How many more banks are likely to fail? | Joseph Wang & John Maxfield

Adam Taggart 0:01
All right, and we should be live. Welcome to Wealthion. I’m Wealthion founder Adam Taggart here with a special report on the banking system. I’m joined as you can see here by John Maxfield and by Joseph Wang. You sure know both of you said esteemed gentlemen, they both been on this program before. Joseph writes about the banking system and the monetary system really understood explaining how the plumbing works over at his website fed guy.com John Maxfield is a banking analyst. He has covered the industry for decades, talks daily weekly with bankers across the country and writes about that in his substack Maxfield on banks.substack.com. Gentlemen, thank you for joining me on short notice for today’s special report. I wanted to to produce it because we’ve had a lot of questions come in from viewers this week about the current status of the banking system. You know, we made it through the earlier failures with Silicon Valley Bank, Signature Bank, Credit Suisse, we had sort of been told that look, you know, the system’s under control here and things should be subsiding. And then, of course, first republic bank went down over this past week. And we’re now seeing renewed downward pressure on share prices and a number of other regional banks now. So a lot of people are wondering how many more banks are going to fail from here. So hopefully, we can dig into that in this conversation with the two of you, folks watching. This is a live recording here. So if there are any flubs just be patient with us. But one of the benefits of a live recording is that I can take questions from the audience here. So I’ve got some prepared questions for our guests here. And then I’m going to open it up, you can ask your questions in the live stream, we’ll try to get to as many as possible. As we kick things off here, gentlemen, just to sort of set the context. Maybe, Joseph, I’ll start with you. And then I’ll let you jump in on that. John, how did we get here? What are the main reasons for the recent bank failures? I believe three of the four largest bank failures in US history have happened within the past two months. So something important is going on here. What are the main factors that are causing the current instability? Joseph, let’s start with you.

Joseph Wang 2:18
Yeah, so when I take a step back and look at the banks that failed, so let’s say silvergate, signature Silicon Valley first republic, what strikes me as putting all these banks together so far was their heavy reliance on a very particular volatile sector of the economy. So if you’re a bank, the what you’re afraid of the most is everyone coming and asking for their money back at the same time, obviously, banks don’t have enough liquidity on hand to meet that. And of course, they have some interest rate risks. So if everyone asked for the money back at the same time, well, if they have some unrealized losses on their balance sheet, they can’t meet that. But let’s be clear, though, you’re looking at deposits. In theory, everyone can ask for their money back at the same time, but in practice, not everyone does. In practice, a lot of people keep money in the bank for a long time. So you can think of that as actually more of a long dated loan. Now, the problem arises when what you thought was actually a stable and long direct deposit actually isn’t. And everyone asked for their money back at the same time. And I think that’s what happened. So if you think about the Silicon Valley Bank, very high reliance on the venture capital community, which as we know, in those more speculative aspects of tech, we’re not doing well. And so it seemed like that community had a panic and suddenly took money out of all the banks that we had strong relationships with. So signatures here brigade, obviously, big crypto business, first republic, San Francisco, basically a lot about people in the more volatile tech communities being with them. And so they had a panic, and they took all their money back out at the same time and ran and these banks because of that sudden withdrawal failed. Now, I was thinking that with the end of

I was thinking over the past couple of weeks that you know, this is probably over because we have this localized, I think withdrawal among that community, in all the banks who are otherwise limited, and otherwise a limited rather than a systemic issue. Now rolling into this week, though, we see something a little bit different. We see all the regional bank shares, as we all know, plunging and that is giving people a lot of flashbacks, what happened with Silicon Valley Bank, people looking at the share price plummeting, thinking about my gosh, I’ve seen this before, people are pulling money out of the bank, there’s a bank run, and the banks are going to fail. But that that’s actually not happening on the ground. Let’s look at Pacific West or Western alliance. For example, one of the banks, a couple of the banks that have the biggest declines. They actually issued statements just a couple of days ago saying that, you know, it seems like there’s a panic in our bank stock but in our own books,

In our own deposits, we’re not really seeing any significant outflows. In fact, over the past few weeks, we’ve actually seen inflows or deposits are coming back. So there’s a big disconnect between what we see in the share price, which there’s reporting that suggests significant significant positions are building against kind of like a reverse squeeze that we saw during the AMC mem SOC phase, and that that’s coloring, a perception that the banking crisis is getting worse and everyone is, is, is going to be not good when on the ground, these banks are telling you that we don’t really see big outflows. So I think that’s that’s where we are now there’s this big, I think, difference, a big difference between the what’s actually happening on the ground, and what’s what we’re seeing on the screens in the market. And that’s very dangerous, because someone who is not very attuned to what’s happening on the ground, could look at a share price, get spooked, and actually go and take their money out. That is to say that price action can actually shape narratives and create a crisis where there otherwise would not be one.

Adam Taggart 6:11
Okay, and just on that point there, you know, a bank run, if big enough could take down any bank. Right. Right. And so you’re saying that the risk here psychologically, is that people think, you know, there’s a fire in the theater when there isn’t, and everybody runs, and you get casualties when it didn’t need to happen.

Joseph Wang 6:30
Exactly. And I’ll just note, there’s reporting from the Wall Street Journal that’s showing that there’s all time high positions, building against, let’s say, Pacific West, and Western lions. Now that’s to your to your example, Adam, that’s like buying insurance on someone else’s building, and then burning it down.

So that that’s a very dangerous situation. So no, that’s not what we want to happen. Western airlines, these are, these are so far, based on their what they’ve just announced to us. They’re functioning, they’re making loans to, to American businesses, they employ people, we want businesses that function that are working to survive, give jobs gives credit, we don’t really want to destroy them, just so some speculators can now make a little bit more money.

Adam Taggart 7:16
Okay, so there are two other factors in play. And, John, I’ll let you maybe address these in your answer. One is that, you know, banks are in the business of borrowing short and lending long. And they have, you know, for years, have been buying bonds, which is sort of a form of lending long to the government. And with the recent extreme interest rate hikes that the Federal Reserve has pursued, they’re now underwater on a lot of their their treasuries, at least, in many cases, they’re treasury bonds. And these are generally sort of safe, what are called Money, good assets. And if you’re underwater in them, and you can wait until they interest rates, you know, readjust in the prices come back, you’ll be okay. But of course, in the case of Silicon Valley Bank, for example, you know, there were just way too many calls on deposits, and it had to turn those unrealized losses into realized losses by selling them to pay those depositors who are leaving. So we do have that pressure on these banks, right, as they their loan books, or their sorry, their bond portfolios are underwater in a lot of cases. But secondly, you know, more and more depositors, not not just big players, like the VCs that were parked in Silicon Valley Bank, but just regular people are really beginning to wake up to like, wait a minute, like I can get like, close to 5%, you know, in a money market fund through my brokerage or by buying US Treasuries. And my bank, you know, in many cases, a lot of banks are still paying, you know, almost zero or a pittance, basically, and deposits are starting to walk out the door that way. I want to say I saw a stat that was pre first republic that something like over a trillion in deposits had had left, the smaller banks smaller being kind of any bank that’s not in the top 10 Bank way or our banking system is overweighted here.

So how serious, how serious is that threat to the banks that remain? Is it is it just an inconvenience and it’s just a you know, inclement weather that they can just hunker down and and get through? Or will that, you know, potentially cause some of these other banks to get into real trouble?

John Maxfield 9:39
So Adam, let me I’ll start let me start a million miles up and zero in real quick to answer it’s like I actually kind of thought the first question and the second question, great, kind of quickly, so like so. So why is this happening? What’s going on all that so like, let’s just start all the way up. So like there have been nine major banking crisis since the beginning the United States, and like dozens of minor banking crisis. Okay, so crisis is as odd as it sounds like kind of the exception, not the rule in banking. Okay. And so like, if you look at that on an on an institution by institution kind of basis, there have been 17,000 Plus bank failures since the beginning of the country 22,000, mergers and acquisitions, let’s say four to 5000 of those are mergers in lieu of failure. So you’re looking at failure is actually and we have less than 5000 banks today. So failure is anywhere from four to six times more likely, in the banking industry than is survival. So again, like these, even though in these these periods, they seem really unusual, because they’re short and very acute. It’s actually it’s actually a pretty usual thing in banking. As then you say, Okay, well, then why, what causes these, what causes these intermittent panics, right. And if you go back, and you study all through time, it’s the same thing, each time that causes these panics, or these crises, and it is, you see this huge surge of liquidity. And I call it novel liquidity, because that means that because you have, there’s two different types of liquidity, there’s liquidity that comes kind of slosh around within the system. So it can go from like, you know, a bank account at Bank of America to say, like a money market account at St. Charles Schwab. Right. So it’s kind of it’s not necessarily in the banking system, per se, but it’s within our own, it’s within the financial system, kind of writ large. Okay, so that’s not that’s just a regular liquidity surge, a novel liquidity surge is when you have liquidity come into the system. And that can come in in two different ways it can come in from another system. So in like the late 1800s, like the 1870s, to the early 1920s, you had enormous amount of liquidity coming into the United States system from the European system, okay. And that kind of peaked in World War One when we’re like sending all this produce over to Europe, feeding their armies, and they’re sending money back into the United States. So that’s a novel liquidity surge that comes from one system into another system. Another type of novel liquidity searches when it comes up to the ground. And Adam, you’re you’ll be very familiar with these. These are like Federal Reserve. This is just when like, money is just like created out of thin air, right? It’s like a geyser coming out from the ground, right? So you go back to the very beginning. And what you see is you have these novel liquidity surge, surge failures, surge failures, surge failures, surge failures, and just I mean, just talking like, all the way through to today. So then you look back and say like, Okay, well, what’s going on in the economy right now? Well, what happened three years ago, two to three years ago? Well, we had the Coronavirus crisis, right. And what did the government do in response to the Coronavirus, crisis crisis, an enormous amount of fiscal and monetary stimulus. So that’s basically just that’s just a novel liquidity surge, right? Just coming up through the ground like a geyser, right. And so what happens in that situation is it throws the whole system out of equilibrium. Now, like, that’s not like the system is ever like totally in equilibrium. But it’s always kind of moving toward or away from equilibrium. But when you do something like that, that accelerates that position of where you are in relation to equilibrium, everything kind of gets thrown off. So that’s kind of where we’re at right now. And so what you have there is, then you have all this extra money just dumped on the heads of these banks. And they say, well, like, what are we gonna do with all this money? You know what I mean? And you go to the very tip of that spear, and who’s at the very tip of that spear, Silicon Valley Bank, right, and Silicon Valley Bank, because they are doing like the VC stuff. So all the most like the cutting edge type of investment stuff, and they’re holding all the cash for those companies. So they get they go into the crisis with $60 billion in deposits on their books. And then they’re at by the end of I think it was last year, I think they had $190 billion in deposits. So they go from $130 billion in deposits just get dumped on this bank’s head, right basically triples within a couple years. That’s exactly right. So these guys are like, they’re looking around, like, what what are we gonna do with all this money, right? And they say, well, like, let’s do let’s be real safe. Let’s not do anything crazy. Let’s put it in the safest stuff that we can think of. Right? Let’s put it in treasuries. And let’s put it in I think, Adam, what you like money? Good. They like money, good bonds, basically. Right? And let’s put in treasuries, and let’s put it in mortgage backed securities that are guaranteed by the government. Right? So they go in they do that, but they do it at a time when interest rates are basically zero. Right? So this, again, to your point about the bonds, that interest rates are zero. Well, when you do it, when interest rates are zero, that means your bond prices are basically as high as they get as they can get. So when you do that, and then the Federal Reserve comes in and raises interest rates, will bond prices plummet. Right? And that causes the Silicon Valley Bank their books to basically go underwater. Right? So then you have these group of people who are out there saying, like, oh, like, this is a problem, right? Because 95% Or I think, I think it’s something like 95% of their deposits are uninsured. So thinking like, oh my god, like, we’re gonna lose all of our money. So then that starts that run, right? So that’s really and then then everybody is tuned in to what’s going on there, everyone’s like, Oh my god, like, there’s these runs on these banks like, we don’t want to lose all of our monies, then other banks that are kind of similar that share similar characteristics. And in this case, it is exposure to cryptocurrency. So that’s why your signatures, you know, then went down. And they also have concerns about uninsured deposits of large percentage of uninsured deposits. And then in the case of first republic, you also have the unfortunate similarity of the customer bases. So you have all those things come together. And so those banks then go that then every but then then you enter this time period, where it’s everybody is acting irrationally, and everybody is concerned, right, everybody’s concerned about just getting their money. And so that’s, that’s a true panic is when you’re in that situation. And that’s kind of the situation that we’re in right now. And so like, you know, when you go out, and you look at, you know, the bond books of these banks right now, and yes, like, theoretically, like, a lot of these banks are underwater, because you know, the interest rate shot up so quickly, that causes bond prices to go down so much, and they’re underwater. But the fortunate thing is that, like, the way the counting works in banking, is that you can take bonds, and you can put them in two different buckets, one of the buckets is available for sale, and those are ones where like, you have to mark those to market when that when the market price of those changes, but the other bucket is called held to maturity. And so long as you do not have to raid that other bucket, the held to maturity bucket, you do not have to then sell it to get liquidity to satisfy depositors, you do not have to mark those bonds to market. And so you could you sit on those that you just wait to they mature, and then you sell them for the for the par value, right? And so there’s but these are nuances. And in times of irrationality, you cannot expect people who are like not, you know, accountants in the banking industry to appreciate and take the time to understand the nuances. And so that’s kind of where we’re at right now. And that’s kind of where all the fear is kind of leading right now. And so, you know, the banks that are having issues right now, those are the ones that are lots of uninsured deposits, and where there’s concern about the valuation of their bond portfolio.

Adam Taggart 17:07
Okay, so somewhat similar to what Joseph was saying, you’re kind of saying right now, the biggest threat sort of is fear itself, right? It’s the the herd being spooked may do things, that that may not be completely rational, given the reality on the ground. But if they do it anyways, that then actually creates more instability that could create a real issue.

Joseph Wang 17:27
I’ll add one point to John’s point. So like John mentioned, so first republic, similar client base to Silicon Valley, there’s actually another bank in that area that had some of that similar client base. It’s specific Western, of course, not as much, but some overlap. In their earnings report, they had a very telling slide. So they lost deposits. But when they broke it down, they said they had 10 billion deposits from the VC community, and half of them left in March. So again, you can see that it’s very much part of that client base part of the community that had some kind of a panic.

But I’d like to address one of one of the questions that you raised that I think I hear a lot, but I think it would be helpful to comment on, and that is that we see overall deposits in the banking sector decline, and we see a rise in money market fund assets. And there’s often a perception that, Oh, my God, all these deposits are leaving banks and going into money market funds, how are banks going to survive, they can’t pay those high interest rates right. Now, that’s really a big misunderstanding of how all this works. So if I take money out of a bank, and then put it into a money market fund, that money doesn’t leave the banking sector, now the money market fund has to deposit. So, you know, it’s kind of a quasi closed system. Unless, of course, the money market fund lends to the Fed, which, on average, that amount has been it’s the ROP amount hasn’t been changed that much. What’s really been driving declines in overall banking system deposits, is actually quantitative tightening, and also changes in the securities portfolio of banks, as well as changes in the TGA. Now, these are all technical factors. But overall, I think the takeaway would be that the level of deposits in the banking sector is dependent on many factors. You individually, you know, it’s not because everyone is running to a money market fund and the money market fund just has the cash and they have to do something with it.

And to the second point about whether or not banks can afford to pay compute money market funds out, say 5%, I think that really misunderstands how deposit rates are are set. So if you’re a depositor, so let’s just look at the history over the past few decades, over the past few decades, Fed has hiked rates up and down, up and down, but deposit rates, savings account rates have always been very low. This is because that banks don’t purely compete on deposit rates when they’re funding themselves or when they’re attracting customers. They can offer things like you know, a toaster or payment services for business

Sell your business every month, you have to pay employees, lots of Ach, lots of wire transfers bank can offer that as a service rather than offering higher rates. And of course, a lot of people are just like to convenience and don’t really care about interest rates that much. So even as interest rates go up, the deposit beta, that is the amount of interest rates, the Fed offers, passing through to depositors has always been, you know, maybe at most 40 50%, that’s totally certainly normal. There’s, there is really no problem for bank to be funding itself. We’ve had many, many rate hikes cycles, so this is not something new.

Adam Taggart 20:38
Okay, that’s actually a really useful, you know, grounding perspective there.

John Maxfield 20:45
Adam, do you mind if I do you mind if I just build on one more point on that, please do? So just so Joseph is exactly right. Um, but there’s one thing, two points on that. The first point is that, like, so and you’d asked about the smaller banks, is there concern about the smaller banks losing all their funding, because of kind of what’s going on right now. And that would be kind of a function of the implicit government guarantee of the large banks of all the deposits at the large banks, right, rather, isn’t that same implicit guarantee of the small banks? Well, what’s one of the things that’s interesting is that, and Joseph kind of touched on this that over time, there has been a stickiness in deposits at this at all banks, right. Because it’s been, it’s like not easy to change your banking relationship, right, you have direct deposits coming in, you have automatic bill paying going out. So you have all it’s not like just as easy as just pressing couple buttons, and you can switch your banks, right. And so what we’ve seen is that in previous rate hikes cycles, the smaller community banks, they had somewhere between three to six months before when they had to start actually increasing their own rates on their deposits, to match what was going on in the market, before they saw any attrition. So it’d be before they saw customers leaving their banks that to go elsewhere for higher for higher rates. What’s interesting is that I was talking to I’ve talked to a number of different rural bankers in the past couple of weeks. And they said that this is the one that’s the first cycle, that they have noticed that there that there is an expectation that they hike their rates much more quickly than they have in the past. And so they said, and I was talking to a banker in Nebraska, he said, basically, is almost immediate. As soon as those rates went up last year, there’s, and then they didn’t raise their rates, they did see deposit flight. So that is different this this time, the last time you say, Well, why is that? One is because the rates went up so fast, right? I mean, they basically went from zero to 5%. Right? almost immediate. So you’re sitting on a bunch of you’re sitting on 100,000 200,000 million dollars in deposits, I mean, the opportunity cost of not moving your money is actually pretty high. That’s the first point. Second point is that

Adam Taggart 22:50
Sorry to interupt but that that’s like the frog in the boiling pot analogy, right? Where normally, the heat gets raised slowly, and so the frog never jumps out. But if you raise it too quick, the frog jumps out of the pot. And that’s what’s happening here is the depositors are saying, oh, wait a minute, you know, I can see the difference. So let me go over there. Yeah,

John Maxfield 23:08
I’m gonna steal that because that’s really good. Because that’s exactly, that’s a perfect way to describe it. But the second point is that if you break down deposits and deposit betas by the type of deposit is, so you have consumer, you have commercial and you have high net worth. One of the things if you look at consumer consumer deposits, actually, they go up and down a little bit here and there throughout the years, right, but like, they really haven’t, you haven’t seen the betas on consumer deposits go up that much. Right? Presumably, that’s because like, the size of those accounts are not so large, that that you’d be thinking like, I’m missing out on like, 10s of 1000s of dollars, or hundreds of 1000s of dollars, not switching my account to get 5% as opposed to you know, 1%, right. But you have seen a huge change in commercial deposits, the debate, the betas and commercial deposits have gone way, way, way up. And you’ve also seen an increase in in betas on the high net worth deposits, right? So where the opportunity cost is much higher? Well, if you go to your small banks around the country, what what is the predominant share their deposits, the parameters of their deposit are consumer deposits. So that is, you know, so there’s, you know, there’s things that cut against it, and things that cut in favor of the smaller banks, the things that kind of favors that larger consumer, as less commercial, but things that are cutting against him is that because of the the magnitude of the hike, people are more aware of kind of like the differential and so you have all these kind of things that are that are kind of going on at the same time.

Joseph Wang 24:34
And point out that that smaller banks are also much higher percent of their deposits are insured rather, they’re smaller, smaller clients more mom and pop like so that’s another thing. There’s less of a reason to panic because those smaller banks, they don’t have as many uninsured deposits.

Adam Taggart 24:49
Okay, and let’s talk about insured versus uninsured for a second. So, you know, those words used to mean something, right. If you had insured deposits in the bank, when under, you would get all your money back or sorry, up to the FDIC limits if you were insured. But if you were uninsured, you wouldn’t, you’d have to take a haircut.

So far, the uninsured depositors haven’t had to take a haircut. I’m actually not super up to speed on the First Republic details right now. So correct me if that’s incorrect with them. But, you know, I think there’s a narrative going on right now that Oh, I guess all deposits are going to be insured going forward from here. Would you disabuse listeners have that josepho? What you continue?

Joseph Wang 25:39
And no, I agree with you, Adam. I think that the public policy response, this time has been a lot of strongly suggesting that all deposits will be guaranteed. So the I think the authorities, the Fed the Treasury, are very concerned about the banking sector. And so what they’re strongly suggesting, and Interpol was basically gone on, let’s say, during his press conference and suggested that the treatment that they gave Silicon Valley, depositors were, which were all made whole is going to be the playbook going forward. So technically enable to have full deposit guarantees, you need an act of Congress. But once a bank goes into receivership, the administration has all sorts of emergency tools, so they can actually honor that. Implicit guarantees. I think that’s the playbook going forward.

Adam Taggart 26:28
Okay, John, you’re nodding through this. And people can actually see that now. So it’s nice to not have to tell people that, is this just, here’s the question I have. And of course, there’s there’s a moral hazard aspect potential that we’ll we’ll talk about in a second. But like, is this just magical thinking? I mean, how do we go from a system where we say, alright, we’re only going to ensure a certain percentage of bank deposits to you know, all right, Oprah everybody gets a car, right? Everybody’s? Could we always have done that? Why didn’t we do we actually have the money to do that? We’ve always pre this, we’ve always heard that FDIC will ensure accounts per bank, but there’s only so much money in the FDIC insurance pool. And if every bank were to go under, you know, it would exhaust that immediately. And nope, most folks wouldn’t be covered. Are we just thinking magically here? Or does this actually does the math pan out somehow?

John Maxfield 27:26
Well, I would say and Joseph, I mean, you may know more about this than I do. But you know, this is this is one of the hardest questions, really in banking. Because on the one hand, so if you if you go back to, like, pre FDIC insurance, right, do I mean we had there were panics every single decade. Sometimes they’re panics multiple, multiple times a decade. And then after those panics, you’d have depressions very serious depressions 1857, there’s a panic serious depression afterwards. 1873 major panic, serious depression afterwards, 1893 panic, serious depression afterwards, then these those three depressions were on the same scale as the Great Depression in the 1930s. Right. So the idea with the bringing in the FDIC insurance is to stop the panics and hopefully to stop the panic feels, also stopped the great these depressions, right. And so we saw that, right in the in the wake of the of the Great Depression, there’s this long period called the Great Moderation, where there weren’t a lot of bank failures, the bank growth was relatively pedestrian bank profitability was relatively pedestrian. But then it all kind of changed again in 19, in the 1970s, when like, you had this younger generation of bankers who weren’t alive during the Great Depression, who weren’t scared who that didn’t like, that didn’t impact kind of their risk appetite, right. And so then eight and then then we have the failures again, but at that point, we still did, even though the deposit maximum, there was still a cap, they still did ensure basically all deposits, but then that changed in 1991. Because that’s what we came in after we had a whole bunch of bank failures in the 1980s. During the US now crisis, then there’s a care crisis, that impact is kind of commercial real estate crisis that impacted your commercial banks. So then they the Congress came in said like, whoa, whoa, whoa, if we ensure all these deposits, like, the FDIC is gonna go broke. So then they change the law 1991 where they say the FDIC, like, No, you have to do an assessment on you know, whether or not like, you know, the risk of this does to the DI F, right. And when that when that law changed, the FDIC stopped insuring deposits up to 100 up to that 100% level, regardless of whether that limit was so yes, but there’s these are smaller, these are smaller failures, that that impacted. So is only until just recently that this has come back up what I mean, it came up in the financial crisis, if you remember with IndyMac, right, where they were like, we’re not going to insure all those deposits, but then what happens then, right, what happens then when the when the FDIC comes out and says we’re not going to show the deposits, You have runs on these other banks. Right? So you have these two things that the FDIC, the FDIC, is they’re charged with protecting the Deposit Insurance Fund. But if you if you insure up to 100%, is that is that protecting it? Maybe? Maybe not. But if you don’t insure, and then you cause additional runs? Is that is that protecting it? Or is it not? So the premise is like, it’s not an easy, it’s not an easy, it’s not an easy answer. They’re like, yeah, regardless of what you do, you’re kind of screwed either way.

Joseph Wang 30:30
I think that what we’ve seen so far, and I totally agree with John is that policymakers are are not willing to accept the risk of a greater banking panics. So even if you have, in theory, limited deposit insurance, or if you look across in the euro zone, you have in theory, bail ins where investors in the bank would take a loss, you know, they, they don’t want to run that playbook. They’re afraid that there might be greater contagion. So in practice, it seems like they’re ruling out a policy where, you know, everyone gets gets to be protected. Now, there’s, there’s some reason for that, obviously, you don’t want panic. But let’s say you’re a depositor, do you really have the responsibility of seeing whether or not your bank is doing every day, you have no way of knowing that. So maybe it’s not right to allocate that responsibility to you. So I think that’s, that’s probably going to be a more of a policy shift going forward, just, you know, just guarantee all deposits.

John Maxfield 31:27
But the other thing to keep in mind is that if you think about the dynamics of how banking works, if you if you just say like, okay, like every single bank is insured up to up to whatever limit, it literally opens up your federal government to an Ireland type of situation, right with with that we had in like 2010, right, or 2009, or 2010, where it’s like they have these huge banks that can literally, I mean, you can grow a bank, because of the supply and demand dynamics of banking, because there’s an unlimited demand for credit, right? You like if you price it low enough, and you set the terms easy enough, literally, the demand just goes straight, it goes parabolic, you go straight up, that means you can grow bank as large as you want. I mean, you can grow from one to one to $1 to $1 trillion, basically, as quickly as you want, as long as you have access to funding. Right. So with by opening a government up to completely backing all the banks, they’re basically saying that ahead of time, you’re basically opening a bank up to saying like, okay, like little bank, and like little Springfield, Wyoming or Springfield, Colorado, like, you basically get to say whether or not the government of the United States is going to I mean, assuming that the regulators aren’t doing their job. I mean, they could the LIS little bank could basically break the United States government. I mean, that’s, that’s, that’s the concern, and the date with around protecting all deposits.

Joseph Wang 32:44
But I think there’s also a cultural change. I don’t think the government cares about how much money they spend anymore, right. So we, to your point, Adam, how do we afford this? Have we fought anything? Right? We’ll just go and borrow it. That’s kind of how we operate the government now.

Adam Taggart 33:05
Okay, so I mean, this this is, I’m going to I’m going to say that you guys don’t have to put it in this these words. But I mean, it does seem to be sort of magical thinking time, right? Where it’s just okay, you know, everything’s protected risk really doesn’t matter. Of course, this then opens more moral hazard in the sense that like, yeah, okay, shareholders and bondholders of these banks are getting wiped out or whatnot. But if you’re an executive, and you kind of know that, alright, well, I can sleep at night, knowing that 100% of my depositors will always be taken care of, I’ll just take as much risk as I can, and hopefully win and get massive bonus payments and stuff like that. But if I lose, whatever, you know, I go into the next thing. depositors are okay. Right? You guys are nodding as I’m saying this. So, I mean, our I guess, let me ask you this. Are you concerned about this policy? Does it concern you as someone who’s just a stakeholder in the long term sustainability of the US banking system? Do you think this is a good policy or a bad policy to potentially now blanket cover all all depositors?

John Maxfield 34:09
Well, I mean, I would say that like, either way concerns me, you know that? I mean, I’m not a doom and gloomer, let me be very clear. I’m pretty optimistic guy. You know what I mean, particularly when you live in the United States, you have every reason to be optimistic, United mean, like you look at the growth, you look at the land that that’s in this country. I mean, like, we have a pretty good situation here. So I don’t want this to sound doom and gloom, but like, whether you insured, there’s problems, if you insure them all. There’s problems if you don’t show them all, you know what I mean? It’s just a matter of like, and that’s why really, I think probably the proper solution is you have to, and again, this isn’t an ideal, necessarily ideal bulletproof solution either. But you have you’ve got to go on a case by case basis. You’ve got to the people on the ground, have got to have there’s got to be built into legislation flexibility to make the right decisions, depending on what the facts are at the time.

Adam Taggart 34:57
Okay, and it sort of sounds like that’s what We’re doing at the moment where at least Powell hasn’t come out and said, Oh, or there hasn’t been an announcement yet that says, Yes, everybody’s 100% going to be protected all the time. They’re saying we’re going to do it on a case by case basis, but in the recent cases they’re applying. So it kind of de facto is what’s going on right now. I guess that could change it. But just if you’re nodding through all this,

Joseph Wang 35:21
no, no, I totally agree. But I’m a little bit, you know, I totally get the moral hazard intuition. So if your depositors are guaranteed, you’re basically borrowing with a government subsidy, and then potentially, you can do more riskier investments. Great. They turned out great, big bonuses to executive. And if they don’t, okay, well, you know, government will take care of everyone that I bought from. But I’m, that’s my sentiment. But then I think you have to keep in a couple things in India to mine as well. So there’s a lot more regulation on what banks can buy capital regulations, for example. So it’s, it’s not as likely that a bank would go and make these high risk, high return investments, they are a lot more regulated. And the second thing is that these execs usually have tremendous amounts of compensation in stock. So if you’re a Silicon Valley Bank exec with a lot of stock, well, you kind of got locked out as well.

Adam Taggart 36:17
Right? When the when the music ends, but if while the music’s playing, you’re selling your stock grants as you get them right, you can still that’s a perfectly good point. Well, I think there were some reports that insiders were selling their stock, knowing how it was going to go. So that was that was that should be clawed back that there’s that there has to be some some response to that. I know that question was raised earlier. Do we know if anything was clawed back from Silicon Valley Bank yet?

Okay, I think you guys are really depressing. A lot of the viewers here.

Joseph Wang 36:43
I don’t know. I think it’s worth noting that I believe the CEO, CEO of Silicon Valley Bank was one of the board members of the San Francisco fed, which is one of the regulators. So you have you have some angle there? Yeah. Is it possible that they got preferential treatments? And obviously, the Fed was aware that they were not managed? Well, but did they kind of, you know, turn a blind eye because, my gosh, the CEO is on the board of directors. So we have to look into that as well. There’s some governance issues there.

Adam Taggart 37:13
Right. And you were just talking a minute or two ago, I was gonna bring this up about, you know, well, these banks are regulated, and folks are going to make sure but it’s kind of like, well, you know, just kind of missed, you know, the vulnerability, at least of these West Coast banks here. And, you know, the CEO of Silicon Valley Bank being on the board of the regional Fed out here in California. sounds shocking, but but then it might have been you, Joseph. But when it was explained to me, it was like, it’s actually not that uncommon, because he’s one of the largest banks in the region. It’s kind of how the system is structured. It’s a feature, not a bug. But let me ask you this. I’ve seen questions raised recently, like, look, Mary Daly, who’s the president of the San Francisco fed, her batting average is pretty terrible this year, right? Like, I mean, how culpable or responsible is this? The San Francisco fed for not raising more warning flags about the banking dominoes that are falling in its territory right now? I’m gonna get to you, Joseph first, because you’re fed guy, but

Joseph Wang 38:14
okay. So, you know, like you mentioned at a married dailies, batting average isn’t great. She seems like a nice person. But, you know, she was on Team transitory, you know, it’s kind of failed at monetary policy. The other job the Fed has is banking regulation. Well, listen, we’re all the bank failures, first republic, San Francisco based Silicon Valley in California. And so you know, she’s not doing very well on a supervision, either. And it seems like they’re fed presentations that suggested that she had a recent to know. So it doesn’t seem like it’s the right job for her. But here’s the thing that I’ve learned looking at working at the Fed, is that they never fire anyone. And so because of that, nothing really matters. You can just do whatever. And then, you know, you still have your job. And maybe you even get promoted. I mean, they’ll Brainard obviously, terrible call and inflation now she gets to be promoted to be head of the something economic whatever. So you know, that’s the thing, because we have a system that doesn’t penalize failure and doesn’t reward good judgment. The Fed organizations like that can’t improve, they can’t grow and they can’t learn. So I’m thinking that everyone who made those bad calls, still works at the San Francisco fed, still contributing their bad judgment. And that’s, that’s not good for us as a country. I think

Adam Taggart 39:33
you’re putting your finger right on the open sore of worry that a lot of our viewers here have right, which is you have a system that in some ways, allows insiders to take a lot of risks get unfairly compensated for kind of gets to socialize the losses, and it’s being run by people that you say, you know, it’s not really a self learning operation. And so, you know, I mean, maybe You’re just stating reality, but it is it is concerning because, of course, you know, it seems to always be that, you know, the the bad actors don’t get punished. In fact they can, you know, leave having line their pockets. The people who are supposed to be overseeing don’t really get accountable for oversight mistakes. And yet it’s the taxpayer, the depositor that has to pay the the ultimate price of cleaning all the mess up. So anyways, maybe I’m being a little bit too too Doom or gloomy here. John Ilicic. comment anything on there. But let me ask you one last question before we open this up to q&a from the audience, which is, you know, you talk to banking executives for a job. How worried? Are they? You know, from at the beginning of this conversation, you guys were sort of saying, like, look, this, it looks a lot worse than it is it’s probably going to blow over. You just said, we’ve seen this many times in history when we have these liquidity spikes. This is all kind of natural, everybody, you know, don’t don’t freak out. It’s the freak out that could do more damage than anything else. So are these guys just hunkering down? And they’re not too worried? Or are some of these guys worried?

John Maxfield 41:08
Well, I would say that. So to answer the first question, firstly, like, in terms of like the, the looking at the people at the Fed, and in kind of what happened at the San Francisco fed, like, I’m of the belief that like, if I was in the job, I’m not sure I would have done it any better, because it’s just a really hard job. I mean, I think I think we just have to, like, be honest, and say like, what they’re doing. It’s not like there’s a playbook where it’s like, do A, B, C, and D, and then like, E is the answer. F is the answer. And then they just missed B, you know what I mean? Prom is like, all of these things are brand new. Right? Even though we’ve had all these crises in the past, each crisis does have its own unique peculiarities. And dealing with monetary supply is extremely, extremely hard. And anybody who says it does, they just do not understand how this stuff works.

Adam Taggart 41:54
Can I Can I just inquire for a second here? So I get it. It’s not, you know, it’s not super easy. And every bank is idiosyncratic to a certain extent. And yeah, like you said, sometimes you’re inventing the playbook on the fly. That being said, let’s look at Silicon Valley Bank, right? They hit a hyper concentration in a few very rich depositors, right. So just simple math says, Okay, a few of those guys go, you start getting into trouble, unlike a Midwestern bank that has just a bazillion small retail customers. But then, back to our frog in the boiling pot of water, the Fed knew it cranked up the heat, right? And so what it should be doing, I would think, is looking at the books of its banks, and just saying, okay, who’s who’s vulnerable to being really underwater? You know, because of our policy shift, right? And our people, at least putting interest rate hedges in place to make sure that they’ve got some buffering against this. And Silicon Valley Bank was both vulnerable and its loan book, but didn’t know risk management on the interest rate hedging side of things. So is that something that, you know, a decent regulator should have noticed

John Maxfield 43:09
that one of the ironies in banking is that, like the darlings in one era, are almost always the prize in the next era? Right? And it’s like, I mean, you go back four years, Silicon Valley, I mean, like this thing hung the moon, everybody thought, like, oh, the customer base was amazing, because it gave them all this low, this low cost deposits. I mean, they had, they basically paid nothing on their deposits. Because the requirements of these customers that they had in there, they’re basically like, you can pay your customers, we’ll open up all these doors and do all these things for you. But like, you gotta leave these things, basically, the functional equivalent of a checking account. So like, I mean, the returns on this thing, were just flying high. And then when you had all this money come into the economy from the Coronavirus crisis, Where did that money go? It went to that sector, right? You remember the IPO boom, and all the stuff that was going on at the time? I mean, Silicon Valley, and everybody was like, like, everybody thought, why did you do exactly what they were doing? Right. And then all of a sudden, it flips is the same thing with with kind of all these other banks that are having all of these issues. It’s like the business model of the past decade that everybody kind of worshiped in the banking industry, was what yet a low cost consumer deposit base and built on top of that you had a commercial finance engine, right? So you get the yield on the commercial finance engine, and then the low cost of the deposits. And that was like, I mean, these they were making more money than anybody in anybody, everybody thought that they were like the best banks ever that like to ever to come about in the banking industry of all time, right? We’ll turn it around. Like, it turns out, that’s not that good of a situation. Right. And so it’s like an everybody buys into this stuff. The regulator’s buy into this stuff that people in the industry buy into the stuff that people that are reading the news, everybody kind of like drinks the same Kool Aid, right. And so it’s like, you look at the regulators and think like, Yeah, clearly they didn’t do the right thing. Right. And you can look at that from a variety of different angles. Like they didn’t do the right thing like they should have come in and said like, Silicon Valley, you should, you should not be taking those deposits on you. Balance Sheet, like either What are you going to do with $130 billion in cash? Like, what do you got, you only knew how to do a $60 million. And of course, it was 18 months, you got an additional 130. Like, you shouldn’t be taken out on your balance sheet. But like, we had never, ever, ever seen anything like that. We’ve never seen anything like that surge into positive single organization like the particular one that was considered to be a marquee institution in the industry. So it’s like, I mean, you could see where it’s like, you’re just like, it’d be just a hard situation, I think, to kind of judge what the right thing the right thing to do in the moment.

Adam Taggart 45:34
It is like it we’re saying, although, of course, you know, what you’re saying is, is like it was unprecedented, because we’d never had such a massive liquidity spike, you know, before, especially during a national pandemic. But of course, the liquidity spike was largely due to the Feds policy response to the pen so that the Fed both created the liquidity spike, and then created the inflation returns inflation, which then made it right, right. So the Fed has been the cause of

Joseph Wang 46:02
and would have to defend the fed a little bit, just like John mentioned, they didn’t have to take those deposits on their balance sheet. So I’ll use another bank as an example, JP Morgan, a lot of Fed liquidity, a lot of people wanting to deposit money at JP Morgan, JP Morgan said, No, actually, you can go put it in the money market fund and the money market fund that takes that money and puts it into the RP. So basically, it takes liquidity out of the banking sector, and Silicon Valley Bank could have done the same thing, if they did not want to, but then if they did, that, they would have wouldn’t be able to earn so much money, right. So it’s kind of their choice their

John Maxfield 46:34
Adams. And to your point about like, it was also the Fed that kind of fueled this, and which is exactly right. That is exactly right. But like, you think about like now, let’s go back to then let’s go back to March. Let’s go back to March 2020. April 2020. What did we see? We saw a 30% annualized decline in GDP. We didn’t even see that in the Great Depression. I mean, like, so far beyond anything, so it’s like, all this stuff. You go back all these other ones you’d like? Hell yeah. You want to? You want to get in a strong on that. Because you don’t want to Great Depression, you certainly don’t want that. You know what I mean?

Adam Taggart 47:08
Ya know, I’m sensitive to the fact that they were freaking out with the rest of the world at that time. And, you know, you never know what the implications are going to be of big decisions you make in a crisis like that. All right. But real quick, I do want to take a few questions from the, the audience here. Two last questions for you guys. I’ll start with you, John, you both can answer them? How worried are bankers? And then the second question is going to be? Do you expect many more banks to fail from here? Or today’s worries, maybe a bit overblown?

John Maxfield 47:38
I think that the bankers, the worry of bankers is on a continuum, some are very worried, some are less worried. And that’s a function of where their deposits come from the larger commercial or the large uninsured. So I’d say falls in that contained continuum. And then in terms of like, whether more banks are going to fail. I mean, I don’t like to come out and say like, Yes or No, I think there are going to be some or aren’t like, I would not be surprised if there were and I would also not be surprised if there weren’t. But if I were to kind of fall on one side, I say that we’ll probably see a few more would be my guess.

Adam Taggart 48:09
Okay, I don’t want to put words in your mouth here. But or it sounds like you’re not afraid of like, you know, just sort of like a out of control cascade of failures through the banking system here. So yes, there may be a few more failures from here, but you’re not expecting like, oh, my gosh, the banking system is really vulnerable here.

John Maxfield 48:28
I think if that were to happen, I think the Federal Reserve would open up the floodgates, and I think there’d be so much, I think there’d be so much liquidity dumped into the system that, that they would stop that from happening. That’s just my that’s just my that’s just my analysis.

Adam Taggart 48:39
Okay, Joseph.

Joseph Wang 48:41
So I think there’s a big divergence between what we see in the prices and what’s happening on the ground. So again, what’s the banks that are most in the news right now, let’s say Pacific West, I’d say Western alliance, you look at what’s actually happening in their business. They’re telling you that they don’t actually see in change day to day, but their stock prices are taking because there’s a lot of speculation, it seems. So right now, from my perspective, it seems like the actual banking sector is stabilizing, and you know, should be fine. But if we keep seeing all these scary headlines, these price declines, that’s going to panic people. So whether or not this gets worse, it gets better is going to have to depend on public policy. A couple of things that have been whispered one is just even stronger deposit guarantees for everyone, such that even if you’re seeing your share price of your bank plummet, you won’t want to run anyway. Or today. I think there’s some whispers of a short sell ban. Now, I think so first of all, I don’t like short sell bands and all that stuff. But I think the bank can a bank is kind of special in the sense that you don’t actually know what’s going on in the bank. So if someone have a if some investor can just easily impact the stock price of a smaller bank and create a perception of panic and profit from that and basically destroy something that was otherwise healthy. So there’s whispers of that and that could also stabilize So we see now, my sense that when you panic, the policymakers, things get better. And they are panicked right now.

Adam Taggart 50:08
Okay. All right. Well, look, I’m going to take some questions here from the audience. So folks, just ask your questions here in the live chat, and I’ll pull as much as I can. What I’ve seen that’s come through here is, what are your thoughts on commercial real estate loan exposure? So the really big banks tend to own more of almost every other loan type, except for commercial real estate that’s much more over owned in the regional slash smaller banks. A lot of concerns about potential defaults on those loans. So could that be something where the stool is a little wobbly, but not so bad, but then all of a sudden, somebody kicks out one of the legs, you know, with commercial real estate loans, if they start defaulting like it? How big of a risk, additional risk? Do you see that to the banking system here? Jonathan, let’s start with you.

John Maxfield 51:04
I would say that, so commercial real estate, I don’t think, you know, commercial real estate isn’t just like some big like, you can break it down into different types of commercial real estate. Right. And I think the concern is that within the office, portfolio, that’s, that’s for a variety of reasons. And so, but office is not an insignificant amount of of bank balance sheet to be looking across the entire industry. And so I would say that there is concern in office. And it’s funny, I was just talking to a banker who’s like really dialed into this stuff yesterday. And he was saying that for, up until basically this week, they had not seen much capitulation in among the sellers and among the sellers and trying to like drop the prices down. They’re kind of holding tight to where they were at. But he said, Just the last week or two, they started to see capitulation among office, a set of people who own office properties and selling them at a significant discount. And he was referring specifically to San Francisco, which is like San Francisco is kind of like everything right now you’re

Adam Taggart 52:09
getting getting kicked rocks down. Yeah.

John Maxfield 52:12
And you see that he said he hadn’t seen as much kind of on the East Coast yet. But but there is concern, and I think I think the concern in office is a legitimate concern.

Joseph Wang 52:23
Yeah, I agree with John, and I’m going to defer to him on his observations, he has much more conversations with bankers, but also make another thing that I don’t think people are taking into account is that real estate prices, even commercial real estate prices have gone up a lot over the past five years. So let’s say you made a loan five years ago, to 50% loan to value over the past five years, you know, inflation has pushed up a lot of things higher. Now, of course, office is going to be in big trouble, as John mentioned. But if you look at everything else that say multifamily, let’s say, you know, malls and so forth five years of high inflation, that’s going to help your loan to value, it’s going to push it lower. So if your bank making a loan against that, you have more protection, because your borrower has more equity in the deal.

Adam Taggart 53:07
Okay, I guess just before we hop off this, because I’m seeing lots of people comment on it is your general outlook on the banking system is like, it’s really not that bad guys right now. But if commercial real estate defaults really pick up a different story, or I don’t want to misrepresent your level of concern here, but I just wanna clarify. So back to you, John.

John Maxfield 53:30
Well, I mean, let’s keep in mind that all of this is coming on the weight in the wake of the financial crisis not too long ago, which was in large part, the thing that caused a lot of the smaller bank failures was commercial real estate. So that that a lot of these people who run these banks today have been careful in terms of like the loan to values on the commercial, real estate and the collateral on all those types of things. So like, the risk, there isn’t as much my assessment is that there isn’t as much risk in commercial real estate overall. But there is in this one pocket in the office space, there is risk in that office space, but there’s just one piece of a much larger mosaic. Okay, so this is not like a situation like 2008 2009, where you’re going to have like, hundreds of banks fail because of commercial real estate. But this is somewhere you’re going to have, you know, if you have some that are focused in the office space, they could seriously they could face some serious issues.

Adam Taggart 54:23
Okay, so if you are invested in a regional smaller bank might not be a bad idea to try to find out what their exposure to office spaces.

John Maxfield 54:32
Sure, sure. I mean, well, the other thing to keep in mind is like if you’re an investor, there’s times like these that you buy bank stocks, okay? Because it’s like you a bank is you’re up against a fixed return schedule. Your typical bank, a good bank will earn 12% 14% of equity just every year just bang, bang, bang, bang, bang, bang, bang, bang. That means if you want to juice your return on it that you have, it’s the price that you pay that really matters. If you’re an investor like what I would say to investors is like, don’t be scared at a time like this, like, go out, look at your really good banks or US banks or m&t banks, European seas and like those things get get real low. Like, it’s not a bad thing to consider putting this putting some of that in your portfolio.

Adam Taggart 55:13
Okay. And I’m glad you mentioned that because in your intro, I had wanted to ask you this question, which is, is this the time to be greedy when others are fearful, right? You guys sort of seem to say, hey, the the fear of the crowd is kind of in the driver’s seat right now. And maybe things really quite aren’t as bad on the ground as the headlines are making things seem so while share prices are becoming collateral damage of that fear, you may be able to really scoop up some good values here. I actually did a twitter poll last night where I just opened question asked people, hey, you know, what, what assets that are unloved right now, do you think you know, we’ll be in demand again soon. And people were putting up was Kre is that the ETF that invests in the regional stocks? That was a pretty popular one that folks were suggesting? Sounds like you think something like that may actually be worth worth considering? Given what’s going on right now.

John Maxfield 56:05
Don’t Don’t buy anything, don’t go out on a limb. Don’t buy anything like speculative. Just get your big banks, like your jpm your BAC is, like one of my favorites is m&t Bank. I mean, the way that they have managed the way that Renee Jones, their CEO has managed the liquidity crisis, or the liquidity situation in the past two years. I mean, it’s like the guy put on the clinic. I mean, this is absolutely remarkable the way that they manage that situation, like, go out, buy stuff, say stuff, don’t Don’t, Don’t be crazy, buy safe stuff. That’s been that’s been brought down by everything else. And then you just sit on it, you just sit on it for 510 years and just let it do its thing.

Adam Taggart 56:42
Okay, and I assume most of these stocks probably pay nice dividends as well. Yeah,

John Maxfield 56:46
certainly, they pay really good dividends when there’s trade below book value. Yeah. So yeah, it’s your typical, the way that the way banks work is that you take a third of your net income, and you distribute that into dividends, you take a third of your net income, and you reinvest it in the bank. And then you take a third of that your net income and you invest that growth, either, you know, doing m&a, or if m&a is not an option, you buy back your stock. So typically, you’re getting about a third of what they make this coming out into your dividend.

Joseph Wang 57:17
Oh, just had one thing in case for the audience. So if you’re if you’re really cautious, you can also move up in the capital stack a bit so you can buy preferred shares. So preferred shares are kind of like that. So they have like a fixed coupon. But if something bad happens to the equity, common equity gets gets hurt first before the preferred. So you get a little bit more safety if you want, if you want that.

Adam Taggart 57:38
Okay, great. I’m going to ask this question, Joseph, because I think you’ve had some people’s policymakers were panicked right now, this guy saying why why? What are you hearing from your insider context at the Fed? But if you could just clarify that comment you made a few minutes ago.

Joseph Wang 57:56
Okay. So when you when you are someone when you are stressed in the banking sector, and you see over the past few days, these regional bank stocks basically implode by 50%? Yes, yes, you were worried that this could something could happen. So, and of course, we’re hearing more whispers from reporting that maybe the Treasury wants to do more with deposit guarantees, maybe the SEC will ban short selling. That’s, that’s then looking at what’s happening in the markets. And, you know, trying to do something about it. This is obviously something that’s been in the focus in the news for the past few weeks. Of course, it’s not red alert, but we are seeing noise that there could be movement towards some kind of policy response. Can’t let, and also, of course, if you don’t do anything, there’s a possibility that this was spurred an actual panic, which is what no one wants.

Adam Taggart 58:50
Okay, all right. I am just continue to scroll here to pull up a couple more questions, folks, do me a favor, by the way, if you enjoy having these live topical special reports, and we try to rush them to market here and do them live, because they’re so relevant to what’s going on in the news. If you if you like this, this model. And if you’re enjoying this particular conversation today with these fine banking analysts, please do me a favor and just let me know your feedback in the live chat. And of course, if it’s if it’s positive enough, we’ll we’ll do more of these. All right. I’m pulling this up without reading it. A question from a total novice. Can you describe the Massachusetts deposit insurance system? And can other banks and states do something similar? Not even sure what he’s referring to But John, it looks like you do. So why don’t you go ahead?

John Maxfield 59:42
Yeah, so that the Massachusetts has its own deposit insurance that kicks in? So let’s say you have a Massachusetts banks that fails, and that the Fed the FDIC, whatever, for whatever reason doesn’t cover all the deposits. You know, all the uninsured deposits will demand Massachusetts fun will cover up to 100% of deposits. So it’s kind of an additional an additional safety net there in Massachusetts. That’s, that’s yeah, I could go on about that. But that’s that’s basically the answer to that question.

Adam Taggart 1:00:14
Okay. All right. Well, look, here, we are coming up on the hour here. And I want to be respectful of your guys’s time, because I know you guys are in high demand here. We’ll quickly before we tell people where they can go to learn more about each one of you guys and your work. I just want to give you guys a chance to kind of just give sort of parting comments. What would be your your parting counsel advice to today’s viewers who have listened to everything here? And are just, you know, what are the key things you want them to take away from this conversation in terms of the current health and status of the banking system? Joseph, why don’t we start with you?

Joseph Wang 1:00:54
Again, I want to hit on the fact that there’s this very big divergence between market prices and what’s happening on the ground, the prices are declining a lot, that seems to suggest, oh, my God, there’s a bank fraud, that’s not happening on the ground. So you got to keep that in mind. Alright, so again, if it persists, it can totally precipitate a banking panic, but that’s just not happening right now. So right now, I don’t think you should panic, but it would be very helpful if prices could stabilize.

Adam Taggart 1:01:23
Okay, and you did just make me think of one last question I forgot to ask. I’m going to slip in here. And, John, I’ll let you answer this, too. But I’ll start with you, Joseph, which is, how would you rate the response from the central planners so far to the banking instability? So the fed the FDIC, the Treasury? What kind of letter grade would you give them for what they’ve done so far?

Joseph Wang 1:01:47
Oh, that that’s hard. All right. So sorry. Okay, so I want to so here’s the problem here. So I think the best policy response would have been just go out and just guarantee all the deposits but because of legislation post GFC, they really don’t have the tools to do that. So with the tools that they had, the Fed rolled out this lending facility, which for the first time ever, the Fed is basically lending unsecured, because they’re lending on face value and market value, okay? And then they’re basically doing the best they can, given the constraints, they have to guarantee all deposits. So I think they’re doing a job. So I think they they’re doing the right thing, and if it’s not heading, it’s if it’s not perfect, it’s because they do operate under certain constraints. The Fed really made this unprecedented move on lending unsecured I’m not sure people realize just how, how much of a lift that was. Okay,

John Maxfield 1:02:45
I’d give them a b or b minus E because we they get if they got an A, we wouldn’t be having this conversation. And if they got an F, maybe we wouldn’t be having this conversation either. So I’ll give him I’ll give him a solid D but like, Adam, to kind of your point earlier like it. I think you have to think about all this stuff in you’ve got to put it all in the same bucket as the Coronavirus. The response to the Coronavirus response, like this stuff is is all part of that same story, you know what I mean? So it’s like, they probably went into heavy when they went you know, three years ago with the with the response to Coronavirus. So like that gets them down from an a, you know, they when they came out and they said after Silicon Valley Bank, you know, they when they issued that press release on Saturday said like we’re not going to cover all the deposits and that causes additional runs like, you know that that that that certainly kind of went against them getting an A so I probably given a B or a B minus. But let’s but let’s pretend that C is not Douglas, ninth grade and flate. Right, let’s give C right in the middle. Maybe a little bit better than average. But not horrible. But so then to answer your question about like, so I think Josephs wrap up point was a really, really good point, you can look what’s going on in the market, and what’s going on in the ground. And these are two totally different things. Okay. And I think that’s a really important point to keep in mind. So I would, I would subscribe to what Justin said there. And then I would just add to it that like, again, to go back to what kind of where I started, like, we’ve seen these things over and over and over and over again. And you know, what always happens, we just always go back to just like kind of how it always was, you know what I mean? So it’s like, there’s the to be irrationally fearful at this moment, is to forget that, like, well, we just went through one of these, like, you know, a little over a decade ago, and look, look where we came out, we’re in fine shape. So like, just chill, you know, like, keep your head down. If you have some excess money, like, take advantage of what’s going on in the stock market while everybody else is being fearful. Like you can go out and you know, be a little bit greedy. And you’ll make it through just fine.

Adam Taggart 1:04:43
Okay, yeah, I mean, you guys, I’m sure like me had been just bombarded with questions over the past month of like, should it be taking my money out of the bank and, you know, people that feel that instinct to just, you know, get their cash out and buried in the backyard. And you know, I hear guys saying we Which is nice to hear, since you guys are so much closer to this than than the rest of us is. Now, it’s really not that not nearly as bad as the headlines are making it sound. In fact, there’s likely opportunity here to take excess capital and invest it at these prices and some of the better banks, you’ll probably get a nice return coming out of it. So guys, thank you so much for that very informed perspective. I do want to part here by letting people know where they can go to find out more about you and your work. Let’s start with you, Joseph. And I’m going to use my godlike powers here to put up the URL to your website while you’re giving your answer. And

Joseph Wang 1:05:36
thank you. And for the of course, I have a website fed guy.com. But I also started a channel, a YouTube channel called Joseph Wayne, where I give weekly updates on what I think about the markets. So if you’re interested in my perspective, check me out over there. Joseph Wang,

Adam Taggart 1:05:50
just type in Joseph Wang at YouTube. Yeah, that’s my

Joseph Wang 1:05:53
channel at YouTube. The channel actually could go on to but if you just Google Joseph, can you find me? Okay, YouTube? Yes.

Adam Taggart 1:06:01
All right, great. And Jonathan, how about you?

John Maxfield 1:06:04
And let me just say that I followed Joseph for a long time. And so I would just I would just second that you should follow him. He’s one of the one of the kind of the sharpest minds in this space. So I didn’t know you started YouTube. So I’d love to take a look at that. You can find me at maxvill on bank subset.com. And you can also find both me and Joseph on Twitter. That’s kind of one of our one of our kind of our main distribution platforms. But we’d love you know, we’d love all the readers and all the listeners. So anybody who’s interested in this stuff, you know, come check us take a look,

Joseph Wang 1:06:33
definitely check out Mexico substack. It’s really good. And Max has tons of experience in the tech sector. So he knows what he’s talking about.

Adam Taggart 1:06:39
Great. Great. Totally agree. And I really want underscore to for anyone that’s on Twitter, you guys are two most follows. Really enjoy. Follow you guys myself on Twitter. So highly recommend that folks go do that. Well, folks, folks, if you enjoyed this, and it seems like from the comments, when I asked for feedback earlier, we’re pretty positive, please do us a favor, support this channel by hitting the like button, then clicking on the red subscribe button below, as well as that little bell icon right next to it. And if you’re looking for, you know, help and guidance on on, obviously just navigating this crazy time that we’re in, but potentially taking advantage of some of the opportunity here that both Joseph and Jonathan talked about. As always, you can always go schedule a free consultation with one of the financial advisors that’s endorsed by Wealthion. To go do that just go to wealthion.com doesn’t cost you anything, no commitment to work with these guys. It’s just a public service they offer. Really enjoyed this hour. Thank you so much for taking the time on short notice, gentlemen, to join us for this clearly from the feedback here in the chat. Folks learned a lot from this conversation. Really appreciate your time here. Look forward to having you guys back on the channel each individually soon. And just want again to extend my thanks, guys. This was wonderful.

Joseph Wang 1:07:53
To be here. Thanks so much. And great to meet you, John. Sandy. Joseph.

John Maxfield 1:07:56
We’ll see you guys the first time

Adam Taggart 1:07:58
you guys actually got Yeah, yeah, wash

John Maxfield 1:08:00
your hands. You’re still photos, but even better live.

Joseph Wang 1:08:06
Thanks for Thanks for organizing this whole thing. Adam has a great discussion.

Adam Taggart 1:08:10
All right, guys. Thanks so much, everybody else. Thanks so much for watching. Bye, you guys.

Transcribed by https://otter.ai