How can you protect yourself from bank failures and uncertain foreclosures? There is a lot of confusion around the current crisis, resulting in misinformation leaking to the masses and inciting panic among those who rely on said banks.
In this episode, Toby Mathis, Esq., of Anderson Business Advisors, is joined by Stefan Whitwell, CFA®, CIPM®, founder and Chief Investment Officer of Whitwell & Co., LLC. Stefan leads this wealth management firm and its investment practices. He is a sought-after advisor who works closely with clients at the intersection of health, wealth, and purpose. Stefan has particular expertise in tax planning and alternative investing.
Toby and Stefan will be going over the facts about the most recent round of bank failures and uncertainty. They’ll explain what questions to ask your bank or custodial firm, how multiple layers of insurance protect your accounts, and other information you need to know to make informed decisions on what to do with your money.
- Stefan intro
- What happened at Silicon Valley Bank
- What should you do? Separate into two buckets – a bank and a custodian
- Insured custodian accounts
- How banks vs. custodians handle your money
- Money market accounts – low vs high risk
- FDIC, SIPC, and private insurance coverages
- What banks have said about customer’s money- “Don’t worry”
- Unadvertised negotiations to segregate your accounts are available on large bank balances
- Do your homework, or ask your advisor to do the homework on your investments
Full Episode Transcript:
Toby: Hey, guys. Toby Mathis here. I have Stefan Whitwell. This is going to be a fun one today because we’re going to dive right into not only what occurred in the banking crisis, but what you can do to protect yourself, because there’s so much bad information out there. First off, welcome, Stefan.... Read Full Transcript
Stefan: Thank you so much, Toby. Glad to be here.
Toby: Just a little bit of background because you’re a financial professional. Just give me your background real quick so somebody understands.
Stefan: I started out my career in investment banking, working on Wall Street, and worked my way to Main Street. Today, I run a wealth management firm. We’re licensed in all 50 states and serve clients in 14.
Toby: You’re also a graduate of the Wharton School of Business, right?
Stefan: I was just lucky. I was at a garage sale. I found an old certificate and just did a little photoshopping. I’m going with it. I was lucky enough to get into a great school. But like any other school, you only get out what you put in.
Toby: I’m just saying you’re not some armchair quarterback. This is something that you’ve studied, you understand these things. Wharton school is fantastic. I just want to give people an idea of who they’re talking to because you’re not a broker. You’re a financial professional, a fiduciary, you manage money, millions and millions of dollars for people, and you have to navigate these waters, right?
Stefan: Every day.
Toby: I’m not going to date it exactly because I want this to be something that people can use for months and years later. In a nutshell, what caused this most recent banking crisis?
Stefan: I appreciate you saying that because these kinds of things happen pretty regularly over history. We tend to forget about these and then it happens again. There are some timeless things that you need to take from this.
First, what happened? There are a couple of things that happened. At one level, the board of directors and the management of Silicon Valley Bank were just asleep at the wheel. They bought investments that were tanking, that were going down and down and down in value.
In fact, what’s interesting is I went and looked myself in the SEC filings with a balance sheet of Silicon Valley Bank, these financials for the end of last year, so they’re dated December 31st 2022. KPMG—bless them—clear as day, right on the front of them, they showed that by the end of last year, the management had lost 94% of their equity, but they didn’t seem to really care about that until about two weeks ago.
Toby: Let’s be fair. Audited financials don’t get done in December. That probably just came out right before this crisis. I bet you, that came out and then people went, what? A smart person goes look at that and say, you have no liquidity? This doesn’t mean that they lost their money. This just means that they don’t have their deposits available to people. There’s no cash.
Stefan: It’s both actually. They have two types of investments on their balance sheet, one that they hold to maturity and the other that they can sell whenever they want to. The stuff that they’re holding until maturity has lost $15 billion. If they had to sell that in order to pay depositors, those are very real losses.
Toby: Let’s break this down to everyday Joe language. They went and bought a bond. They have long-term government bonds. Is that primarily what it is?
Toby: These bonds may mature in 10 years?
Stefan: I think, on average, between 6 and 10 years.
Toby: Jiminy Christmas. They will probably listen to Yellen and all in the Fed. Oh, inflation is transitory. They’re buying these bonds at interest rates to the banker, a quarter, 25 basis points. They just have to beat that. They’re going to a government bond, which at the time was probably close to 2% or something. Am I saying it right?
Stefan: 100%, and those are fixed rate.
Toby: They’re going to get 2% for the next, on average, you said about six or seven years?
Toby: Who wants that now that inflation is so high? On the same token or even worse, the Fed raised the interest rate. All of a sudden, you went from, hey, I could get money at a quarter basis point to now it’s 4½ or something like that.
Stefan: That’s exactly right. It wasn’t a mystery to the world. You don’t need to be a PhD in finance to have figured out a year ago that the Fed was changing its tune. They were going from a decreasing rate environment to now, hey, we’re going to start increasing interest rates.
Toby: But they had already bought the bonds, right? They bought these bonds years ago in some cases.
Stefan: That’s right. Without getting into the details, there are things they could have done to hedge that at that point. There’s no perfect hedge, but they could have hedged it, and the cost of that hedge in hindsight would have been nothing compared to losing the whole bank.
Toby: They just didn’t do an appropriate party a serious banker would have done and they left themselves exposed.
Stefan: It’s common sense. If you’re driving on a freeway, 80 miles an hour, and all of a sudden the skies darken, and it just starts pouring cats and dogs, you may not keep driving 80 miles an hour. If it gets bad enough and you can’t see 30 yards ahead of you, what do you do? You slow down, you pull over. The fact that you’re going to change what you’re doing to be adaptive to the new environment is just common sense. But to your point, Toby, they didn’t do that, and that means that’s ultimately harder.
Toby: They have this bond. I’m just going to use a real basic. Let’s just say you have a bond, it’s a 10-year bond, it’s 2%. You bought it two years ago, so there are eight years to maturity. You haven’t lost the bond. You’re going to get paid.
Let’s say you bought a million dollar bond at 2%. You’re going to get the million dollars plus the 2%. Problem is, right now, you could go get a bond at 4%, 4½%, 5%. Who wants the 2% bond?
Toby: Now you have to turn it into cash.
Stefan: That’s right.
Toby: That’s where they sold a bunch of it to JP Morgan, and they were buying this stuff at a big discount just so they could turn it into cash, and then everybody said, let’s pull all of our cash out. They just completely eviscerated the bank, right?
Stefan: That’s right. The tipping point, they were in a vulnerable position because they weren’t adaptive, they didn’t take action, and now they were vulnerable. In that moment of vulnerability, what happened? You had the Silvergate Bank collapse, you had other systemic concerns, and then all of a sudden, you had two significant voices in the Silicon Valley ecosystem to say, hey, minimize your exposure today.
Peter Thiel and also the Y Combinator, a very respected venture hub, are reported to have gone out and said, hey, let’s minimize your exposure to this bank, so people started withdrawing. The challenge is that when everybody’s in the same neighborhood, they’re just part of the same tribe, and people to your left and right are suddenly like, hey, I got to get my money out today, what are you going to do? You’re going to feel like, hey, I’d better do that as well, because you don’t want to be the dummy left standing last.
Toby: It’s a wonderful life situation, where I need my cash back. You have a loan over here, it’s been loaned out. It’s backed by assets, but I can’t just go get the cash. Give me my cash.
Stefan: They were all in the same community. All of a sudden, people start calling up. Of course, part of it is the Internet. With the speed of communication today, that accelerated it as well.
Toby: One day, $40 billion, right?
Stefan: Yeah, it was amazing. Even here in Austin at local banks, we’re getting calls from tons of clients saying, hey, we got to move money over today. Can you help us? Can you help us?
Toby: Let’s talk about this because in the case of SVB, most of their deposits, I think it was 94%–95%, were not insured. Right?
Stefan: That’s right, a huge percentage.
Toby: That’s not normal. That’s unusual. These are deposits that exceed $250,000. There’s $250,000 of federal insurance on a bank on your bank account.
Stefan: That’s right, per account.
Toby: Per EIN. Here I am, Toby. I have a personal bank account, I have a savings account, and I have two CDs. CD1 is 100, CD2 is 200. I add up my personal bank account, my savings and those CDs, and I have $250,000 of insurance against it. Is that correct?
Stefan: That’s right.
Toby: More than 90% uninsured means that most of these people had a ton of money sitting in this bank of more than $250,000.
Stefan: These are venture companies. Obviously some wealthy individuals, too, but a lot of them were venture companies, as well as high net worth individuals associated with those companies. Big balances in there.
Toby: What do you do? Here I am, I’m freaking out, I’m reading the news every day. This bank could go under. You see Credit Suisse, you see all these others. Again, I don’t want to date this. I want this just to be, hey, banks are going under, or I’m scared. I might not get my money back out of my bank.
What is somebody to do? Is it just to consolidate it all on the big banks? Maybe there are other alternatives? Is it to open up multiple accounts in multiple banks so that I have more federal insurance on each account? What do I do?
Stefan: One of the other key takeaways, Toby, here is to understand in the financial sector, the difference between a bank and these companies that hold money on your behalf as a fiduciary. We call those companies custodians because they just hold your assets. An example of a custodian would be Fidelity or Schwab.
Most people don’t understand that banks take all your money. When you get a bank statement and it has a number next to your account, that’s just a piece of paper that says, here’s how much we essentially owe you. But behind the scenes, they’ve taken all your money, the next account’s money, the next account’s money, they put in a little bit of theirs, and then they go out and they invest that. If all goes well, they make enough to put some money in their pocket and pay you a little bit of interest, and all is well. Until it isn’t.
A custodian, on the other hand, operates very differently. Each account is segregated. They’re not allowed to take your money out of your account or do anything with it. They may authorize an REA like us to go in there and invest things within that account, but not for my benefit.
Toby: But it’s your money.
Stefan: It’s your money. That is even more important than government insurance because it’s common sense that if they can’t touch your money, it’s safe. That is a key distinction.
What I had been talking about with clients and advising people is, think about dividing your money into two buckets. One is your day-to-day operating stuff. The truth is, banks are best at that. They’re great for bill pay and all these different things you use banks for. But a lot of us have some excess cash. Companies might have some extra savings or money, and that’s in a different bucket. That bucket, you want to make sure is getting the highest yield and as secure as possible.
One way you can do that would be to open up an account at a custodian. I’ve had several people call me this week. We’ve opened up institutional accounts for them at Schwab. They then can easily move money between that account back to their regular bank as needed to support their operations. You can even get a debit card and check for the infrequent transaction in that kind of account.
Toby: It’s going to have limits, right Stefan? They’re going to have maybe six transactions a month, you could do this, that or the other, and then they just charge you or something if you go above that?
Stefan: It’s incredibly competitive. They have very, very low fees. At certain balances, fees get waived. Truth be told, it’s not designed to be transactional accounts, so it’s not as convenient as regular bank accounts. It’s really more about your convenience.
Tony: I could just move the money from an account like that into my bank account, right? I’m going to issue settlements in a day or two, right?
Stefan: Yup, super easy. What you can also do is you can set up pre-created instructions. All you need to do is just pick up the phone and say, hey, move money from our corporate account here at Schwab to our corporate account at Bank XYZ. It’s super easy to do.
The most important takeaway for all of you watching this is to understand that key difference between a bank and a custodian. That’s what really protects you. However, in addition to that, on a different government program, the SIPC guarantees your safety in Schwab, for example, or any custodian up to $500,000. But at least in Schwab’s case, they’ve also gone out to Lloyd’s of London, which is a big insurance cooperative, and they’ve obtained additional insurance up to $150 million per account.
What that means is if you put the money into that kind of account and you then look at us to help you put it in the right money market fund, the securities in that account are guaranteed up to $150 million. If it’s just sitting in cash, that’s $1.15 million, which again, is four times more than the bank, and that’s per account.
What that means is that if something happened and somehow, some way Schwab went bankrupt, that because those assets are sitting in separate segregated accounts with your name on it, they are protected, nobody else can lay claim to them, and they are yours. You’re not depending on a government bailout for that. It’s structural, which really makes a big difference.
Toby: It’s like this. I just want to make sure again; I’m going to put it in the everyday Joe language. If I put money in a bank, it goes into a big bin. They mix it all up and then they multiply it. It can be multiplied by 90 times. They can loan out, for every dollar they bring in, probably $90. They’re trying to make a spread on what they pay you for your dollar, versus what they can get somebody else now that they’re loaning $9 out, and they’re trying to make an interest on it.
Toby: In a brokerage house, a custodial account, you give a dollar and it’s your dollar. It’s not being mixed up with everybody else’s, it’s your dollar. You might have somebody that’s allowed to manage it and to put it into different investments, maybe put it in a money market, where money markets and savings accounts are pretty darn close. You can get a high yield savings now around 4%. Is the money market equal to or better?
Stefan: Yeah, even more than 4%. Even the net of fee is 4.2%–4.3%. One thing I will say for those of you who have money and you want to get a higher yield, but you don’t want to take risk, there are two different types of money market accounts. One, that will not put your principal at risk. Other types that try to get you a little bit higher yield, but are going to expose you to some fluctuation potentially in your principal.
My recommendation is for an extra 15–20 basis points, why take that stress on it? Don’t worry about it. Just get an infinitesimally smaller yield, which is still much better than it’s been for the last couple of years, and sleep soundly at night.
Toby: You’re hitting on something, by the way. When you’re looking at market risk, the S&P has returned in over 100 years. They’re a little over 10% a year. Then you look at bonds that might be right around that 5% range. The closer those items get to each other, if the market’s down a little bit and bonds are up a little bit, people are going to go with bonds, and that causes the market to start to decline.
You see, all these things are related to each other. Last year was an anomaly because bonds got torpedoed and the market went down, which is bizarre. Usually, you see one of them going up and the other one going down, but never both going down.
I’m going to throw another idea out there. If somebody is listening to this and they’re going, aha, maybe I need to have more than just the bank account, I need to have a custodial account, but what if they’re at a half a million dollars and they’re just like, hey, I just don’t want to lose my half million, you could just open up another bank account, or you could buy a CD with another bank perhaps. Do you guys do any of that, Stefan? Do you guys do any laddering of CDs, go to 10 different banks and get a $250,000 CD at each bank? That way, your money would be insured too, right?
Stefan: We tend to not do that just because it ends up being a lot of work for the client. Today, with rates so high in low fee–high quality money market funds where it accrues interest daily, that’s really attractive. In the past, CDs had to be held for a certain minimum amount of time, so you had to count on it being stuck there. The nice thing today is you can get a competitive yield and you’re not committed. Give us a day’s notice, two days notice, and you can get access to your capital.
It really depends on you. The good news is if you’ve got about $500,000, two banks, great. That’s easy. But if you have substantially more that it ends up becoming a lot of work to do that, I think there’s something to be said for consolidating that. I would probably look at the larger custodians. The reason for that is that even though a smaller custodian still has the structural advantage, if you think about what securities are today, we look at them on a computer. We’re not holding physical shares anymore.
Some of the risks that you need to worry about if you’re evaluating the strength of a custodian are things like cybersecurity risks. The big guys, the State Street’s, Fidelity’s, Schwab’s—there’s a half a dozen of them—they literally custody $2, $3, $4 trillion. At that level, they have the budget to be able to put into place really premier cybersecurity-type functionality to just help protect your assets that much more.
It didn’t matter 20 years ago. But today, if I’m looking at it, I’m making sure my money is safe. That’s one of the things that I think would push me to use a larger custodian rather than a smaller one. We’re not saying any custodian is always better, you still need to be smart.
Toby: There are three things. We have FDIC insurance. We have SIPC, which goes to how much?
Toby: And then you have private insurance. Everybody’s familiar with FDIC because that’s all you hear about in the news. But there’s the SIPC, which is a little higher, and you get both. I have a bank, I get up to $250,000, I have a brokerage account, or if I have custodial money, then I have up to $500,000. And then you have the private. I’ll just use Schwab as an example. You said it was $150 million per account?
Stefan: That’s right.
Toby: You have three ways to be insured. What’s the best? I don’t know. I’ve never had to use one, thank God, but I imagine that the FDIC makes it pretty simple to get your money back. SIPC probably makes it pretty simple to get your money back. I’m not sure about the private. It sounds like Lloyd’s of London, chances are it’s very solvent. Really strong insurance has lots of reserves, you’d probably be able to get your money back. But in any case, you’re not just going in blindly hoping that your money is protected. You’re actually systematically saying, here’s how I mitigate my risk.
Stefan: That’s right. One of the things I’d add to that, Toby, is you’d mentioned brokerage accounts. Increasingly, large financial companies are these hybrid behemoths that have all different parts to them. What’s important is that if you’re exploring or putting money into a particular custodian, please make sure that you verify with them that the money you are putting into that account is going to be segregated and part of the custodian arm of that company.
I have seen situations where people opened an account, I thought it was one thing, it turned out to be another, and that’s just super important. Read over those documents yourself or run them by Toby.
Toby: Don’t make it easier for them. Work with a fiduciary. I’ve been saying this for years. You get smacked in the head all the time by the brokers. Work with a fiduciary.
In an REA, can you even open up an account that’s all merged in together? Because you’re not doing a good service for your client. I don’t think you can do it. It’s always going to be a custodial account, right?
Toby: How do you know whether somebody is a fiduciary if you say these magic words? Are you a fiduciary, and is this a segregated account?
Stefan: Anything other than a yes or no, if they start going off on some weird tangent, then just take that as a run.
Toby: I had that once. I had a doctor who’s being represented by somebody. I said, he’s on both sides of the transactions for sharing us. No way, I’ve been working with him for years. I just asked him who he owes his fiduciary duty to. The guy started hymning in high, going all over, and he goes, no, we’re looking out for both parties. I was like, there you go.
Both parties are representing both parties. Nobody’s looking out for you, they’re actually just interested in the transaction. Sure enough, that was exactly the case. It’s like, yeah, it’s that simple. Are you a fiduciary? Do you owe me a fiduciary responsibility? Yes. Good. Move on.
Is this account segregated? Is it just my money? Is this a custodial account? Yes. Fantastic. What’s the level of insurance on that account? X. Fantastic.
I had to fight with clients because they were in little banks. I said, ask the bank because they didn’t want to move. People are starting to open up different accounts, a lot of people are moving into the big four, and they’re a little nervous. They’re worried about the solvency of some of these little guys.
They would write these things saying, we have up to $150 million of insurance, we’re very liquid, blah-blah-blah. I said, here, it’s really simple. My balance is what? How much of that is insured? They would not respond. They would send press releases and other stuff. I was like, get your money out of there.
Stefan: Speaking of press releases, one of the things that drove me nuts last week about the Silicon Valley Bank is they came out with a mid quarter PowerPoint presentation on an update on how they’re doing. It’s just to support their equity race. There were two or three slides in particular that just made me sick to my stomach because they were full of these big generalities of, oh, we have lots of liquidity, oh, we’re doing great. Literally, four hours later, they’re taken over by the government.
Toby: There was a case here, Stefan. Not to interrupt you, but in Vegas, there was a plumbing company. I remember this because it was in the RJ during the Great Recession. The guy who had actually come in was worried about his payroll. He had about $3 million in the bank.
They said, we are perfect, we have no problems, we’re very liquid. He said, I’m still worried, I want to move some of my money. They said, how about this, we’ll give you a cashier’s check. It’s a big chunk of their balance. That way, if anything happens to us, you have this cashier’s check. They literally gave him a cashier’s check, which of course became worthless once they were taken over by the Feds.
He lost his entire balance. I think he had $250,000 of insurance. Fantastic. He lost over $3 million and killed his company. Bankers, sorry. They don’t know you have fiduciary duty. They’re going to say what they can to keep their bank alive.
I talked to my bank, and they’re like, hey, I understand you probably want to move some money around. We’re pretty good, here’s our balance sheet. We’re feeling like we’re not going to be affected by this, but I understand why you’re doing it. That’s what you want, someone who’s like a real human being.
You don’t want someone who’s going to like, oh, no, no, no, no, don’t move your money. No, no, that’s just crazy. Why would you do that? Because those are the folks that are like, okay, why are they so desperate to keep this?
Stefan: It also drives me crazy because when in the context of a situation like that that’s telling people, don’t worry, actually change anything? When someone’s telling you don’t worry about it, that makes you like, oh, now I’m feeling great, this is great, I feel so much better.
It’s almost like a cue, like I should be more worried now. They’re like, don’t worry about it. Now I’m definitely twice as worried about it. There’s one other thing I want to add real quick. It’s about real estate. It’s a super important asset class and one that is hard to buy all cash. We frequently need banking partners to get access to high quality loans to build that side of our portfolio.
One of the things that I just wanted to share is that it’s harder to do unless you’re really dealing in bigger, bigger numbers, but it is possible to negotiate particularly with some of the largest banks out there—Goldman, Morton, Merrill—a guarantee on a set dollar amount for your balance with that bank. They don’t advertise this. It’s by negotiation only. But if you’re a big player in real estate and you’ve got a very close relationship with that bank, which is very, very valuable to have in the concept of real estate—
Toby: They could ensure your balance is what you’re saying.
Stefan: And there’s a price for that. Just know that it’s an option. I want you to have informed choices that you can look at and then you can decide what’s right for you, but just know that that’s another choice that is available.
Toby: I never heard about that. I never really thought that you could actually go negotiate. If you had $20 million in an account, you might be able to say, hey, I need to know what’s going to be there, can we get an insurance policy? Maybe it’s Lloyds. Maybe it’s somebody like that.
Stefan: The reason is they don’t advertise that because what that forces them to do is to then segregate that money. The only way they can guarantee it is to segregate it. They’re not going to get to Lloyd’s to guarantee it if it’s not segregated.
Toby: That makes sense. They need to know what their liability is.
Stefan: If they segregate it, it means they can’t take your money and invest it until it becomes less valuable to them. They’re going to try to make it up in some way through a fee. But still, again, it’s just math. You get the number, you find out what it is. At least it’s an option for you to be aware of.
Toby: Great options. You have lots of choices, FDIC, SIPC, private insurance, even go into your bank. If you have a larger account, negotiate to see whether they can segregate it. Using segregated accounts for your investment money sounds like it’s probably a good idea for your business. Maybe it’s a combination of the two or at least maybe multiple banks, you have a lot of different options out there to do some things.
Stefan: I’ll just add one more thing to that. When you’re looking at which bank should I use or part of the bank custodian mix, again, I’ll draw your attention to the fact that Silicon Valley Bank had a very non-diversified client base. If the bank you’re working with has a more diversified mix of clients, that’s going to strengthen that bank’s profile.
I would just say, do your homework or get your advisor to do your homework, and show you what they looked at in terms of making sure it’s diversified, in terms of making sure they’ve got plenty of real equity. It’s not about the fancy stuff, it’s really the basic stuff. Is it diversified or not? Do they have equity or not? Silicon Valley didn’t have equity by last Friday, so that’s what made it vulnerable.
Toby: You certainly broke it down and made it understandable. Hopefully, if you’re listening out there, you’re getting good information. Now you know. If this information could help, by all means, please share it.
I’ll tell anybody out there, please subscribe and click the little bell for notifications because this type of information is timely, but also it’s always moving. We’re always posting more. If you want to be on the list, make sure that you get notified. By all means, please do that.
Stefan, I want to say thank you for joining us. I know that you’re busy. I can only imagine what’s going on. You’re probably getting phone calls left and right, people freaking out. I just appreciate you taking time out of all that to come and educate my subscribers and all the good folks out there.
Stefan: You’re most welcome, Toby. Great to be here with you.