Happily, we continue to enjoy portfolio stability in our accounts in spite of the recent collapse of Silicon Valley Bank (SVB) and Signature Bank in the regional banking sector. While the S&P is down roughly 6.6% since early February, and the regional banking sector is now down about 37%, we’re only off by about 1.5% over the same period. Excellent.
No Apparent Exposure
We do not appear to have any direct exposure to Reuters’ list of companies using SVB as their primary bank. Small positions of these or other companies that are or may be affected by this issue may exist in some of the ETFs and mutual funds that we own; but my initial reviews don’t show any substantial exposure to this sector or these companies.
Of course, this should come as no surprise. I have long taken a dim view of extremely risky investments like venture capital, IPOs, penny stocks, or the highly volatile, unproven, micro-cap, liquidity limiting types of issues in which SVB specialized. Additionally, I have flat out refused to participate in the cryptocurrency fad since its inception (Signature Bank was a significant crypto player), as well as avoided any investment denominated in non-fiat currency (not backed by a recognized government or regulated central banking system). While some “kids today” may think this “out of touch,” I take solace in the fact that Warren Buffet shares my avoidant view of crypto.
Custodian vs Bank
As you know, TD Ameritrade (purchased by Schwab in 2020) serves as the custodian of your money. This means your accounts are generally segregated from TD Ameritrade’s own assets. In other words, your securities investments are not generally subject to the risks of TD’s business success or failure. Certain limits apply to “cash positions” but they are so high as to be of limited material impact for most people (see below).
FDIC, SIPC & Private Insurance
As for the cash holdings, the FDIC typically insures up to $250,000 per account owner, whereas SIPC insures up to $500,000 in cash per brokerage account, and TD carries an additional $149.5 million policy above that up to an aggregate limit of $500 million total. If you’d like a more detailed description of how the cash portions of your accounts are protected, let us know and we’ll send you the official summary document.
What Happened to SVB?
Eerily, almost exactly what I discussed in my last email about why we’re not invested in long-term government bonds. SVB was forced to sell its long-term government bonds at a massive discount (loss of $1.8 billion) in order to raise capital to meet its depositors demands for short-term cash. But SVB was subsequently unable to raise adequate capital from traditional lenders to cover its loss. It’s a classic mistake. SVB invested short-term customer deposits into long-term government bonds. Sure, this made for huge profits when rates were low (both on the income spread and the capital gains) but it also meant huge losses when the Federal Reserve increased rates drastically over a short period of time. Should their risk management group have anticipated this? Yes. But that’s tough to do with an 8-month vacancy in the Chief Risk Officer position…
Upside in the Downslide
As always, I see market chaos as an opportunity to scoop up strong companies at a discount. This time is no different. On Tuesday, we took a roughly 2% stake in Schwab (SCHW), as it appeared to have been unfairly lumped in with the “regional bank” issues. To be clear, Schwab is far better capitalized than SVB or Signature Bank, having roughly 80% of its assets covered by FDIC, (nearly the direct opposite of SVB), and Schwab is not looking for capital or debt. More telling, in some ways, is that the insiders of the firm have been buying strongly at this devalued price. Afterall, Schwab saw its rating upgraded to “Buy” on Monday by Deutsche Bank and others. Schwab’s near-term target price remains in the mid 80’s. We picked it up for roughly $57, and have already seen a nice 6% profit, handly beating all four of the major banking players this week (Wells Fargo, JP MorganChase, Bank of America and Citigroup).
The Road Ahead
Analysts appear to agree that SVB’s failure, while problematic and shocking to some degree, is unlikely to have the same sort of broad banking contagion effect as Lehman Brothers’ failure had in 2008. Basically, SVB’s limited impact is due to its more singular focus on venture capital and higher risk startup loans. Lehman Brothers, in contrast, had countless tenticles running through a wide variety of banking products, industries, markets, and countries. More importantly, SVB’s failure begs the question of what sort of rate increase the Federal Reserve has in store for us next week. Lower is better…
Of course, our plan remains, “Buy Low, Sell High.” Nothing earth shattering, but in order to make such a plan work, you have to be willing to buy low, which normally means buying into madness. A fitting toast for tomorrow’s holiday it seems…
If you’d like to talk about any of this in more detail, please feel free to reply to this emal or schedule a time to talk on my calendar.