A Message from Your Advisors

Welcome to this special market update where we bring you timely information surrounding major events in the financial markets. We understand that news of these events can be alarming and may bring uncertainty, but rest assured we are here to support you and help you stay on track to achieve your goals.

Our team of experienced professionals is committed to providing you with sound, data-driven guidance. It is our belief that, while the financial markets may experience short term volatility, a well-diversified portfolio and a long-term investment strategy can help weather these storms.

We are here for you every step of the way, and are confident that together, we can navigate these challenging times and emerge stronger on the other side.

GoalVest Update on Silicon Valley Bank

No doubt you’ve heard the news and have seen the market turmoil over the last few days involving Silvergate, Silicon Valley Bank, and Signature Bank. We want to share a summary of events, what it means for you, how we are reacting, and open the door for any questions you might have regarding your investments, the economy, or otherwise.

Last Wednesday, 3/8/2023, Silvergate Capital, an $11 billion central lender to the crypto industry, said that it would wind down operations and liquidate its bank. All depositors received their funds back and the FDIC did not get involved.

That same day Silicon Valley Bank (SVB) made an announcement that surprised its investors – it was selling some of its “available for sale assets” and needed to raise $2.25 billion to shore up its balance sheet. Almost immediately depositors started withdrawing funds from their accounts with over $40 billion being withdrawn on Thursday, 3/9/2023 alone. By Friday, SVB held a negative $1 billion cash position. Within 48 hours of SVB’s surprise capital raise announcement, regulators shut down SVB and seized its deposits in the largest U.S. banking failure since the 2008 financial crisis (when Washington Mutual went down) and the second largest ever with over $212 billion at the end of last year.

Adding to the turmoil, on Sunday, another bank with large exposure to cryptocurrency, Signature Bank, also ceased operations and was shut down.

Initially it was uncertain what might happen to SVB and Signature Bank depositors who held more than what the FDIC standard insurance will cover ($250,000 per depositor, per bank, for each account), but the Fed, FDIC, and Treasury issued a joint statement Sunday March 12th, confirming that depositors would have access to all their money starting 3/13/2023. This will allow depositors of Silicon Valley Bank access to their cash to continue processing payroll and other operations even though Silicon Valley Bank shut down. Furthermore , the Fed announced that it will make more funding available to other banks, if required, to ensure deposits are safe.

While the broad market finished slightly down on Monday, March 13th, the financial sector was down about 4% and the regional banking sector was down approximately 12%. It’s no surprise investors are wondering and if there is another bank that may be in the same position as Silicon Valley Bank.

Several factors made SVB unique and vulnerable during this time, though –their asset base, their deposit base, and their customer base. SVB more than quadrupled in 5 years and had a very concentrated client base since they were the “Go-To” bank for Silicon Valley venture capitalist investors, private equity investors and their portfolio companies (an industry also in turmoil right now). Because of SVB’s rapid growth over the last several years, they had a lot of cash that they had to do something with. SVB decided to reach for yield and buy securities at a longer duration than they should have. Even though they bought safe assets issued and backed by the U.S. government, when interest rates started to rapidly rise at the beginning of 2022, the value of their securities started to drop. This might be ok for an investor that can hold their securities until maturity. However, when SVB required cash because its clients weren’t depositing as much and, in fact, started withdrawing cash because of the tech slow down, SVB had to sell some of those securities. This means they booked losses which prompted the potential credit rating downgrade and need to raise liquidity from their balance sheet.

What all this means for us:

• The Federal Reserve raised rates very quickly without knowing the full impact of their decision. We are starting to see some of the fallout, but do not believe this will be wide-spread contagion.
• While anything is possible, the Fed and Treasury took a very powerful position Sunday, March 12th to prevent continued bank runs. Politics aside, this announcement has helped restore confidence in the banking system.
• In the unlikely event that there are further bank runs on well-capitalized banks, we are confident the Fed and Treasury will continue to step in and secure all depositors, even those above the $250,000 insurance limit.
• Charles Schwab is the custodian for the large majority of our client assets. Considering recent events and the fact that Schwab is both a bank and a custodian, they issued a press release Monday reiterating the strength of their liquidity. Regardless of Schwab’s strong balance sheet, all our investors’ assets are held in accounts segregated in their name, invested in securities on the brokerage side, and not in cash that the bank can use to lend out to others. Additionally, for those of our investors that do have some “cash” in their accounts, it is less than $250,000 FDIC insurance limit and is actually held in treasury bills or other securities, not cash. This means it is very unlikely that there will be an issue with Schwab. We are confident our client assets are safe.
• We purposefully do not make any concentrated bets. While our portfolios do have some exposure to the banking industry through structured notes and some of our equity exposure (though we have less exposure to the financial sector than the S&P), we only use the largest banks. Those that are the highest-rated with broad based-client exposure (i.e. not concentrated risks). Further, after 2008, capital controls and regulations have made banks significantly stronger and well-capitalized than they were previously.

In conclusion, while these recent events are concerning, we are diversified, we are cautious, we are invested in strong, solid companies, and we are still partially hedged on our equities. We will continue to review our portfolio and monitor the situation for further repercussions, but we also want to consider how we can take advantage of potential opportunities that may arise.

Please do not hesitate to contact us with any questions or concerns you may have about your specific account or situation.

Sevasti Balafas, CFA, CPWA®
CEO & Founder
GoalVest Advisory

Source: YCharts, BlackRock, JP Morgan Asset Management, Invesco