Why did Silicon Valley Bank fail and were there red flags to indicate the failure was coming? The answer is remarkably yes, in fact, by some measures, Silicon Valley Bank was not solvent as of the Fourth Quarter of 2022, as evidenced by their financial statements, which we've reviewed multiple times on the channel before. But in this video, what I'd like to show you is a thread by an individual whom I've had my criticisms on before and that's because some of the things he says I think are pretty dang well put together. Some of the things are a little bit bearishly manipulated. I've made a video talking about how this individual has sort of bearishly manipulated some information and basically called them out on YouTube and Twitter to find out where the actual numbers are as a way of saying hey, I could be wrong here, help me rebuild your model and I never heard back Now that's not to say that there was any kind of intentional mistake in previous data.

it's just to say that what you're about to hear is this person's opinion. It could be wrong, but this set of information actually sounds relatively reasonable. Ready for it? Here we go: Macro: Alpha on Twitter Silicon Valley Bank does not deserve a bailout. A deep look at their financial statements reveal how horrific they were at risk management, and in my opinion, incompetence explains only part of it.

Moral hazard must have been at play. A threat. What Silicon Valley Bank did with their portfolio is either a signal of enormous incompetence or outright moral hazard at play. Gamble away billions as policy makers rescue you.

I Can't believe the incompetence reached at these levels. All right. As a result of: Regulation banks have flushed their balance sheets with trillions of dollars of bonds. Such a large amount of bonds on the balance sheet also comes with risks like interest rate risk.

And over here he explains how you can hedge that interest rate risk. now. I'm not going to explain that in his way because it's very complicated. It's not worth talking about for the point of this, so let me simplify it.

Basically, if you're a bank, you want to pay people interest through CDs Uh, certificates of deposits or yield on accounts. You do that so you could attract customers, right? Makes sense. Somebody deposits 100 bucks. If you give them four bucks, that's a four percent yield.

That's pretty cool. Now, what are you gonna do with that hundred dollars? Well, ideally you go invest it in such a way that you make more than four percent. Now that means your 100 isn't immediately available for you to withdraw it. This is why when a lot of people try to go withdraw money at the same time, the bank's like, oh goodness, we don't have enough cash for you because we invested it into bonds or other assets.

The problem is in a rising interest rate environment, those assets lose value and so now all of a sudden if people liquidate and get their cash out of the banks and the bank says oh no, we have to sell these Investments we made but rates went up, which means the value of our investments went down. We now have even less money to cover all of the deposits. and that's exactly the kind of stuff that was evident on their financial statements. You could see that very very easily by for example laws that allow these Banks to say they have 91 billion dollars of assets.

but the reality is this is what they actually show on their their financial statement. But on the left side they actually say oh sorry, that's actually only worth 76 million dollars because it's lost money. But the reason we're going to say it's worth 91 billion is because we're holding them to maturity. These assets are not available for sale, so so we don't need to write them down.

That's basically what they're saying. Okay, got it. Now there are ways to hedge that interest rate risk by doing swaps I know I'm not going to explain what swaps are or how those work because it's really not important to the story. So let's keep going here.

What is macroov say? He says Silicon Valley Bank did not hedge interest rate risk at all and he shows this chart here that's showing at the bottom. Their hedge adjusted Q4 2022 duration was exactly the same as their portfolio duration in English It means they didn't hedge, they used to hedge on the left side, They used to hedge in Q4 They did not hedge. Okay, so so the bank all of a sudden was not hedging despite the fact that interest rates were skyrocketing. Okay, got it.

Who takes the risk? Ah, Makarov says in my opinion, correctly, the depositors take risk. Now many people are calling for a bailout, but the evidence that moral hazard was at play is too big to be ignored and we should not reward moral hazard. Here are three facts that are hard to ignore the outrageous amount of accounting tricks. Number one: That's kind of like what I showed you when you can just take toxic assets and say they're worth a lot less, but we're just gonna say we're holding them to maturity.

Then all of a sudden, you don't actually have to report those losses. All you do is you end up saying hey, uh, we have a column here of unrealized gains of two billion dollars. But we have unreal. Or this is actually two million dollars.

And we have unrealized losses of 15 billion dollars. Which is like an entire year of net income for the bank. Well, now you're playing an accounting trick to deceive people to some degree, right? So Number one: Accounting tricks Number two: Not hedging. And they talk about how in December of 2021 Silicon Valley Bank had interest rate swaps, but by the end of 2022, they got rid of all of their Hedges So in other words, they used to have hedges.

but then they did not. You could see that right here. Look on this right side. it says December 2021 notional or contractual amount of hedge 10.7 billion dollars.

It says right here to manage interest rate risk on our available for sale Securities portfolio, we entered into a pay fixed received floating interest rate swap. Basically, we bought a hedge for 10 billion dollars to hedge against the exposure to changes in the fair value of the Securities resulting from changes in interest rates. AKA J Pal make rates go up. We designate these interest rate swap contracts as the fair value of the hedges.

Okay, so the fair value of the hedges was 10 billion dollars. At the end of 2022, it was 550 million dollars. So in other words, they got rid of almost all of their hedging by the end of 2022, even though rates were skyrocketed. Okay, makes sense.

Not number three. So number one, misleading accounting. Number two, they got rid of the hedges they used to have most of them. And number Three quote the urge to stay away from tighter regulatory scrutiny.

Now, I'm going to simplify this here. It doesn't actually even mention Donald Trump over here. Maybe he really likes Donald Trump Uh, but I Don't think what I'm saying has anything to do about whether or not I like Donald Trump or I don't like Donald Trump This is not a political video, this is just a video to remind you about the courses on building your wealth Link down below because that's the only sponsor of the channel and this really high quality content and perspective on building your wealth whether it's in real estate or stocks or otherwise. and we could do q A together in the lifetime access to the course member live streams that you get remember: I am a licensed financial advisor but I'm not a your personal financial advisor I Run an actively managed ETF I sell these courses I'm building your wealth I've got a real estate startup so I do a lot of stuff in the finance world, but without getting into politics.

Number three Silicon Valley Bank has been begging begging for Less regulation since at least 2015 and they got less regulation under the Trump Administration Republican Congress in 2018 where they were deemed not a systemically important bank because the limits were changed, which basically meant the bank didn't have to go through the regulation of supervision and stress tests that bigger Banks do. In other words, they were able to take out more risk and now they're defaulting and now everybody's begging for a bailout. Probably doesn't exactly work that way. Now you do have a lot of people who are quite fussy.

Uh, right now on. Twitter especially the Venture capitalists. The Venture Capitalists are freaking out. They're trying to cry a foul how terrible it would be that a lot of people are going to consolidate into larger Banks to the death of smaller Banks Personally, that's actually what I Recommend Get away from the smaller Banks Get into some of the top eight Banks Top Eight Banks JP Morgan Bank of America Citigroup Wells Fargo U.S bank or PNC Financial Services Truest Bank and Goldman Sachs those are the top eight according to bank rate as of March of this year.

That uh, it's worth noting that a lot of these Venture capitalists are making these sort of analogies like the following: and I think they're They're really freaking out because they've got a lot of exposure. Here's one and I actually like Dave Sachs Okay, I think he's a good guy I Think he's got a lot of perspectives, but he says blaming the poor. This blaming depositors for a bank failure is like placing the blame for medical malpractice on the patients because they didn't do a good enough job shopping for a doctor. Now somebody here replied and said, when you sue a doctor for malpractice, does Your settlement come for taxpayers This is actually a really good counter argument here.

There are Insurance programs in place for that and there are Insurance programs in place for banks 250k. So it's kind of like if you go into a doctor and you're like hey man, you know if you mess up I'm gonna sue your insurance Well you're that. insurance might cover you up to two million dollars, right? Well FDIC They make it very clear every time you walk into a bank 250k, there's a sticker on every single teller window 250k Now personally I actually think it's worth making the argument here that yes, to some degree there is some blame about shopping for a doctor because if you buy a discount doctor isn't then like you know, sometimes you go to certain areas and it's like here's a billboard. oh we'll do you know Lasik for 95 dollars and it's like okay, you're gonna do an eye surgery for 95 and you know it's like let me do a little bit of vetting Sometimes when things sound a little too good to be true, maybe they're a little bit too good to be true.

Maybe maybe some say maybe some of the benefits that Banks were providing like Silicon Valley Bank or just a little too good to be true because the bank was taking on too much risk and maybe that was a red flag Now of course, then you have people like Bill Ackman who has been freaking out for a while clamoring here. What should the FDIC do? Well, The FDIC should immediately guarantee all Bank deposits by Sunday night before Asia open and call a timeout, run a process to recapitalize the bank and manage the liquidation Now I Hate to say it, but I have a lot of uh, very, uh, big skepticism for Bill Ackman Bill Ackman was the guy in Covid who went on CNBC demanding that everything be shut down for 60 days or 30 days to slow the spread or stop the spread of covet. While he was shorting the crap out of the market, he made lots of money shorting the market with his freak out talk. So I you know I have some skepticism here.

Now there are some other people uh who also say, let's see here there's some other people who make this analogy that Regulators are basically at this, asleep at the wheel. uh Here for example is the following: It says only morons in the media could blame a single venture capitalist or all venture capitalists for Svb's demise. I mean I don't think anybody's doing that I think Svb is taking most of the blame or should take most of the blame. But anyway, it happened because Svb managed its, uh, mismanaged its balance sheet now I agree with that I do think Svb mismanaged his balance sheet I agree with that.

However, they also say right here that Regulators were asleep at the wheel. My personal opinion is Regulators are asleep at the wheel as much as the DMV is at your wheel when you're driving. Now that might be a little bit extreme, but keep in mind usually: The Regulators set up the rules and then they kind of only show up when stuff goes wrong. I Hate to say that's just the way the game is played right now.

I'm not saying that's right or wrong. it's a saying. That's usually what happens. They usually come swooping in when stuff goes wrong, not every single day and the reason for that is because they generally Focus their attention on what their mandates say which is focus on the too big to fail banks in the case of banking.

so they're not actually like sitting on your shoulder every day when you're driving at your smaller. Regional Bank This is why personally, I'm not the biggest fan of of of um, you know, suggesting hey, hey whoa whoa whoa whoa This is solely a regulator problem. Okay, all right, you know, a little bit of a blame shift there. Who knows.

That's just another one of my, uh, my opinions. So there we have it. Why did Svb fail? It's probably complete mismanagement of their balance sheet. They're upside down.

in my opinion. If they get bailed out, it's probably going to cost taxpayers money and this is my take now. I'm going to make another cup of coffee and I'm gonna do a live stream with my course members in the Elite Hessless course. All right folks, we'll see you soon! Goodbye.