I just have to get through it I don't necessarily need to make a lot of money right now I just need to avoid getting smoked and so for me I start to say all right.

Well you know, if my goal is ten thousand dollars a week, let's just say kind of like minimum right now just to kind of get through. I could do that in one day. one good day. So that means I should have three or four sitting tight watching carefully days and then when I see something looks good I Just strike at that.

So this is a market of being very selective and being very patient. Traders who are selective and patient will be rewarded traders who over trade who are getting aggressive. They will dig themselves holes and during this period they will go red for sure. Now it may be hard to go significantly green during this period and I've even people who are shorting the banks I've seen them take huge losses so long or short this may be a hard time to make a lot, but if you can avoid losing a lot, that by itself is a victory.

So you sort of put yourself on the sidelines. You watch carefully, you gain experience if you're trading a simulator. By all means, you can still gain experience trading a simulator. But trading with real money, this is time to be very selective.

So that's going to be my Approach here. Um, while we've got this um, you know Global Financial event going on and once we start to see the dust settle, we're gonna see this week what the Federal Reserve is going to do with interest rates. That's going to be telling for sure if they're just going to say let's pause or if they're going to say nope, we're going to go with a quarter basis point or we're going to go with half a basis point. Um, you know I mean we'll find out, we'll see what ends up happening.

So we've got some things right now that we're kind of waiting. You know to see is this going to accelerate or is this somewhat isolated and we're going to see things kind of stabilized? So this is a time right now to be patient and disciplined. I Can't emphasize that enough. That is what's going to get you through this market.

and in terms of individual banking. Obviously, right now the banks that feel the safest are the big Big Banks the small. Regional Banks You know? Yeah, I Think everyone's a little bit nervous, but unless you have over 250 000 with those small Regional Banks you're covered right? And so you know. Does it hurt to open an account with one of the bigger Banks just so you have it ready to go in case you need it? No, of course it doesn't hurt.

but I don't think moving money is really necessary as long as you're below that 250. If you're above the 250, then diversifying is probably not a bad idea just to be safe because I don't know if how many more you know banks will get bailed out if they if it comes to that, and they'll make depositors whole above 250 000. So this requires some personal responsibility on our part of diversifying ourselves and managing our risk. So I hope this has been helpful as always.

I'll remind you that trading is risky. My results are not typical, but for those that are in the market right now, keep practicing. Keep getting experiences is a very interesting Market to trade through and anything you can do to keep your head above water is going to be a good thing. So I hope you enjoyed this episode.

Thanks for tuning in and I'll see you for the next one real soon.