Recession Planning Part 1/3 – The Hidden Banking Crisis & How To Protect Yourself

This is a dovetail to a previous video we did when the banks were really going out of business. I think we had three major banks go out of business. We just had another one go out of business. They get taken over by the Fed, and they get their assets absorbed by other banks.

What’s going on right now? What should people be afraid of? And what’s the reality? I only see what I read in the news, and it’s like it’s all over. It’s like, oh, the bad stuff is done. Is the bad stuff done?

Stefan: Bad stuff’s not done. The banking crisis is a slow-moving train wreck that’s going to take place for the next several years. In fact, even in the last quarter, the biggest banks lost $260 billion in deposits.

As banks lose these deposits, their profitability is going down. At the same time, they’re saddled with a lot of commercial real estate debt that’s in trouble. On top of that, they’re having to deal with new competitors in the financial space, these so-called fintech companies that are running circles around them.

Banks, as I’m sure you’ve experienced, are often just very, very slow and not innovative. They’re in trouble. The biggest catalyst for that is the fact that we live in a more transparent world today. People have figured out that, hey, on average, banks are paying American savings accounts 0.4% interest when you should be making high fours to 5% today.

Toby: Yeah. I wrote down a couple of things based on our conversations. I wanted to go over these really quickly so that we could talk about what’s going on, and more importantly, what you can do to address these issues and make sure that you don’t fall victim to something that we would say is unexpected, but it’s actually very predictable at this point. We know that there are going to be continued bank failures. The only question is, how quickly and how extensive it is, and then what you can do to make sure that you don’t fall victim to it.

Let’s go over these. We have big banks and small banks. We saw JP Morgan, Chase, and some of these others just have massive amounts of deposits move over. Are they up on their deposits? Are they overall down? What’s happening to the regional banks? Are they going to rest in peace, and we’re going to be wondering what happened to them all? Or is there a way for them to recover?

Stefan: Everybody’s scrambling. One of the reasons for trying to keep deposits is by now, a last ditch effort is saying, oh, we’ll pay you more interest. People are waking up, Toby. The difference between 0.4% and 5% is too big of a difference. If you’re a company, and you’ve got $10 million in deposits, or an individual with a million dollars in deposits, that’s real money.

People are saying, hey, I’m going to take that money out of the bank and invest that in a relatively risk-free way to get a much higher rate of return. Like we talked about earlier, it’s not just the interest. You’ve got to protect your capital.

Toby: Let’s go over that. Let’s say I’m a business. I have a payroll and all these things. I have to keep a million dollars in my bank account. That bank fails. Out of the blue, they fail. All of a sudden, I hear about a run on deposits, and the Feds close them down. What happens to my money? What happens to my million dollars?

Stefan: Yeah, the $250,000 is, in theory, protected. Giving the government full benefit of the doubt, you’re going to get access to it, but it may take a couple of days. That’s problem number one because oftentimes, if suppliers or employees aren’t paid immediately, there can be real world consequences to that.

You need to always have a backup plan. You need to have another account. The question is, where do you have that account? The other part of that equation is the other $750,000 is gone.

Toby: Insurance, anything? Nothing else is going to cover that?

Stefan: It often will take months after that to figure out how much, if anything, you’re going to get above the $250,000. But if you’re running a business, you’ll have months to figure out what to do.

Toby: The Fed stepped in, I believe, Silicon Bank, and they covered. Am I incorrect, or did they agree to cover people’s deposits for an amount greater than what was insured?

Stefan: In that case, they did, because they were facing a huge risk of a massive market sell-off that Monday.

Toby: Yeah, because we were seeing the regional banks especially. We did this, we were repositioning. You’re spreading money across multiple banks and multiple accounts, because you didn’t want to have that one account. Hey, we don’t know whether you’re going to go under. You see some of these banks that are in that range. They’re losing deposits. If a bank has a dollar, like you put a dollar in a bank, aren’t they loaning that out like $90 or some ridiculous amount?

Stefan: Almost all of it. The important thing is—we talked about this a little bit last time, and that goes to your question of how do you protect your money—in a bank, all that money is commingled with everybody else’s money and then invested. The way to protect it is, you want to get money into a custodial account where that money is segregated.

Toby: Let’s break that down because there are two flavors here. The easiest way for me to understand this is that, when I put a bank deposit into a bank, it’s on their asset sheet as an asset. It’s their asset.

My dollar is their asset, and they have a liability to me for a buck. I do that same thing, but I do it to a brokerage account. I’m in a custodial account, which means it’s almost like a safety deposit box. They’re holding my money for me. Is that their asset anymore, or is it always my asset?

Stefan: We need to be careful, because there are brokerage accounts that are non-custodial. It’s really important that you put your money to protect it in a custodial account.

Toby: How do you know?

Stefan: You’ve got to ask and then you’ve got to double check it.

Toby: You’re CFP, so you have a fiduciary responsibility to your folks. Are you using non-custodial accounts?

Stefan: No, we’ll only use custodial accounts.

Toby: All right, here’s an easy one, go find a CFP. Go find a fiduciary and say, open up my account for me. Is that too simplistic?

Stefan: No. There are a number of large, very, very good custodians out there. We happen to use Schwab, but Fidelity is another good one. There’s a handful of big, well-known.

The thing is, though, you’ve got to make sure that you’re working with their custodial account, because some of those large institutions have different divisions, different branches, and you want to make sure 100% that your money is being held in a custodial segregated account. This means your money is held separately and not mixed in with everybody else.

Toby: That means that it’s yours. Let’s say that Schwab goes out of business. Let’s say that Schwab, Fidelity, somebody gets tanked. Like, oh, my gosh, it’s Lehman Brothers, it’s whatever, and it goes out of business. Do you get all your money back?

Stefan: Yes, 100%.

Toby: What about these folks that are like, wall, there’s still FDIC insurance. It’s called something else for a brokerage account.

Stefan: SIPC Insurance.

Toby: And it’s like a million dollars or something?

Stefan: It’s more. Some banks have entered into insurance agreements that can increase the amount of that protection. That’s helpful. But like anything else, you need to pay attention to the details. If you’re going to be depending on a bank making a representation that they have more insurance, in terms of the amount of cash that you’re holding, my suggestion is that you hire somebody, or if you have the skills to do it that you really double check, fact check, make sure that it’s right.

Toby: Let me give you guys a story of what happened here in Las Vegas. There was a bank. I’m not going to say the name of it, but it was a popular bank here locally. It had a bunch of blue bloods on the board. I was like, yeah, big muckety mucks. There was a plumbing company that had about $3 million of deposits, and they were worried about the bank failing, and this was back in the recession.

The banker gave them a cashier’s check for their deposit amount and said, here you go. If you’re worried, if you have a cashier’s check, it’s as good as cash. If anything happens to us, you go deposit that. He gave that plumbing company the idea, the illusion that they were covered. That bank went under, and the Feds took it over, and that cashier’s check was not honored. It was still a check.

That plumbing company wasn’t able to pay its employees, its vendors. I believe it went out of business. If it didn’t get killed, it didn’t get put out of business, it was really, really close. But it was in all the papers here because people were talking about the banker giving them assurances, but you can’t rely on the banker. I think you’ve used the term. If you go to the barber and you ask him, do I need a haircut, what are they going to tell you?

Stefan: It’s important to keep that in mind, because no matter how much you may like that person that you’re talking to, their incentive is to make you happy, make you okay with the situation. But they’re not going to be paying your debtors, they’re not going to be paying your suppliers, or your employees if something goes sideways. No matter how nice they are, it’s just not going to happen, so you got to watch your back.

Toby: Your job is to prevent foreseeable events from disrupting your business. You really have three parties with the business that you’re worried about.

Stefan: Obviously, if you own a business, you have to worry about your employees. It’s like your family. Two, you fought really hard to get your clients. You got to protect them, too. The third thing I want you to think about is your reputation. If it was as simple as you moving your excess money into a segregated account for your business to protect it, and you didn’t do that, and something happened to the bank that you were working with, and your business went under, and all these people’s lives got disrupted, and you could have done something about it, that’s just not a situation you ever want to find yourself in.

Toby: I’ll say this as an asset protection attorney. To your employees, you could be personally responsible for unpaid taxes and unpaid wages. You could have exposure that no matter what type of entity you are, that you’re still on the hook for. You owe it to yourself to take steps to make sure that you don’t have that disruption.

Here’s what some banks are doing. They’re saying, hey, we’re going to take your deposit. We’re going to buy a bunch of CDs at other banks, and we’re not going to buy any CD that is greater than $250,000 at any particular bank. In theory, all of your money is insured. But again, I just look at it and go, okay, how are you going to get to those funds?

Of the largest banks that have ever failed, I think we just put two or three out of the top five on the board. I think we had the largest bank failure, and everybody was like, meh, it’s covered. Press was like, meh. No. If we have a bank run, and there’s any panic, and I want to make sure I’m not being sensational about this, but you’re going to have multiple banks go under.

Stefan: Toby, the other thing is just, whether you’re an individual or a company owner, you got to ask yourself, is the stress worth it? Do you want to have to, every week, every other day, be worried about whether that plan is still compliant? Do they still have everything they need in place for that fancy scheme to still be working? Are they okay?

Is your bank losing deposits, or is it gaining deposits? Life’s busy. Who’s got the bandwidth to do that when it could be as simple as simply moving your money into a segregated account, where you’re not faced with that issue?

Toby: You could operate out of a segregated account. Do you still have a check writing and debit card?

Stefan: You do. I will tell you that I think a traditional bank account, checking account is still going to be more efficient for that. Just keep your balance under $250,000, and then just move money in as you need it.

Toby: What if I have a big payroll? Can I tie that to an account where I’m like, hey, three days before I run payroll, can we move the monies over from a segregated account into it?

Stefan: Absolutely, yeah.

Toby: What if the bank goes out of business during those two or three days? Is that your risk?

Stefan: That’s a problem. I was looking at this issue recently for a client who’s receiving a $10 million check. Bank wanted to hold it for five days. Everybody thought I was this mean, bad guy, because I was asking the simple question like, okay, during those five days, is it at risk? What can we do to protect that money?

Toby: And am I getting paid for it? There’s interest on that $10 million. It’s not a small amount.

Stefan: That’s another pet peeve of mine, too. It doesn’t take five days to clear the check, in my opinion, today. You got Fed now that eventually speeded up. You’ve got fintechs that are way faster, but it bothers me when I hear them say, well, it takes five days to clear a check. No, it doesn’t.

Toby: What they’re saying is I want to use your money, and I want to multiply it. I’m going to use fractional banking. I’m going to loan that out. They’re probably giving it back to the Fed getting an interest on that one in their overnight window.

Long story short, let’s not get too far off track. You believe that the banking crisis is not over, that we’re going to see more bank failures. We’re sitting here in 2023. We’re sitting here at the end of summer, and you’re looking at the fall. We’re hopefully at a Fed pause, but we’re not in a pivot where it’s not lowering.

The cost of money is really high. These banks, a lot of them didn’t hedge. They have bonds that are not marketable. Let’s just be real. The Fed came in and said, hey, we will loan you money on those. That’s a temporary fix. Are we sitting on a ticking time bomb with these banks?

Stefan: That’s a great point, Toby. They’ve got issues on their balance sheet, losses on their bonds. What makes that worse is that their deposits are leaving. If their deposits were permanent, then they could just wait that out. Eventually, they get paid by the government. But people are waking up and they’re saying, hey, I don’t want to get paid so little on my cash that’s sitting there.

I’ve seen this happen, Toby, in the last week. A couple of clients were pulling their money, and suddenly their bankers were on the phone saying, hey, we’ll pay you more. The problem is that confidence is lost. A lot of people are saying, hey, you know what, you didn’t have my back. You’re only paying me more now because I’m leaving.

Toby: It’s not even a return on my investment. It’s the old adage, it’s the return on my investment. In the bank, it’s at risk. You know it’s at risk. You’ve seen banks fail now, so now you know. You can’t say, oh, I never saw this coming.

When Silicon Bank toppled over, people were like, oh, we didn’t know, we never saw it coming. Now you know. We’ve seen some major bank failures. Since then, we’re going to see more. The only question is, is your money at risk?

What are the institutions that have custodial accounts where I could go to? I know you named a couple, Schwab and Fidelity. But is this Morgan Stanley, Merrill? Is it most brokerage accounts? What is the custodial account? What are the different places?

Stefan: Unfortunately, this is where you probably want to call an advisor to help you on this, because some of these large financial institutions, Toby, have so many different divisions, some of which are not custodial. You really need to be clear when navigating that. Some of them have hybrid models. Unfortunately, there’s no shortcut. You really got to do your homework.

The good news is, there are a number of firms out there where your money will be a lot safer. The other catalyst to your question is commercial real estate. It’s a different conversation entirely, but banks have debt on their books. A lot of these assets are in trouble. Occupancy is down 50%, interest rates are up substantially, and these loans are going to be coming due.

Toby: In the next three years, I think we have $1.5 trillion worth of commercial loans that are going to reset. If they reset at higher interest rates, because keep in mind, they’re probably 4% or 5% a few years ago, now they’re looking at 7%–8% or higher.

You’re talking about doubling the cost of debt. A business or a building that already is losing people, is already suffering, and now all of a sudden, you just increase the cost of their debt by doubling it, that’s going to put a lot of people under. You’re going to have a lot of notes that institutions or groups that own these assets are probably just going to quit paying it.

Stefan: I think there’s going to be a concerted effort to keep some of this out of the headlines, because there’s going to be this sense of, well, we want to protect people, we don’t want people to panic. There’s going to be a real effort to, I don’t say cover it up, but hush hush some of the bank failures through often forced mergers. Often, a regulator will come to a bank and say, hey, you either merged with another bank, or we’re taking your over. It avoids the headlines when it’s structured as a merger, but really, it was more we’re pulling the plug,

Toby: Yeah. You see banks that are in peril and then they say, oh, UBS gets Credit Suisse.

Stefan: That’s exactly right.

Toby: It was like, okay, we’re not really going to talk about what happened. All the bondholders got toasted.

Stefan: That was a huge one.

Toby: That was huge.

Stefan: There’s going to be a lot of small- or medium-sized ones.

Toby: Maybe if the Fed comes to the rescue in some of the cases and comes in and bails some people out, but at the end of the day, it’s disruptive to your business. By the way, it’s very predictable, and it’s very easy to solve.

What Stefan just said is get some custodial accounts and don’t put all your eggs in one basket, which is really good advice. I’ll just leave this bread trail for another video. There are gonna be opportunities, especially in the world of commercials, because you’re going to see massive amounts of failures. Just in the lending world as a whole, there are going to be opportunities for investors to participate.

Stefan: Significant.

Toby: Significant All right, thanks for coming in today. You know what? If you’re going to scare some people and say, hey, these things are coming down, at least you gave them real life easy solutions that they could implement to protect themselves and their businesses and make sure that they’re not hurt, so I really appreciate that.

Stefan: You’re welcome.