By J. Keith Buchanan, CFA, Senior Portfolio Manager
At this point, most market watchers have endured another crash course on interest rate risk, credit risk, and contagion risk over the past four days that we would all rather not re-learn after the Great Financial Crisis. If you've heard the story of interest rates moving higher and exposing the latest, greatest financial innovation before price declines that lay bare underappreciated vulnerabilities in financial institutions which were themselves the very sought-after assets due to the aforementioned exposure to hot asset class, please stop me. It should sound eerily familiar… substitute venture and crypto capital for real estate and you have, in a nutshell, the beginning of the Great Financial Crisis. Emphasis on "beginning" as there were several dominos that much of the market had no clue were related in the last crisis, such as the trouble at AIG and the credit default swap debacle.
However, the current financial turmoil is much different in nature.
First, the current crisis stems from a classic bank run. The traditional banking model takes in deposits and lends to borrowers. A bank run starts when depositors withdraw funds in a more aggressive manner, causing the bank to struggle in meeting their obligations. The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to protect banks from exactly what has happened here. In theory, if bank deposits under a certain limit (the limit today is $250,000) were guaranteed by the full faith and credit of the United States, then depositors would not be as panicked to withdraw deposits at the sign of danger. In that case, Uncle Sam could make them whole. So there's no need to fret, right?
However, there were three elements that made this bank run unique. First, the depositors were concentrated in a few industries. As the name suggests, Silicon Valley Bank grew its deposit base largely from technology companies which had raised money over the past several years. As one could imagine, several of those corporations had more than $250,000 deposited with Silicon Valley Bank, and any amount above $250,000 would not be FDIC-insured. For instance, Roku had about $487 million deposited at Silicon Valley Bank. Second, the bank invested much of that money into principal-safe, but interest-rate sensitive, long-term Treasury and agency bonds which, if sold, could cause the bank to realize any associated losses. Third, news and rumors move fast in this age of social media, and withdrawals can be made anywhere in the world by smartphone app at most financial institutions.
All three of these elements collided late last week and over the weekend. On March 8th, SVB announced a capital raise after realizing a $1.8 billion loss from the sale of securities in an attempt to meet the liability obligation demands of their customers. On March 9th, depositors withdrew $42 billion, leaving the bank with a cash balance of approximately -$958 million at the close of business.
Our viewpoint has long been that a rising rate environment would cause things to "break." Typically, those things that break are those that benefitted most recently and on the grandest scale from liquidity-induced imbalances. With that being said, we do not have any direct exposure to Silicon Valley Bank nor do we own regional banks in our equity strategies. We remain conservatively positioned and wait diligently for the weight-of-the-evidence for direction of our next move. As always, we view diversification as an invaluable asset, particularly when it comes to assets with low or negative correlation with traditional equities.
GLOBALT is an SEC Registered Investment Adviser since 1991 and, effective July 10, 2013, remains a Registered Investment Adviser through a separately identifiable division of Synovus Trust N.A., a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be considered a solicitation for the purchase or sale of any security. This does not constitute legal or professional advice, and is not tailored to the investment needs of any specific investor. Registration of an investment adviser does not imply any certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information may be required to make informed investment decisions, based on your individual investment objectives and suitability specifications. Investors should seek tailored advice and should understand that statements regarding future prospects of the financial market may not be realized, as past performance does not guarantee and/or is not indicative of future results. Content may not be reproduced, distributed, or transmitted in whole or in part by any means without written permission from GLOBALT. Regarding permission, as well as to receive a copy of GLOBALT’s Form ADV Part 2 and Part 3, contact GLOBALT's Chief Compliance Officer, 3400 Overton Park Drive, Suite 200, Atlanta GA 30339. You can obtain more information about GLOBALT Investments and its advisers via the Internet at adviserinfo.sec.gov, sponsored by the U.S. Securities and Exchange Commission.
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