I was at a tension point with what I wanted to discuss here on Thoughts On Money today; I was really feeling torn. The newsfeed this week has been absolutely flooded with analysis, opinion, and speculation on the demise of Silicon Valley Bank (SVB). What you don’t need is another opinion or perspective on what happened. I’d really encourage you to read David Bahnsen’s piece on the subject that was published earlier this week.
Yet, I also didn’t want to shy away from the topic that is top of mind for most. So, I will try to thread a very fine line and share a few financial truisms that a financial planner would gather from what happened. I in no way want to make light of what is happening, as the human impact, both at the micro and macro level is significant. But I will attempt to glean some wisdom from the missteps and misfortunes of SVB that we can apply to our own financial lives.
If you are thinking, what in the world could a bank’s balance sheet and business planning have to do with my personal finances and financial plan!? I’d say that is a valid inquiry indeed. Let me say this though, financial wisdom and prudence permeate all aspects of finance – personal, corporate, government, etc. In times of financial strife, as a spectator, there are always lessons to be learned and practical applications for your own stewardship and financial maturity.
I will organize my thoughts into three sections:
(1) Hysteria in the Information Age
(2) If You’re Rushing to Borrow, it’s Too Late
(3) With Great Wealth Comes Great Responsibility
So, off we go…
Hysteria in the Information Age
We have this old adage that “news travels fast,” but it’s never been more true than it is today. The greatest headwind that SVB faced was the onslaught of withdrawal requests. As each dollar was withdrawn, their problems amplified.
Every fire starts with a spark, and many blame this financial forest fire on a few very influential billionaires. Popular CNBC host, Sara Eisen, tweeted, “There should be more scrutiny of Peter Thiel and Bill Ackman for yelling fire in a crowded theater in this SVB collapse.” Ultimately, as some influencers nudged their networks (banking customers) to head for the exits it incited hysteria.
I can’t tell you how many friends, clients, and acquaintances sent me unsolicited notes of how they were pulling money out of certain banks. None of these cases were SVB, but rather other regional and local banks where deposits were being relocated to one of the big four banking institutions.
Again, information and influence move at the speed of light these days, AND one’s ability to react to this news can be instantaneous as well. It’s a Wonderful Life is one of my favorite movies of all time, my wife and I have an annual tradition of watching it during the holidays. In a moment of hysteria, everyone flooded into Bailey Building & Loan to withdraw their funds. Our hero George Bailey saves the day with his deep relationships, calming logic, and influence. In today’s digital economy, we just don’t have a jovial gatekeeper like George to stop online transfers, wires, and the such.
So, where’s the lesson here for us? Do most of us digest a hefty portion of media daily? We do. Do billionaires capture the most attention and influence in financial media? I believe so. With one single click of a button, can you make meaningful buy/sell decisions in your portfolio? You can. And, again, George Bailey won’t be there to convince you otherwise.
Information moves fast, it has influence, and it can cause lasting damage. Be aware and be careful of who you let influence you.
If You’re Rushing to Borrow, it’s Too Late
Once SVB leadership digested the depths of their issues, they did make an attempt to raise capital. Unfortunately, there was no market or interest to support their financial needs.
No access to capital forced SVB to sell assets at a loss, which heightened concerns on the streets and lead to further bleeding of deposits.
A big part of financial planning is to build out safety nets and appropriate redundancies to prepare for surprise events (risks). We often use the analogy that an architect maps out multiple fire exits because you never know where the fire will be, and these redundancies (fire exits) are simply prudent safety precautions.
In a reactionary manner, the government established the Bank Term Funding Program (BTFP), which would allow the needed borrowing capacity, but failure may have been avoided for SVB if access to capital and liquidity was in place prior to their crisis.
This same truth applies to your financial plan. Having sources of surplus cash, access to lines of credit that are backed by the equity in your portfolio and/or home, and consistent reliable cash flow (wages or portfolio income) are all needed safety nets. Most importantly, these protections need to be in place when the waters are calm so that they can be accessed when the storm does come. Many business owners found themselves in need during COVID, even willing to keep their business afloat with a home equity line of credit, but many institutions closed their doors to new applicants – it was too late to try to prop up those safety nets.
Again, if you’re rushing to borrow money, it’s already too late. You should review your own balance sheet and financial plan to see how many fire exits you’ve built into the blueprint.
With Great Wealth Comes Great Responsibility
Uncle Ben famously advised his young nephew Peter Parker, “With great power comes great responsibility.” If you’ll allow me to modify this a bit, with great wealth also comes great responsibility.
SVB saw hockey stick growth in deposits, and it could be argued that perhaps that growth outpaced the maturity and risk management capabilities of the bank.
I often use the phrase “long-term wealth accumulation,” which is antithetical to most people’s deepest desires to “get rich quick.” Yet, most research – whether you study professional athletes or lotto winners – will show you how damaging getting rich quickly can be. Why is this? Perhaps there is some level of investor maturity, experience, and responsibility that you develop along the way as you build your nest egg one dollar at a time.
SVB became a victim of their own success, lacking the responsibility and risk management capabilities to endure what it encountered.
So, whether it be an inheritance, a rise in income, or some other sort of unexpected windfall, I’d caution you to surround yourself with the appropriate guide (advisor) and accountability partner to keep you out of harm’s way. Lifestyle creep, expensive new friends, and all sorts of other financial commitments are knocking at your door and looking to stake a claim on your wallet.
Jeff Bezos once asked Warren Buffett why more people don’t follow his simple investment thesis, Buffett’s response was, “Because nobody wants to get rich slow.”
In Conclusion…
My notes have a handful of other tidbits and nuggets of wisdom I’ve gleaned from this SVB failure. I’d encourage you to also study what happened and meditate on the other lessons to be learned. My goal today was to leave our discussion short and sweet, so I chose to highlight just my top three takeaways.
I want to reiterate that as much as this is a hot topic (SVB failure) and it will make for a great Harvard case study one day, in the here and now there are so many impacted by what’s going on. The associated hysteria around regional banks will lead to job losses and heartache for many. I’m conscious of this and sensitive to that reality. My hope and prayers are that this shake-up will build strength and resilience in both the people and institutions that have been impacted.
With that said, please do feel free to contact me with any comments or questions.
Until next week…
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
