158. ​​Silicon Valley Bank Failure - Protect Your Deposits

You are listening to the Wealth Without Bay Street Podcast, a Canadian guide to building dependable wealth. Join your host, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future you can truly bank on.

Inherently, all banks, yeah, they're insolvent.

And so we, you know, when we talk about, well, and the reason, I mean, obviously, right, I mean the, the, the amount of loans that banks have outstanding in relation to deposits. So without getting into a two week course on how banks work, Nelson said something to us many years ago. He said that every dollar that you put on deposit with a conventional bank is based purely on trust. It's based purely on trust. And so when you see this scenario that's played out with the conventional bank in the United States and now there are two banks, so there's a second bank that's been essentially, lights have been turned out until the regulators figure out what they're going to do. And then you see what's happening. So today is March 13th and the stock market is responding primarily to regional banks that are taking a very, very big boom, brow beating in the market as a result of this.

Some of them as much as 75% decline in their stock value.

And so the government steps in and says, we are absolutely going to ensure that, not the technical word, insure, we're going to make sure that all depositors are made whole. So the market, the actual market, doesn't have the opportunity to actually work as a market. When the government steps in and says everybody's going to be whole, obviously good for depositors and there's a whole process in a system that they're able to make depositors whole. I'm not talking about fdic, I'm not talking about using taxpayer money to do it or bailing out the bank. There's a whole method and process in place to do that. But the big question that people have is why does this sort of thing happen? It's because the banks are printing money where no money existed before and contributing to the problem. And one of our colleagues posted earlier on Facebook, Ryan Griggs, he said, have you ever heard of a run on a mutual life insurance company? There's been instances of a run on the bank. But we're not here to say, oh, hey, told you so or one institution is better than the other. We're just here to speak the truth. And the truth is that this sort of thing is inevitable because Nelson referred to it as the biggest con Game in the world.

A great book called How Privatized Banking really Works is available that explains this whole process to a great degree. And that's, that's if you want to go a little bit deeper in your understanding and I think everyone should do that. Or you could read page 21 of Nelson's book and furthermore page 22. And in fact he goes even prior to that, if we look at page 19 and 20 of the book, he talks about creating a bank like the ones you already know about. Specifically he references the First national bank of Midland, Texas, which was the highest earning per capita bank in the entire United States in 1983 at that time. And that bank failed. And one of the reasons it failed was because of the shenanigans taking place by management. And management was lending money, thinking they could go and make money all over health acre in the oil business at their oil tycoons instead of bankers. But they were stealing from the bank and they weren't repaying the money. They weren't being an honest banker. 26% of the whole loan portfolio was non performing. That's a good way to cause a bank to fail. Well, another good way to cause a bank to fail is to lock up a bunch of the deposits at a low interest rate. And then when interest rates spike up and everything you got locked up is worth a lot less than what it was before, then you have to sell at a discounted price in order when someone comes and demands their money back. That's part of what happened here with this Silicon Valley bank. Yep. And there's a whole host of other problems associated with it let that led up to this chain of events. But as you're identifying Jason, it's the circumstance, it's the, it's the reason that how banks are able to work. Banks don't lend their money. They lend the money someone else has left there, the depositor's money. But they don't have to keep all that money available. They don't have to keep all the deposits available.

And that's, they wouldn't, they just wouldn't operate for very long as a bank if they did that. And so when you have all of these securities that the banks have put capital to work in because the bank should be maintaining very little cash on their balance sheet, the capital should be out there working. And so they go and get all these securities at ridiculously low interest rates, they're buying these government backed treasury bills and all of these securities that have really, really low interest rates. Depositors start flowing into the bank to say we'd like our deposits back. And then the bank says, well Houston, we got a problem because those very same securities are marketable at a much higher rate. So nobody wants to step in and say I don't want to buy your security at 1.4% over a 10 year window when I can get the same security now and earn 5.5 on it. Why would I do that? It doesn't make any sense. And so they go to the marketplace and say we're going to sell more stock, we're having a downer, as Nelson would refer to it. Let's create shares and let's go to the marketplace and get capital from the marketplace to make sure that our reserve ratios, that everything is properly maintained and that there's no perception that we've got a problem. And the marketplace said we don't want to buy that stock because you do genuinely have a problem. And so the market said, no thank you. And now look at the situation that they're in. And the federal government is scrambling like mad to convince the American public that the financial system is sound. And when you're dealing with large, too big to fail conventional banks, that's one thing. These banks are in a situation now where they are literally too big to fail. They're in a really, really bad spot. And it's just, you can see what starts happening when panic starts to take root. And that's all it would take is for those dominoes to tip over and depositors going to those financial institutions. Like there were a bunch of videos on Instagram and TikTok and people saying, oh, I'm just going to pull up into insert bank name here and I'm going to withdraw everything out of my savings account and see if I can get it. What does that tell you? People don't have certainty. But as it relates to, when you contrast that again with people who warehouse their money, they're not laying awake at night wondering is the life insurance carrier solvent? They have to maintain minimum capital surplus reserve ratios. They're regulated much, much differently than conventional banks are.

On that note, we had an event in Calgary, Alberta last Friday. Fantastic event, great turnout, a lot of wonderful people. And we had a representative from one of those life carriers there and we talked about, there was a question that came up about in general just concerns over deposits versus say Canada Deposit Insurance Corporation or how the system, the current banking system operates on insuring deposits. And the life insurance carriers and the industry in Canada is extremely well regulated. The amount that they have to have in protection mechanisms around being able to pay their claims and their benefits is far greater than it is in the banking industry. And they operate with something referred to as a licat ratio or life insurance capital adequacy test which is now done on an annual basis with life carriers. And that particular carrier has the best like at ratio and their ability to make all of their claims, pay out all their claims, etc. In comparison to the other companies in Canada, all of which are well, well capitalizing. Oh yeah, yeah. This particular carrier being at the kind of top tier level of that. And it just goes to show the difference in both strength and management of the financial institution. Because the financial institution is thinking in 100 year lifespans and it's looking at things over long, long time frames and it's understanding past history and a little bit of future presumptions that are reasonable and then they over capitalize to a large degree so that when there's good or bad years they have capital available to, to smooth out those rough waters that do happen. There's rough financial waters that happen. But if you're well capitalized you could really, you know, with a proper methodology you can really ease through that in a very effective way. It's a lifeboat for rough waters. Ultimately in the financial category, there's a.

Reason why life insurance companies remain the most financially solvent institutions on the planet because the outcome is engineered and that's a really good outcome to create certainty for people who have a co ownership interest. You know, whether it's notional or otherwise. When you're dealing with a mutual life insurance company, there's nobody else to share the owner's equity with. It doesn't belong to anyone else.

And so in this situation, going back to banking, I mean, it's referring to fundamental truths, right? R. Nelson Nash said often one of the fundamental truths is that your wealth must reside somewhere. And then as he was referring to building a warehouse of wealth inside of a policy or a system of policies being dividend paying, participating whole life insurance contracts, he would ask the question that would introduce logic. What better place is there essentially to warehouse your wealth than here? What better place is there? And again, there's many different perspectives where people think, okay, wherever I decide to put my money is the best place to put my money? Absolutely. Hey, that's absolutely your privilege to store it anywhere that you'd like. But when you just look back on history, then you see how financial institutions can run into trouble. And then you contrast that with the track record of, of well operated life Insurance companies, the track records simply do not compare in the sense that these carriers just year over year, decade over decade, now, century over century, remain the most financially solvent financial institutions on the planet. And so again, it just kind of begs the question. If you understand all the attributes of the insurance contract, it's not an on demand deposit account like your savings account at the bank. If you understand all the attributes, then how much of your capital do you not want residing there? And when things like this start to happen, the human condition is there's a degree of panic. And once that sets in, if it's not curbed, once that sets in, if there was a run on the banks tomorrow, it would all be over. The financial system would collapse. Because what you think is there isn't really there. It's just an illusion. And so people were literally showing up at this bank going, you know, let's take it to a high degree, showing up at the bank and saying, yeah, I called voicemail. The 42 million that we have floating around in walls of this bank somewhere. Can you, we just pulled up a couple of F150s. Can you just go ahead and fill up the truck beds and we'll, we'll go ahead and get out of your way? And the bank is saying, what you thought was here isn't really here. And we can't liquidate securities or deal with everything that we have on the books in order to satisfy all of these obligations. So the federal government has to step in and say, we need to maintain confidence in the banking system, so we got to make depositors whole. So again, it brings me back to my point from earlier. It doesn't give the market an opportunity to actually function like a market. If that, if that was yes, the bank should have failed. Sadly, depositors would have been in a bad, bad spot. They would have, they would have lost in the deal, but the market would function. And now you've got all this government intervention going on and hey, you know what, you put yourself in the shoes of a depositor who's in a bad spot financially, hey, that's a good thing. That, that is absolutely a good thing that a depositor is made whole, Tom. But as it relates to just purely allowing the market to function, because otherwise it's just going to be a cascading effect. Let's bail this one out. Let's bail that one out. Well, if you have to bail out these institutions, it's going to bring relief to the depositor. But what does that say about the confidence in the financial system? It should say a lot. It should speak volumes.

And where's the learning lesson? Because we had similar activities take place in 2008 and 2009. And we, everyone said that they've learned their lesson. Oh, we learned from this. We're never going to have this happen again. Well, Here we are 15 years later dealing with, albeit a different circumstance. But yeah, it's the same underlying shenanigans that are, that are causing some of this impact. And you, you have a, just for example, one of the companies on that list, well known tech company, had one checking account with $487 million in it. That checking account was only insured up to 250 grand. Now, if you run a business or a household and you knew that only 250, if you knew that only $25 of an account was really secure, but you had $487,000 in that account, would you be a little bit concerned about how much money was in that one account? You might spread it around a little bit. That would be a sensible option as a, as an individual household, for sure. Now put some extra zeros behind that number. And that's one business. But a lot of businesses are doing that. So there is a fundamental problem in the thinking at this, in some of these, you know, I'll be just giving my personal opinion. Some heads should roll. Some people need to be fired. They need to be some serious accountability because of the quote unquote bailout. We're going to come in and band aid, I equate it to this. I made this comment with someone else earlier today. You've got a, you've nicked the femoral artery and you're bleeding out and death is imminent. The government's going to come in and put a band aid all over that and they're going to squeeze some stuff in there to temporarily solve the problem with the wound. So they're going to stop the bleeding, but they're not going to fix the artery. So it's still actually bleeding. So they're not really correcting the problem. They're just buying a slight amount of time. And I think to some degree that analogy takes place in what we're seeing happen here. Because if there's not, if no one's held accountable for what takes place, there's nothing to stop everyone else, every other banking institution from simply continuing the same ridiculous behavior.

Yeah, there's no deterrent. And that's why that particular bank said, look, we need to go to the capital markets to get capital so that we can maintain liquidity and resolve these requests for withdrawals from the bank. And of course that didn't happen. And so the essence is that whenever you, especially as it relates to your finances, if you can be in a position of total and absolute control, logically you would choose that over not being in a position of total and absolute control. And that might not be for every dollar that flows through your hands, you might be open to subjecting some of those dollars to an absence of control to risk volatility. Because when you take risk or you capitalize on an opportunity there, there may very well be a really positive multiplier of capital that works out really well for you, but there's a possibility that it won't. And so the question is how much of your capital are you willing to subject to that, recognizing that some or all of it could be lost versus how much of your capital do you demand be in a, in a warehouse where you know that you've got certainty, control, ready access. So it's again, it just goes back to pure logic. You know, if you Nelson again, you know, in times like these, his teachings are just so amplified and if you understand the problem, the solution becomes clear and you'll know exactly what to do that that's it, nothing more to say on it except you know, you didn't see a whole lot of media outlets reporting on it and you can understand why.

It's interesting that in all the media outlets and media headlines you don't also see somewhere in the article it says meanwhile mutual whole life insurance carriers seem to be well capitalized during these stressful times. Like how much, how much fear can we pump into the article without also providing some solace into what other people are doing. That seems to be working really well. And speaking of that, one additional point I want to mention this is that, and I covered this in another conversation I had with Henry Wong earlier today is that there are many people and like financial entertainers who promoted this bank as a stock purchase buy two weeks before this all happened.

Yeah, well they were indicating welcome to.

The world, you know, and so they.

Were on Forbes list of the best banking institutions in the country. They were number one on the list.

And that was in the lat was that was the most recent report that.

Just a month ago.

Yeah, yeah. So here you have an entire financial industry, a whole system with, built, with a, with a bit of a marketing machine wrapped around it with various news outlets and everything and they're all buying into the same stuff. And this is where the rest of the financial world seems to be getting all of its fundamental knowledge base and information and our next best investment deal oriented advice. Why do you want to take your advice from these people that keep failing you? If the markets, if you know, just ask yourself a simple question. Are the markets going to shift in my lifetime and how many times will they shift? Okay, well, do I want to be well positioned and well capitalized when the market shifts or do I want to have all my stuff wrapped up in the market when the market shifts? Which side of the equation do you want to be on? Capitalization is not investing. Okay. Nelson Nash used to say an investment should only be in something you know a great deal about, everything else. Everything else is speculation. So if you're not knowledgeable at something, you probably shouldn't be calling an investment. Just because you can go put money in stock, ABC or mutual fund, ABC or etf ABC doesn't mean you're investing. It means you've got money in an investment product. You have products that you've bought, but you're not investing. If you actually know what you're doing and you're, you're trained and you've been doing research and you're making calculated decisions based on that to some really true degree, hey, maybe you're actually investing right now. As an example, Nelson, he was trained as a forester. He understood land. He knew the value of land, what land could become, what it could be turned into. And he could make strategic decisions, which he did at a very profitable basis. Thinking about long term, longevity of projects. He made a lot of money doing that. Those were investments. He knew a great deal about them. So recognize what it is that you're actually putting your money into. And to what degree do you have a measure of control over the outcome?

Well, on that note, that was awesome. And we just wanted to get something out there just to share some perspective. If you want to dive into the nitty gritty of what attributed to that bank and that second bank, you know, being in a really bad spot, then there's a ton of great information out there online that, that'll walk you through the sequence of steps that led to that. But equally as important, just always remember, your money must reside somewhere and there are certainly better places to warehouse it than the bank. But on that note, I got to run to all our viewers on the YouTube, keep watching. The next video in the playlist just showed up. Continue your journey of learning. And to everyone who's already implementing this process of becoming your own banker, the infinite banking concept in your lives, keep going keep progressing and remembering that you know, you. You're building, you're on your way to certainty and creating a peaceful, stress free way of life financially. Thanks for tuning in.

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