Today, thanks to the quick action of my Administration. Over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there. When you need them. Small businesses across the country, the deposit Accounts at these Banks can breathe easier knowing, they'll be able to pay their workers and pay their bills. This was the message that President Biden gave just this morning, trying to reassure the general public that the banking system is okay.
But not everyone seems to be buying this. Message a number of Bank stocks are currently, in freefall, First Republic Bank is down 77 percent on the day. The exchange halted trading on this company. Western Alliance is down. 78% key, Corpus down. 26% Pac West Bank has fallen 47%. Zions Bank is down, 27%, even Ally Financial is down 13 percent on the day and Charles Schwab is down Seventeen percent.
So even after a joint statement, from the Department of Treasury Federal Reserve and FDIC, and a direct addressing from the Isn't the banking system is still under pressure and Bank stocks are getting clobbered. So in this episode, we're going to do an update of the entire situation. Try to break down what's going on and the possible ramifications of it, how it will impact our portfolios. And what this means for the future. We have a lot to get into. Let's go ahead and get started.
So first of all, let's do a quick 30, second recap of everything that's happened. So far up until three days ago. There used to be a bank called Silicon Valley Bank that catered to Silicon Valley from 2017 to 2020, as the Texting started to grow rapidly because of cheap. Money low interest rates, Silicon Valley Bank, had an influx in deposits as Silicon Valley, Bank was receiving this influx of deposits and fresh cash. They decided to invest the
money. They invested it at very low interest rates, at the time of the interest rate on average was between 1% and 2%. So they were investing in this area right here. Much lower than the current 5% interest rates. The problem wasn't that they only invested At low interest rates, but they invested in long duration assets, Silicon Valley Bank was buying mortgage-backed Securities and 10-year, treasuries at one-and-a-half percent interest rates locking in that rate for the next five
to ten years. So their entire Bond portfolio is right here in this area and the interest rates of course went up to 5% making their entire Bond portfolio underwater, all of it being unrealized losses and this was a particularly poor decision because of how concentrated the clientele this bank had, it was all Silicon Valley startups. All companies that had the same risk factors.
This graphic shows how concentrated, Silicon Valley Banks portfolio has into long-dated assets and how many losses they had in that portfolio. The impact of unrealised security losses on Capital ratios. It has two bars here. The blue one is the common Equity Tier 1, Capital. The brown bar is adjusted for unrealized losses on securities. So basically, when you make the adjustment, for how much this Bank actually has, when you factor in their losses, this is
what it looks like. Notice how most banks like JPMorgan have slightly less when you adjust for unrealized losses. It's about 80%. That's a pretty decent ratio. They're not down much when you adjust for unrealized losses, we have Citibank doing the same thing. Pretty reasonable ratio there.
And then next we have Silicon Valley Bank third, from the left DC, the problem there when we adjust for unrealized losses, Has their ratio goes from being around, 12% to being around point two percent, it's virtually nothing. And this is unlike any other bank, Silicon Valley Bank is orders of magnitude worse than even the next worst bank. So, this highlights how uniquely bad their portfolio was and how it led to this devastating consequence.
Not to make a long story short. This entire Bank runs started with Moody's, Corporation threatening to downgrade the rating of the bank and they threatened to downgrade it precisely because Of the capital ratios Moody said that you need to increase your Capital ratios, or we're going to downgrade the stock Silicon Valley Bank quickly responded to Moody's
downgraded thread. They issued a note saying that they're going to bolster their cash reserves and they're going to raise their Capital ratios by doing a little dilution to raise some cash. And that is precisely what? Spooked the customers of this Bank word, got around very quickly and Silicon Valley as it often does with everybody on
smartphones. Everybody in slack groups, everybody in Discord channels, word spread Quick that this Bank may not be able to get your money out as quick as you want. And once that happened, everybody wanted their money out. That's the bank run, not only did the stock price drops 66 percent in a single day and was halted, but this Bank received a staggering 42 billion dollars of withdraws. In one day, this was a bank run
by cell phone. Every single Venture capitalists every single startup company that had money in this Bank logged into their Silicon Valley Bank app on their smartphone. And issued a withdraw request, all of them doing that at the same time is the bank run and this create a bigger liquidity problems for the bank on Friday. It was announced that the FDIC had taken over the bank, it no longer exists as Silicon Valley Bank. That bank is shut down. It exists. No more.
It is a remnant of history, but the question remains, what happens to the depositors? What is the insurance? What happens with everything going forward? And what does this mean for all these other Banks today? Her one day of FDIC having control over the bank. There was a joint statement released by the Department of Treasury Federal Reserve and FDIC. Now with this statement, they had two major goals with it. One was they wanted to make it clear that the taxpayer was not
bailing out. All the people that profited from Silicon Valley Bank. They didn't want to make it look like the taxpayer was paying out. The CEO, the executive team, the equity holders, or the bond holders, they wanted to make it clear to the public that that's not the situation, and it's not a Pete of the bailouts that happened in 2008. The second goal is to retrieve depositors money and renew confidence in the banking
system. And I think the statement adequately accomplish both of those goals, depositors will have access to all of their money. Starting Monday March 13th, no losses associated with the resolution of Silicon Valley, Bank will be borne by the taxpayer. This is the sentence repeated over and over again. In the statement multiple times that no losses associated with, this bank will be Burned by the
taxpayer. Now if the losses are not being paid by the taxpayer, who is paying for the losses, FDIC Insurance FDIC is going to raise premiums on every other bank, to cover any losses of the banks that go under or need additional security. This is basically a way of saying that the premiums that Banks pay an insurance is going to go up a little bit if they have to cover additional losses. And then of course, the next thing they highlight is that Senior Management has been removed.
From the company, they have been fired, their reputations have been And any shareholders and debt holders of the company will not be protected. They've lost one hundred percent of their investment, so Silicon Valley Bank exists. No more, the executive teams have been fired, the equity holders, and bondholders have been wiped out. And there's a new playbook, a roadmap for how to deal with this type of situation in the future.
Now, you'd think logically looking at the measures that government has taken that, this would stem all the problems in the banking sector that investors and depositors would have renewed confidence. The combined government came out and said that they're basically ensuring deposits up to any
amount. They'll take any steps necessary to make depositors whole, but like most of History, one panic sets in logic, goes out the window, the route and Bank stock deepens, despite emergency measures in 2020. Did we have a lack of toilet paper? Did we have less toilet paper than we did before? No. But when fear sets in and people think that they may not be able to get something they rushed it. As much of it as they can, they rush to get it before anyone
else? This is a herd mentality and it's a part of human nature and we're seeing the exact same thing with the banking system. Right now, the government has said that they're backing these deposits that they have measures in place to get everybody. Their deposits as they want them. But regardless, people are acting scared. They're still taking their money out and selling these stocks. If we look at the bank's mapped out on, just their recent daily performance.
This is what it looks like we have First Republic Bank. Pac, West Bank Corp. Being the two that have dropped the most but even Zions Bank, which is a much larger bank has also dropped over 30% in price then Regions Financial has also dropped 15% in price so across the board. It's mostly Regional banks that are getting hit. So there's still a lot of pressure and selling and anxiety around these Regional Banks. They're still under pressure and the CEOs. Like, Fifth.
Third Co are coming on to CNBC trying to just share the message that they have deposits. They have your money. They are insured and that things are fine. That's the message. They're trying to share the executives of these companies are trying to reduce panic and contagion as they should be. Now, there has been some second level effects to this. The treasury rates have dropped.
As these banks have been selling off the u.s. 2-year treasury is down to four point one percent just a couple days ago, it was at five percent so that is a substantial drop in treasury rates. The 10-year treasury is also dropping rapidly. It's down from four percent. Now 23.5 percent Sent mortgage rates are also tumbling in the wake of bank failures. There are down about a half a percent on the day. And then most shockingly Goldman analyst no longer expect the FED to give that point two.
Five percent interest rate hike in their next meeting. They think they're going to keep it the same because of the considerable uncertainty in the environment. Now I understand the logic care. The FED will keep raising interest rates until something cracks or something breaks. But I think in this situation, the FED has made it abundantly clear that they're going to raise interest rates and
Inflation comes down. That is their mandate, it's not to raise interest rates until Things become uncertain. It's to raise interest rates until inflation comes down. So, I disagree with golden hair, I think we're going to see another 25 basis point increase, but I also think a lot of this will come down to the next CPI reading. So, overall, this past couple of days and even this past week has
been crazy, it's been event. Filled non-stop news, breaking news all the time, and I think it's good for investors in these situations. To just take a breath, take a step back and not be so consumed.
By every little bit of breaking news, I know it's fun to consume all of it and to read all of it. But I think that can have a negative impact on your view of the market and how you manage your investments in reality, the companies that you're investing in. If they're high quality companies, have been through many crises before most of the companies that I'm investing in have been in existence for 50-plus years. These are companies with long
franchises Of durability. They've been through different interest rates and different market conditions. And so, a little volatility, a little uncertainty is nothing new to these companies. They've been here and done this before. And if the companies that you're investing in are really high quality, any sell-off in them, as a result of temporary Market, Panic can be viewed as an opportunity. I've had a recent sell-off in Sp Global this company's down about 10% that's around four thousand
six hundred dollars. This is a brand-new holding that I built up to a very significant holding so I'm not concerned Earned at all, at seeing this company in the read every single company that I've ever invested in. At one point has entered in the red, I never time the absolute bottom of buying into a new company, so this one's down a little bit and if it continues to trade down, I'm going to be
adding more to this position. SP Global's business has never been stronger before than it is today. Vici was another stock that got hit with a sell-off on Friday in a general related Market Panic. This one traded down around 4%
on the day. About 7 percent on the week when I look at Vici and their fundamentals in their business, nothing that happened this week, materially impacts this company to any degree, but even just being in the General market, and being subject to the volatility can create opportunities with Vici trading down. I've added a little bit more to this, holding both Canadian Pacific and Union Pacific have also traded down with the general panic over the past
couple of days. And these are two companies that again as far as I can tell, fundamentally have not changed at all. So any Time these companies trade down significantly below my buying price. I'll be adding to these positions. I still view them as the long-term Compounders where their intrinsic value is going to continue to climb year after year. So, just to summarize, I'm not concerned about the situation, I don't think you should be
concerned about the situation. And if you're listening to, lots of people tweeting and all caps putting fire and thumbnails creating and spreading panic, I think that's a good indication of the type of commentator or investor you're paying attention to. So that's all for this episode. I have more updates following this week as the situation plays out and I'll see you in the next one. I have more updates following this week as the situation plays out and I'll see you in the next one.