Just when we thought the news could not get worse…!
Over the next several months we will all learn together that the folks in charge of the now failed Silicon Valley Bank (SVB) and Signature Bank of New York were not all that good in the banking business.
As the banks failed, the Federal Reserve of the United States took immediate and effective action to stop what could still be, but not likely contagion, causing other bank dominoes to fail.
The Fed credited the Bank Term Funding Program (BTFP) to squelch the possibility of systemic failure.
Those of us who have lived through the Bear Sterns, Lehman Brothers and Washington Mutual (to name only a few) financial collapses are likely suspecting history will repeat itself. But this time really may be “different”.
Unlike the sub-prime mortgage-backed securities and Collateralized Debt Obligations (CDO’s) that turned out to be toxic, the securities today are AAA-rated U.S. Treasury and Agency mortgage-backed securities.
These will mature at face value (there is virtually zero default risk), but the aggressive interest rate hiking by the Fed caused bond prices to drop in market value, which is different than monetary value.
With additional capital to support depositors need for money the current value of the bonds, if sold, would cause the bank large losses. As depositors learned there could be a risk to their deposits, the sudden need for liquid capital forced Silicon Valley Bank to liquidate high quality assets at a deeply discounted market value, which turned a liquidity crisis into a solvency crisis.
This new BTFP back stop will act as an additional source of liquidity for high quality securities and in the process prevent more banks from having a liquidity crisis starting as of last Monday, March 13, 2023.
It would be reasonable to believe none of this is good, “Not over yet”, but also not the end of the banking world. 2008 was completely different and closer to banking system failure, yet here we are and the world did, in fact, not end.
As for that “not over yet” comment above, well we will continue to hold much higher than normal cash, and cash-like, positions in our WSG family asset allocations while we slowly, thoughtfully and intentionally add to our investment positions. When viewed as “Five Year Money” (Read it Here), it is highly probable that the knocking you hear in the background is opportunity.
I’m interested in your thoughts, comments, and observations. Feel welcome to call, email or stop by the office and say Hi.
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.