Today’s email is a heavier topic than usual…

Silicon Valley Bank, one of the top 20 largest financial institutions in the US, experienced a bank run which led to its seizure on Friday by the FDIC.

This has caused panic among remaining SVB clients, which are businesses primarily in the tech & startup sectors.

97% of these businesses’ deposits are above FDIC insurance levels and many of these firms don’t know how they’ll make payroll next week if funds remain in limbo.

Media coverage and stock market reactions have predictably stoked fears of contagion.

I’ve seen a lot of fear being spread by people who are financially illiterate. It’s important to listen to the right people.

The FDIC is working over the weekend to find a buyer for SVB:

An important thing to know is that SVB has a lot of assets which will be sold to help cover the value of its customer deposits.

These assets are comprised of liquid securities (government bonds & mortgage securities) as well as loans the bank made to venture funds and tech companies.

The liquid securities can be quickly sold in the market and the FDIC likely did so last Friday. The loans will be sold at a discount to their market value to entice the buyer.

The total proceeds from SVB assets may or may not cover the full value of the customer deposits. My math suggests depositors should get at least 70% of their money back.

It is an open question whether the FDIC, the Fed, the US government, or the buyer of SVB assets will make up the remaining difference to depositors if there is a shortfall.

Events over the next few days will be key in determining the long term fallout from SVB.

Here are some things I will be watching for:

• How quickly SVB depositors get access to funds as well as the recovery %
• If the Fed creates temporary liquidity programs to help other banks avoid runs
• If other banks raise additional equity capital for extra cushion
• If tech firms cut back spending or lay off employees more aggressively
• If stock prices stabilize in the banking & financials sectors

Another matter: how will the Fed approach interest rates at the March 22nd meeting?

My view is that aggressive rate hikes (50bps) are now off the table.

A pause on rate hikes seems prudent due to financial stability concerns. Rate cuts are not out of the question if conditions get worse. Tuesday’s CPI inflation report may complicate the situation.

At a minimum I expect market volatility and rumors around various banks’ solvency to persist for several weeks.

I view SVB as an outlier among the largest US banks in terms of its securities exposures and flighty deposit base which brought it down.

That may not stop concerns from extending to large brokers (Charles Schwab etc), regional banks (First Republic etc), or even large banks (Bank of America etc) however.

I expect the Fed and Treasury to act quickly to try to contain the SVB fallout. Will it be enough?

I don’t have the answer to that yet, but there’s no reason to assume a worst case scenario at this point.

Panic is unproductive.

Some moments this month will probably feel eerily similar to the 2008 global financial crisis.

But this uncertainty and volatility can also be an opportunity…

I still vividly remember combing through financial reports, credit documents, and research for 80+ hours a week at the hedge fund during the GFC.

It was highly stressful but I learned a lot of valuable lessons and we ended up having the firm’s best year ever in 2009.

My plan over the next few weeks is to remain calm, do a LOT of research, and compile the list of companies I want to buy if their stock prices pull back to defined "value" levels.

I’ll focus a lot on non-financial areas of the market.

It can be tempting to try to “buy the dip” on financial sector stocks given the crazy price swings, but these complex leveraged institutions can destroy capital in a matter of hours.

I’m looking for Black Friday sales, NOT spins at the roulette wheel.

Stay calm and safe out there!

Best,

Travis

P.S. - There are many angles to this developing situation. Let me know what you want to see me cover more in depth!

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