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Chris Ressa:
Welcome to Retail Retold everyone. We have a special episode this week. I’m excited to be joined by Adam Ifshin, CEO of DLC my partner and friend We have this special episode because given the state of the financial markets thought it would be a good idea to bring Adam on who Spends a lot of time dissecting, meeting with people, and really analyzing what’s happening in the financial markets and with the SVB crisis and what’s going on in the baking system. I think everyone will be learned a lot from this episode. So welcome to the show Adam.
Adam Ifshin:
Thanks, Chris. Thanks for having me back. Certainly wish it was to talk about some great new redevelopment deal we’re doing, but we are where we are. And I think I’m hopeful that I can provide people with a level of perspective, both as a real estate person and as an entrepreneur about what I think is going on in the banking system.
Chris Ressa:
Excellent. Before we get there, you just had a whirlwind travel of real estate and basketball. What why don’t you tell everybody a little bit about that?
Adam Ifshin:
Sure, so a week ago today, at this time a week ago, I was in Milan, Italy at the tail end of my first overseas vacation since 2020. And I was dealing with a massive text and email storm about what was going on in the banking industry, flew back, plane landed on the tarmac at John F. Kennedy Airport and the phone rang of one of our lead bankers, the plane had not yet gotten to the gate, spent a day and a half working around the clock on things related to the banking and things related to the business, the typical things you do after the end of vacation. And then I jetted off in the snowstorm to Scottsdale, Arizona for a major investment sales, investor conference in our industry. And along the way in the middle of that, made both the men’s and women’s March Madness basketball tournaments. And for those of you who don’t know, my dad, who co-founded DLC with me, regrettably now passed six and a half years ago, was the star point guard at the University of Vermont in the mid-50s. And post his passing, I’ve been an active guest lecturer and supporter and benefactor of the university. The family built my father’s memory, the expansion of the business school. And I’m very involved at the university. teams made the tournament, two 15 seeds, tough road. And then I got extremely lucky, depending on how you look at it, which is the men got slotted to play on a Friday and the women got slotted to play on a Saturday. So it was at least theoretically possible that I might be able to go to see both teams play. And I like to support the team. So it was an opportunity. It was not early Thursday night to Atlanta, switch planes, went to Columbus, Ohio, picked up a rental car toward our asset in Columbus, got some work in toward another asset that I think we’re gonna be awarded to buy here in the very near future. And then made my way to a St. Patrick’s Day party on one hour’s sleep that the Vermont catamounts, whose logo color is green,
Chris Ressa:
Ha ha ha
Adam Ifshin:
were hosting at the entrance to the arena, Marquette, which is a tremendous team. I actually think Marquette has an outside shot to win the whole thing. I saw the men play, including actually someone who’s coming to work on Team DLC as an intern here in a few weeks, Nick Fiorello. And then from there, I went to my hotel room and passed out, took an early flight to JFK, a car to my house, picked up my car, and drove to Stores, Connecticut, where the women had the real challenge of in college basketball, which is the Yukon women’s team. And had an opportunity to see the women play. Obviously that was a particularly tough game. I give them all the credit in the world for keeping their wits about them and hanging in a game where during warmups, four different women from Yukon dunked off a layup line, which I think it’d be a team who’s tallest player is six one. I’m a huge basketball fan as you know, I got it from my dad. My little whirlwind
Chris Ressa:
I
Adam Ifshin:
tour of work and and March Madness. I did Chris, I did my work yesterday
Chris Ressa:
Mm.
Adam Ifshin:
on a Saturday. I did go to see four existing DLC property up for existing DLC properties and one that were under letter of intent to acquire. So I yes, I was out playing around, but I think I held my own as your partner in the last couple of weeks.
Chris Ressa:
For sure. I spent some time watching the basketball. NCA Men’s Wrestling was on, so watch that. I prepared, we ordered elk to eat last week. So prepared some elk that we’re gonna eat tonight. So,
Adam Ifshin:
Oh boy.
Chris Ressa:
yes.
Adam Ifshin:
By the way, Chris, there’s a crew of real estate people who went to NCAA Division I wrestling championships in Tulsa, Oklahoma, including some folks we’ve done some business with. So remind me and I’ll hook you up. So next year, if you wanna go, some of the people I was with in Scottsdale, flew to Tulsa and are there for the week. You know, they got there on Friday and they’re there for the weekend to watch
Chris Ressa:
Yeah,
Adam Ifshin:
wrestling.
Chris Ressa:
it was pretty cool. One of the more exciting things, Cornell took third, which I think one of the interesting things about wrestling is you can go to some of the elite universities academically and compete with some of the powerhouse public schools and wins. I had two NCA champs. Princeton had an NCA champ. So it’s pretty cool.
Adam Ifshin:
So it’s interesting, so Princeton, as you know, has pulled off not one but two massive upsets in March Madness, and they were going
Chris Ressa:
Yeah.
Adam Ifshin:
to the 15, and there is a P, you can see it on social media online. The Princeton head men’s basketball coach happens to be a huge wrestling fan. And the Princeton, right after Princeton beat Missouri yesterday, they posted a picture of the entire coaching staff match on somebody’s phone, like in the runway of the arena where they had just beaten Missouri, I think they beat Missouri, just beaten Missouri to go to the sweet 16 and they are screaming their heads off for some Princeton wrestler who I guess became the first Princeton wrestler in quite some time to win a national championship.
Chris Ressa:
Yeah, it’s for a long, long time. Yeah, it was pretty, it’s a, in the wrestler, in high school, you know, the wrestlers at Del Barton kid. So, in a high school, you know.
Adam Ifshin:
So this is, you know, for a lot of us who competed in collegiate sports, as you did and I did, you know, at the same time I’m at all of these things, I have this app called Meet Mobile Open the whole time because my alma mater swim teams, where I swam at Williams College, are at Division III Nationals at the same time. So it’s like, this is the time of year, if you’re into collegiate athletic competition to me, this is the best time of year.
Chris Ressa:
Yeah, for sure. Okay, back to banking. So let’s start off with some simple, Adam. What makes you qualified to talk about the banking system and what’s going on?
Adam Ifshin:
Well, I think that this is the most important question you could ask me today, because otherwise someone’s just gonna say, oh, Chris put his partner on to talk about this. So I actually do have a background in banking. I spent eight and a half years on the board of directors of a publicly traded New York Stock Exchange bank holding company that owned the commercial bank here in Metro New York. until we sold the bank to an acquirer who remains, whose management team I remain very, very close to. So I spent eight and a half years on a bank board. For those of you who think I’m smart, I’m not. I accepted a position on that bank board in the spring of 2008. Memodify, if you get invited on a bank board, try to do it not at the emergence of a global financial crisis. banking before then, I learned a ton. I had the opportunity in a front-row seat in an eight and a half year period. I was on a board that got completely remade, turned over an entire C-suite, did a REIPO and a massive secondary. We raised over $100 million with capital in the fall of 2009 at the height of the crisis. I was on the team that recruited a chief risk I actually, the area of expertise that I had on the bank board was really around financial matters and human capital matters. So I was a member of compensation, risk, audit. And I chaired a committee called that every bank is required to have my bank charter called ALCO, which stands for asset and liabilities. And this is the committee of the board that is responsible for helping and overseeing
Chris Ressa:
Thank you.
Adam Ifshin:
management of what, of the other IRR. In our industry, IRR typically refers to internal rate of return. In banking, it refers to interest rate risk. And as the chair of the Alcoa Committee, in conjunction with learning from some really top people in the industry, I came to really understand how a bank balance sheet works. And that’s really the heart of what these issues and the failure of signature bank as well as some stress in the system. So having spent eight years as the chair of an Alco committee, I think I can speak to some of them.
Chris Ressa:
I agree. Okay. We’ve got the credentials and qualifiers out. So let’s start with the basics. And what I’d like to know is what is happening and why is it happening? And please explain this to me like I’m a two-year-old.
Adam Ifshin:
Okay, so I had some practice at the conference I was at last week, someone, a group of people asked me this question. So hopefully I can do this in a manner that everybody can understand. I think the first thing to understand is that bank balance sheets to most people are hard to understand and very opaque because they’re a little bit backwards. Most people, including sophisticated business people, and we’ll get to this a little later about Silicon Valley Bank, think of deposits intuitively as an asset to a bank. They’re not. They’re a liability. And they’re the most dangerous liability you can have, right, which is that they are an instantly callable loan. Deposits to a bank, right, are money that Now, historically, in the old days, certainly in the era of the Great Depression, which was the last time we saw bank runs, people got to line up with their passbook and wait to get led into the bank and talk to somebody, etc. In this day and age, you can sit at your computer or pull up your phone and call your loan, So that’s the first thing. And the other side of the bank’s balance sheet, its assets are where it invests those deposits and where it invests its capital. The liability side of the bank is essentially deposits and borrowings from other places, typically the Fed or the Federal Home Loan Bankboard of the relative region of the bank. Right and basically banks for the most part do two things with that money The first thing they do with that money is they make loans and those loans can be Any loan could qualify car loans One to four family residential mortgages Commercial mortgages to peak to companies like DLC on individual properties or portfolios of properties And then the other thing that banks do with those funds is they invest them in securities piece of some other loan that has been packaged up. And by and large, banks, particularly at the behest of their regulators, tend to focus
Chris Ressa:
MBC 뉴스 김성현입니다.
Adam Ifshin:
their investments on the security side in very safe securities, usually ones that are either government backed or implicitly government backed like Ginny Mays, Fannie, Freddie, Sally May, or in other types of AAA rated securities. by and large banks have constrained their investing in securities that aren’t either triple A or government backed largely because largely because the regulators have taken the lesson of the global financial crisis was the regulators became a lot more savvy about understanding
Chris Ressa:
So, hey, real quick, so just a question. So, I think a lot of people who listen to this have an understanding on the lender’s side, right? We go, we apply for a loan, we’re negotiating loan docs, or we’re negotiating terms, we go to a committee, credit committee, credit committee approves the loan. Who’s the person at the bank who’s deciding, all right, I’m going to invest this leftover money or this part of our investable capital into the treasuries? Who decides that?
Adam Ifshin:
So by and large, they don’t buy treasuries.
Chris Ressa:
Okay.
Adam Ifshin:
But who decides that is a really good question. So the answer is, and this is really important when we get to talking about Silicon Valley Bank, the answer is that depending on the size of the bank and the level of sophistication of the bank, it’s generally a large bank with a large securities portfolio. like JPMorgan has an incredibly sophisticated group. Right? Now, JPMorgan also has an investment bank. They can pull people from there, but by and large, large banks have very, very sophisticated, usually former Wall Street traders or current Wall Street traders and portfolio managers with deep sophisticated experience in these areas. small community bank in all probability is the chief financial officer of the bank, hopefully operating with the, the help of a consultant. And perhaps maybe more than one, as well as some type of risk manager, again, maybe an outsider who’s providing that service on a on a bank and a small to regional bank. We had an outside consultant who overlooked and that consultant reported to the board. The committee that I chaired not to not to management to help us understand you know what was the risk embedded in that securities portfolio and what types of a tremendous amount of acumen here. And as you can see, there’s very little exposure of the really big banks. Only B of A has a meaningful marked, unrealized mark to mark exposure relative to the others. The issue with Silicon Valley Bank, and we’ll get into Silicon Valley Bank a little later here, has to do with the rate at which they grew and the lack of sophistication and controls that they have.
Chris Ressa:
Got it. Okay. So let’s dive into that. That was helpful. What’s going on right now?
Adam Ifshin:
Okay, so here’s what’s going on. And the reality is that to sophisticated players, there’s absolutely nothing that’s gone on here that should come as a surprise. None whatsoever. This is, there’s nothing surprising here, right? Banks own to varying degrees some percentage of their assets in securities, securities as we mentioned. The Fed has moved interest rates at a record pace, a record amount, right? Interest rates are up 450 basis to 500 basis points at the short end of the curve in about a year. This is no secret that if you were holding particularly longer duration fixed income securities, those securities are going to fall in value in fact, quite dramatically. work is their securities book can take one of can be in one of two buckets from an accounting perspective. If the bank deems that they are going to hold those securities until they mature, what’s known as an HTM book, hold to maturity, they are not obligated to mark those securities to market every quarter. They are operating
Chris Ressa:
Got it.
Adam Ifshin:
under the assumption that there is a government backing on those securities and that at the end of the day, they will get paid a hundred cents on the dollar on those securities. Now, those security may be doing a year, maybe doing two years, five years, 10 years, The flip side of it is they also have typically a book that’s called AFS or available for sale. If you classify a security as available for sale, you must market to market.
Chris Ressa:
Hmm.
Adam Ifshin:
So just because you may look at a bank balance sheet online and say, wow, they got a lot of securities relative to the size of their loans, their deposits, their overall balance sheet, however you want to measure it, any issue whatsoever as it relates to a loss because it depends on what percentage of their loans they’re having their AFS bucket versus their HTM bucket. So if you are holding, let’s say you’re a bank with $10 billion worth of fixed income securities, well if none of them are available for sale and you’re holding all of them at par in your hold to maturity bucket, then you have a big If you’re holding the same $10 billion worth securities, exactly the same, but you’ve classified them as all available for sale. So two extreme examples. Then there’s no issue because you’ve already marked down your earnings to account for the market value of the securities. I’ll give you a crazy one. So when all of this went on, as you saw, underlying interest rates fell like a stone. on where on the curve. Perversely, if you were a bank with a large AFS portfolio, you may have to book a gain on those securities at the end of this quarter, because they may be worth more than they were worth on December 31st when we get around to March 31st.
Chris Ressa:
Okay.
Adam Ifshin:
So what happened to answer
Chris Ressa:
Okay.
Adam Ifshin:
your question is, so, Silicon Valley Bank had an immense securities portfolio relative to the size of its balance sheet in my professional opinion. Their total balance sheet was about $200, $210 billion, up from about $70 billion three years ago. That’s massive growth. And let’s make sure we come back to that because I think that growth is a critical component of why we ended up where Silicon Valley Bank is. And they had acquired over the last two, two and a half years, $80 billion worth of long duration, typically 10-year term, fixed income securities, government backed that were all apparently classified in their whole to maturity by. So that’s the asset side of their book. Remember what I told you about the liability side of their book, which are deposits, which are like this instantaneously callable loan? So to add to that, so there are banks all over, right? They all have deposits. That’s how they fund themselves. So Silicon Valley’s bank, banks’ funding of deposits was highly unusual relative to other It was overwhelmingly from two sources, startups, and it’s custodial business in managing crypto proceeds from cryptocurrency. And to be clear, they were not investing in crypto. I want to be super clear about that, nor was signature. But what they did was they took large amounts of deposits from those two industries. run up in valuation in venture capital in 21 and 22, they took in massive amounts of deposits. Silicon Valley Bank at the end of 2019 had $64 billion in deposits. At the end of 2022, they had over 180, almost $190 billion worth of deposits.
Chris Ressa:
Wow.
Adam Ifshin:
small number of customers. So, and by the way, signature bank almost identical situation, except that it was not heavily involved in the venture capital tech world. But both of these banks had sought to make their deposit gathering machines hyper efficient. They have very few branches. The overwhelming majority of those deposits came from very large accounts.
Chris Ressa:
Mm.
Adam Ifshin:
which as you can imagine is much more efficient than Chase, Citigroup, Bank of America, Wells Fargo, US Bank, et cetera, right, who seemingly has a branch on every corner. So these banks had, and both banks, I’m sure you read this, both banks had been written up as being among the most efficient banks in America, which meant that they had the lowest, some of the lowest expense ratios per billion dollars billion dollars of loans. They were both elite deposit gathering institutions. So what happened was they had an immense amount of deposit growth in a short period of time from a fairly small number of depositors. So that leads to a couple of things. One is those depositors were essentially the Federal Deposit Insurance Corporation, which ensures each customer, not each account, for $250,000, right? So if Chris Ressa has four accounts at Bank of America with $240,000 apiece in it, those are not 100% insured. You’re insured up to $250,000. But if you have $250,000 in account separate social security numbers on each account, those accounts are both in short. Makes
Chris Ressa:
Hmm.
Adam Ifshin:
sense?
Chris Ressa:
Makes sense.
Adam Ifshin:
Okay, but going out and collecting $200,000 at a clip in an account is, as you might imagine, expensive and inefficient. This is why banks have been closing branches, right? And pushing people to bank on their phone, et cetera, right? Is they’re trying to lower the cost of that deposit gathering. for a lot of good reasons. That in and of itself is not alone the problem. When I was on a bank board, our consultants used to say, know your depositor. How sticky are your deposits? How much service are you providing? What other things are you providing to this customer that’s going to encourage them to keep their money in your bank given that they have the option to move it wherever they want? storm of deposit gathering. Interest rates were zero for a long time. So people weren’t shopping for the highest rate because no one was paying any interest on deposits and people weren’t able to go buy money market funds through their broker or their wealth manager that paid any more either. So there was no motivation to move the money. Now, the most that have deep roots in communities. So if you take a regional bank that came up from the community banking side, There are examples of these all over the country, right? But for example, if you take a Valley National Bank in New Jersey, a Webster Bank in Connecticut, I could give you more example and to Berkshire Bank in Boston. These banks may have half of their deposits insured by the FDIC, which means they have lots of smaller accounts. liability risk, remember deposits or liability, and instantly callable loan, you’ve spread that across a huge number of customers. But those customers don’t really have any fear because maybe half or more of their deposits are insured by the FDIC.
Chris Ressa:
Right.
Adam Ifshin:
Okay, here’s the percentage of deposits at SVB two weeks ago that were covered by FDIC insurance. 7%.
Chris Ressa:
Wow.
Adam Ifshin:
Here’s the number at signature, 10%. And what happens is when you aggregate your deposits in a smaller handful of depositors, very often it’s not that person’s own money.
Chris Ressa:
Right.
Adam Ifshin:
Now, the person on the other side is likely to be highly sophisticated and have a fiduciary obligation.
Chris Ressa:
Yep.
Adam Ifshin:
What you have there are the components coupled with technology that enables them to move the money without having to speak to their friendly banker. You have the components of a 21st century bank run.
Chris Ressa:
So that’s the risk component. What really drove people to want to withdraw? Because at the end of the day, you know, what’s interesting, right, is, I wonder if some of these banks weren’t public entities you would have this amount of What I would call bank run issue because you know I think the When they when they report earnings and they and they give their business plan of what they’re gonna do Investors in the stock get concerned There’s a dump of the stock and now that’s forcing a You know a run on the bank is is that part of what happened?
Adam Ifshin:
It is not at all what happened.
Chris Ressa:
Okay, go ahead.
Adam Ifshin:
Doesn’t matter whether the bank was public or private at all. And it would be my contention that the investors in the stock of the bank, the equity holders, the shareholders, they were the tailwagging the dog.
Chris Ressa:
Okay.
Adam Ifshin:
On Friday night, a week ago Friday, signature stock closed at $70 a share. Now, the stock had fallen from a year ago being at $300 a share, but $70 a share signature was a multi-billion dollar entity. In fact, on the Friday before the bank failed, the co-founder of the bank owned $160 million worth of stock at $70 a share. So the reality is that nothing to do with the shareholders. A bank run, let’s make sure everyone understands what a bank run is. A bank run is depositors for whatever reason, real or imagined, no longer feel comfortable making that on-demand loan to that particular bank. So they take their money out. That’s what a bank run is. to do with loans going
Chris Ressa:
Sure.
Adam Ifshin:
bad has nothing to do with the price of the stock. It has to do with a crisis of confidence. So let’s look at what created that crisis of confidence
Chris Ressa:
There we go, that’s what I wanted.
Adam Ifshin:
for Silicon
Chris Ressa:
Yeah.
Adam Ifshin:
Valley Bank because
Chris Ressa:
Yes.
Adam Ifshin:
I’ve described to you, A, that Silicon Valley Bank had grown very quickly on the deposit side and I have described to you the nature of how quickly and easy it is to take your So what led investors to say, uh-uh, I can’t leave my money there. So let’s talk about that. So the week prior to them failing on that Friday, Silicon Valley Bank having spent apparently weeks or months looking at this came to the conclusion that they had a significant problem in their securities book. I would submit to you that they were months late and billions short. have been selling this book down. They never should have bought this book and we’ll talk about that, but they certainly should have been selling it down once they had it, probably starting in late summer of last year. They didn’t. So they crafted a plan to sell a huge block of the book, roughly 25, 28% of the book, $21.8 billion in a block trade to Goldman Sachs, who was also advising And at the same time, they moved to file to issue secondary stock and raise capital. And they were trying to match the loss with the amount of capital they were gonna raise. And they had even secured an anchor investor for the capital, a large P for, called General Atlantic for $500 million. It was a colossally bad plan. And it was communicated terribly. And on top of it all, because they moved to do them simultaneously, they were able to do it. They immediately entered into a quiet period and could not explain their actions cogently because they were simultaneously trying to do an overnight and raise another billion, five to a billion, seven in a variety of different stock sales, convertible preferred, preferred, et cetera, complicated deal. And it failed completely. When it failed, and the tide went out Suddenly, everybody goes, well, wait a minute, what’s their securities book really look like? And their securities book was like, wow, that $21.8 billion, like the tip of the iceberg. The $80 billion of long-term fixed-rate securities at an average yield of 1.56%. They’re paying out more on their deposits, way more on their deposits at this point than And of course the Fed is still signaling that they got more to go. So then a series of events happen. So
Chris Ressa:
So
Adam Ifshin:
people
Chris Ressa:
let’s back
Adam Ifshin:
will.
Chris Ressa:
up. So let’s back up. So I think this is an important point. They took in deposits, they invested $80 billion more that was yielding about 1.6% interest and their depositors could get, now that interest rates have risen, more than that, or they could take their money and go somewhere else and get more interest than that. So that’s a negative spread and bite.
Adam Ifshin:
I mean, Chris, I bought short-term treasuries. I bought two-month treasuries, three-month, four-month treasuries in my own personal account this week in the mid to high force. I mean, it’s not that complicated.
Chris Ressa:
Yeah.
Adam Ifshin:
So here’s what happens at the point of attack. Then now everybody wakes up, right? And remember what I told you about their deposit base. It’s 92% or 93% uninsured. And it’s in the hands of a relatively small group of depositors relative to the number of depositors that a truest would have to have $180 billion of deposits. and their Silicon Valley bank. They have a super efficient online banking system for their customers.
Chris Ressa:
Hehehe.
Adam Ifshin:
And their customers are overwhelmingly operating companies that sophisticated venture capital and PE firms have invested. So basically, and then, just to add a little bit to it, Peter Thiel, Founders Fund, legendary investor,
Chris Ressa:
Yep.
Adam Ifshin:
Facebook now meta, PayPal, et cetera, Peter Thiel goes on this social media platform called Twitter, and effectively, at light speed, yells fire And now you have a bankroll.
Chris Ressa:
Got
Adam Ifshin:
You have
Chris Ressa:
it.
Adam Ifshin:
a 21st century, blockchain tech enabled bankroll. And what you probably heard and people posted stories of this online of there were so many people trying to outbound wire money out of Silicon Valley Bank that effectively their wire system collapsed. And it was purely a matter if you got lucky and you were in the queue or not. This is the 21st century equivalent of your, my grandparents or your great grandparents lining up outside of a bank in 1929 with their passbook, trying to get their life savings out of that bank by getting led in the door by a security guard to get their money out. That’s what this is. And on Thursday, a week ago, Thursday, day, over $40 billion was transferred out of Silicon Valley Bank.
Chris Ressa:
Uuh!
Adam Ifshin:
Now, banks are obligated to keep cash on hand, right? Okay, someone comes calling, says, give me my money. Remember those automatically, instantaneously callable loans called deposits. But they had 80 billion in securities, they had sold 21 billion of it. They have a loan book, they had other securities. There was no way that they could come up with the money fast enough. Banks in America are typically regulated They have a primary regulator mode for most banks. That’s the office of the controller of the currency Which is a division of the department of the department of the Treasury Working in concert with the FRB the Federal Reserve Bank And then of course the FDIC Has regulatory oversight because they’re providing the insurance, but most banks are also subject to state regulation
Chris Ressa:
MBC 뉴스 김성현입니다.
Adam Ifshin:
on meeting of their board and called the San Francisco Fed and said, you have to take the bank now. They cannot meet their obligations at the window, i.e. they did not have cash to pay out to the people who were trying to get their cash out of the bank. And that led to what banking experts will call a messy seizure. if they have to take a failing bank at the close of business Friday. And they like to have a prearranged transaction, either arms length or assisted, where they have sold the deposits to a successor institution. And that successor institution will open up on Monday morning and notwithstanding
Chris Ressa:
Thank
Adam Ifshin:
the
Chris Ressa:
you.
Adam Ifshin:
insurance, everybody has access to all of their deposits. the financial crisis, with the exception of Washington Mutual, I believe in every instance, that’s what happened. Right? I don’t believe that there had been a major payout against FDIC insurance without someone picking up the deposits in 30 plus years.
Chris Ressa:
Thank you.
Adam Ifshin:
And there have only been a handful since the Great Depression. They had to take this bank in the middle of the day on Friday with no successor bank or bank. So the Fed actually had to go out and hire somebody to run Silicon Valley bank Monday morning. This is exceedingly rare, and that is all the result of the speed at which this occurred. Normally, regulators know not well in advance, but have some reasonable amount of warning and opportunity to plan for this type of situation. They did not have that here because of the speed at which the technology enabled a small group of depositors to move.
Chris Ressa:
Okay. Now we have, now we know what happened, it’s SVB. super interesting. And then we have this, I don’t know if it’s the right word, but we have this
Adam Ifshin:
Thank you.
Chris Ressa:
contagion now, because
Adam Ifshin:
Thank
Chris Ressa:
then
Adam Ifshin:
you.
Chris Ressa:
you have this, you know,
Adam Ifshin:
Thank you.
Chris Ressa:
everybody you’re looking at First Republic and all these things and now they’re stuck with Credit Suisse. What’s the aftermath and why is there this aftermath?
Adam Ifshin:
So obviously we don’t know what the aftermath is in totality yet. We’re still
Chris Ressa:
in
Adam Ifshin:
somewhere
Chris Ressa:
it.
Adam Ifshin:
in the middle of this. So a couple of things. First of all,
Chris Ressa:
Adam one
Adam Ifshin:
anybody?
Chris Ressa:
second
Adam Ifshin:
Sure.
Chris Ressa:
one second sorry Sorry, Adam, let me start that one more time.
Adam Ifshin:
Okay.
Chris Ressa:
So now we understand what happened to SVB. Why is there this what I’ll call potential contagion? You have First Republic and Credit Suisse and all these other bank challenges. What’s happening now and where do you think this is going?
Adam Ifshin:
Okay, so it’s a great question. So before I answer that, I think the first thing is people need to recognize that anybody who goes and answers that question and says, well, based on what happened in the global financial crisis and the GFC, we’re in the third inning, don’t listen to those people. This is completely different than the global financial crisis. In the global financial crisis, was what was on the other side of banks balance sheets. What was their assets? And if you go all the way back to savings and loan crisis, when I started DLC in 1990, 1991, 92, it was all about asset quality, i.e. they made loans that were crappy, that they weren’t gonna get repaid, or they bought securities, like in the global financial crisis, that everyone said were triple A when they were really crap. That is not the case here, right? Silicon Valley Bank, absent a bank run. We’re holding high quality, secure government-insured assets, by and large, plus some loans, signature bank, by and large is a securities book and a large multifamily CRE book with very few no defaults for all intents and purposes. So this is completely the other side of banks balance sheet. This is not like the global financial crisis. I can’t stress it enough. So is there a potential contagion? There is a potential contagion only because this is a bank run. So this is a crisis of confidence, and you need to go back and look at something like 1929 versus 1990 or 2008, 2009. So okay.
Chris Ressa:
Pause there, pause there. 2009, I’m sorry. Thank you. I’m sorry. Thank you.
Adam Ifshin:
Not so good.
Chris Ressa:
Thank you.
Adam Ifshin:
It’s all good.
Chris Ressa:
Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. 2009
Adam Ifshin:
So, I think the, so what happens next? Where are we? What happens next? I think it’s important to know the following things. First of all, signatures follow up, follow up or follow on to SVB is entirely predictable. They were the bank with the second largest percentage of uninsured depositors. Signature for years, you can go back and look at their annual reports, regularly touted how many billions of deposits they had per branch. Typical bank branch in America has less than $100 million in deposits. Typical signature branch has over $1 billion in deposits. bank but a client as being one of the most efficient deposit gathering banks in the history of the world. So they were clearly faced the same risk and then they had a unique additional challenge, which is that they had gotten very heavily, they had invested very heavily into developing blockchain technology to bank the crypto industry. And again, to be clear, they didn’t own any crypto, They had a group of crypto investors who kept their US dollars because they built this system that helped those people investing crypto at Signature Bank. So one of the things that the regulators teach you if you’re on a bank board or you’re in bank senior management is to be leery of what they call hot money. What’s hot money?
Chris Ressa:
Hmm
Adam Ifshin:
Hot money is deposits that don’t have any loyalty Right? Historically, this meant banks that bought brokered CDs off the street because they needed more deposits and they had to pay off to get those deposits. Now it means money that could just run out the door for whatever reason. Cryptos down, you know better than I, what is crypto down? 70, 80% on average, maybe even more. So those deposits have obviously fallen precipitously. 40 billion ran out of SVB, a whole bunch of people, many of whom you know, Chris, who were longtime signature depositors went, oh, blank, I better do something here because I don’t want to be the one caught holding it back. Signatures bred and buttered core depositors are a who’s who of the New York real estate industry. That is historically a very sticky, non-hot money deposit base.
Chris Ressa:
Right.
Adam Ifshin:
Signature was very good at providing them with lots of service. They were also banking many of those people on the loan side. Lots of it was in multifamily, so you’re talking about things like security deposit accounts, things that are not as easy to move. But that crew got up Friday morning and said, I got to get my money out. $40 billion ran out of signature in a day.
Chris Ressa:
Wow.
Adam Ifshin:
Now they were holding about $100 billion worth of deposits plus or minus. And the feds had no choice but to take them that Sunday while I was on that plane coming back from my vacation. Memo to file if you want to bank in crisis, send out on my vacation.
Chris Ressa:
Bye.
Adam Ifshin:
So the regulators then had a problem. So here’s how you control a contagion. Here’s how you control a contagion. You
Chris Ressa:
Thank
Adam Ifshin:
take
Chris Ressa:
you.
Adam Ifshin:
a rule of regulators you have to take massive. Massive action fast. So what the regulators did to stop money running out of these two banks that they were taking was to guarantee all of those deposits.
Chris Ressa:
Thank you.
Adam Ifshin:
Now, coupled with the fact that the top, the four or five, whatever they’re called, significantly whatever financial institutions, too big to fail institutions colloquially, have an implicit, but not an explicit, guarantee of their deposits. Now, what you’ve done inadvertently by not explicitly guaranteeing all bank deposits is you’ve created this situation where you think you’ve controlled the contagion, incentive now for people to move money into signature. So if we took $20 million and moved into signature now, it’d be 100% guaranteed. Whereas any other bank, it’s not explicitly guaranteed. Now, most people seem to be operating off of the assumption that, well, if the government guaranteed the signature deposits and the SVB deposits, they would have to be prepared to guarantee the deposits of the rest of the banking industry. There’s only one problem. Post Dodd-Frank and the 2018 partial rollback of Dodd-Frank under the Trump administration, they can’t without an act of Congress. So you can stop the contagion tomorrow if you want, if you can get Congress to pass a law which I assume President Biden would sign that said that the FDIC is authorized to ensure deposits to an unlimited amount, which has happened by the way twice before, right? The government did this at the start of COVID and the government did this at the height of the GFC. So it’s not without precedent, They now need an act of Congress to do it. And, you know, I’m not quite sure that the speaker of the house at the moment could rustle up the votes so easily. Let’s put it that way.
Chris Ressa:
Got it.
Adam Ifshin:
You mentioned Credit Suisse. And I think it’s important that we talk about Credit Suisse. There’s news about Credit Suisse this morning. We’re recording this Sunday morning, March 19th. So here’s the thing about Credit Suisse. Um, credit
Chris Ressa:
So
Adam Ifshin:
Swiss.
Chris Ressa:
there’s a UBS deal, right?
Adam Ifshin:
So UBS has made an offer to buy Credit Suisse this morning for a billion euro, which is kind of like the cheap low rent version of JP Morgan offering to buy Bear Stearns for $2 a share in 2008. But here’s the thing about Credit Suisse, and I think it’s important for people to understand this, a totally different situation. Credit Suisse, and this is just not me talking, I think this is generally the view of the financial community, financially significant financial institution on the globe for over a decade. It’s been through multiple management teams, it’s been bailed out multiple times. It is a poorly run business. They have had more scandals, malcheasings than anybody else, and for big numbers, right? Archipelagos or Archegos for over 10 billion euro a couple of years what happens is, you know, once the world wakes up, they laser focus on the weak. And that is what’s happened here. Now, people are pulling their deposits and their accounts, their investment accounts out. So there’s definitely been a run on credit suites. But the problems at credit suites go far further than on the asset side, than in either Silicon Valley Bank or Signature. I kind of feel bad. There I almost feel bad. That is a great bank. It has historically been a great bank. If you asked 10 really well-respected bankers in America six months ago, they would all have them in their top quartile of management teams. They are, however, the bank with the third highest percentage of their money uninsured. from Uber high net worth individuals and family offices, sophisticated, fiduciary, same kind of scenario. And they do have a fairly high percentage of their book in fixed rate securities that they have not marked. Not as severe as SVB, but more than signature. And I think that franchise is highly desirable to a lot of people. at this point if First Republic is not acquired by another institution. I would think that there is probably intense dealmaking going on at the moment around that. Unlike SVB, unlike Signature, FRC is being advised by the absolute dean of the crisis Roger Cohn at Sullivan and Cromwell. He is the best. Hands down, everybody knows it. He is the man behind more, solving more bank crises than almost anybody else in America. And I would be surprised at this point if there wasn’t a transaction for First Republic. By and large, by the way, I wanna be clear about this. The banking system in America is rock solid. The government needs to take action to stop a bank run. In my view, that’s the government’s responsibility. I don’t have a lot of sympathy, by the way, for billionaire tech guys saying, the government’s got to do something. The government’s got to do something. Well, you’re all pretty anti-regulation, and you’re pretty much not interested in the government being in your businesses until you need to bail out. So I don’t have a lot of sympathy there. But if you want to know technically how to stop a bank run, run with government action, at least historically. And I don’t perceive that this is going to get much further. My sense of it is there’s a lot of liquidity in the system still. It shouldn’t. Most bank management teams did not make the mistakes that these bank management teams made. And I think that’s, I think, you know, we’ll talk a little bit about the end of the day who’s responsible and where the liability sits. But, you know, I think a lot of, have both the balance sheet and the acumen to weather the storm.
Chris Ressa:
Okay, so we’ve been going for a while and over an hour here. Let’s, why don’t we do this? Why don’t we, can you wrap this up in a nice pretty bow for us or not so pretty bow? And you know, you mentioned where the liability sits and maybe start there and you know,
Adam Ifshin:
Okay, so at the end of the day, here are the takeaways. The overall banking system in America is incredibly healthy. Banks have a ton of capital. They generally have very clean, asset side of their books, cleaner than ever, especially given the size, especially given the amount of capital they have. I think we have a fairly limited situation here where you have this confluence of deposit concentration of mark to market in a handful of banks securities books. So I think it’s limited. I think it’s contained. This is not the global financial crisis. I think the single most important thing to know is not the global financial crisis. The overwhelming majority of assets on banks books are high quality. So I think there are two things that people should know on the way out the door of this conversation. Number one, I don’t want to hear anybody blame the regulators. management at a handful of banks that took in deposits without a place to invest them so they parked them in perceived safe securities and they set up a colossal classic mismatch they borrowed short and lent long and that’s called interest rate risk that’s the other IRR and I will tell you now and when I chaired Alpo of a small bank that we would have allowed management to do what SVB’s management did. No chance. And guess what? Management never would have suggested it. And we had an outside consultant who warned us about precisely this every quarter in every committee meeting. This was a failure, a colossal failure on the part of SVB’s management team in my personal opinion. They grew super fast. They did not have a chief risk officer for nine of the 12 months of 2022. And they made just some very, very rudimentary mistakes at scale. That’s number one. Number two, clients need to know their banks. You are lending a bank money when you put a deposit in a bank. I have no understanding of why Roku’s CFO had over $400 million in Silicon Valley Bank. absolutely, it’s suicidal risk, makes absolutely no sense. So that’s number two, you have to know your counterparty at all times, and you need to understand their balance sheet, and you need to understand the risk. And to me, those are probably the two biggest takeaways. There’s one more, I mentioned this. In 2018, Congress at the behest of the executive branch, and there was bipartisan support for this, There was uniform Republican support, and there were a handful of moderate Democrats, particularly in the Senate, who supported a partial rollback of Dodd-Frank. That rollback in retrospect is very unfortunate for what happened here, because it lowered the stress testing bar for regional banks between $50 and $250 billion in assets. would have been subject to very similar stress testing as Wells Fargo, Bank of America, JPMorgan, etc. By rolling that back, the regulators lost a powerful weapon in having the ability to have been more proactive at places like Signature and SVB, SVB in particular. So, in retrospect, At the end of the day, it’s bank management and their boards. I think that the bank management and the boards of those two banks are going to sit for a lot of depositions, Chris, and they’re going to get sued a whole bunch. They may even be criminally investigated. I’m not qualified to say if they have criminal culpability or not, but they are absolutely, to me anyway.
Chris Ressa:
All right, well, there you have it everybody. That’s what’s going on. I hope you’ve enjoyed. Adam, thank you for shedding some light on a situation that, for many Americans, I think is pretty opaque. And you made it a little more, gave a little more clarity to something that a lot of people don’t have visibility to. So really appreciate that. Thanks so much. Hope you have a great weekend. And I will see you Monday.
Adam Ifshin:
You’ll see me tomorrow.
