The SVB Collapse, the Banking System and Real Estate

The Weekly Recap

And oh my, what a week to recap. Silicon Valley Bank collapsed which led to the shutdown of NY based Signature Bank and led to fears of a "run on the banks". Credit Suisse is the slow, long drawn out version of Silicon Valley Bank and their biggest backer pulled out but was then given a $54 Billion lifeline from the Swiss National Bank. Not all bad though as Deutsche Bank and Bank of America are benefiting from the SVB failure making them even too bigger to fail and First Republics credit rating was downgraded to junk as their stock fell more than 30% yesterday before receiving their own $30 Billion lifeline from Wall Street. Mortgage rates have dipped due to banking uncertainty, retail sales dropped in February even though inflation has cooled to about 6%, payrolls increased 311k outpacing expectations and Argentina's inflation passed 100% so things could be way worse. Biden says that banking is safe so praise be.

The SVB Collapse, the Banking System and Real Estate

Fun fact, I'm getting married this weekend and figured I would keep this week's newsletter short but the fury of the economic gods had other plans!

Last week I discussed the resiliency, malleability and tenacity of the US economy with the unparalleled level of interest rate hikes. You can read that here and its something I still believe, even with the hectic week that was mid-size and regional banking downfalls. I'll even double down on that sentiment as we see big banks that are heavily capitalized coming in and rescuing some institutions. Here are some red flags about Silicon Valley Bank that should've sounded the alarm but didn't.

They Were Clearly Underwater: In its most recent earnings report in January, SVB had market losses of $16 billion in Q3 against just $11.5 billion in tangible equity. If they had to liquidate their assets they would've been screwed.

They Were Clearly Morons: The cause of the losses is simple, the bank took billions of dollars worth of customer deposits and invested HEAVILY in bonds with interest-rate risk. They must've not thought that rates would ever rise again. The were lending long term and borrowing short term, not great.

They Were Clearly Working with Clients with High Risk Thresholds: The FDIC insures up to $250,000 in deposits, 95% of deposits were well over that threshold, making it a poker game which is what led to folks like Peter Thiel pulling out all of his funds and advising everyone else in his group to do so.

They Were Clearly Mis-Managed: SVB had been operating without a Chief Risk Officer for almost NINE months from April 2022 to January 2023. That's some risky business. They also had a Chief Administrative Officer who had been with the company since 2007, his previous firm was Lehman Brothers. So lightning struck twice for that guy.

They Were Clearly Crooks: A trust for CEO Greg Becker sold $3.6 million worth of SVB shares just days before the bank disclosed its $1.8 billion loss. Other execs also sold over $84 million worth of stock over the last two years. Oh yeah, they also paid out bonuses hours before their sezuire.

They Were Clearly Being Protected by the Fraternity: Audit, Tax and Advisory powerhouse KPMG released a report mere days before the collapse of SVB and Signature Bank giving them a clean bill of health on their books. Auditors aren't fortune tellers but its their job to raise red flags about the viability of institutions. This is almost as bad as having Barney Frank on your bank board of directors (looking at you Signature Bank).

Real Estate Market: A large majority of the depositors at Silicon Valley Bank and Signature Bank were VC's, Hedgefunds and other tech centric companies. Unlike 2008, these issues almost exclusively impacted business' rather than individuals and are NOT directly tied to the housing market or an individuals ability to pay their mortgage debt. The upside to all of this is that the Fed may pump the breaks on continuing to raise rates as to not continue to distress the banking industry. For those of you at First Republic, it seems that as of this writing, they will be saved and capitalized through a larger bank securing all depositors faith. If you were entertaining the idea of financing through their Eagle program, you may want to reconsider your lending options.

Market Performance

Here are how some other asset classes performed this week as of this mornings opening bell.

NYC Market Update

A new weekly section! Here is a week over week view of new inventory that has come onto the NYC market as well as newly signed contracts that have taken place.

Mortgage Rate Update

Mortgage rates are down following an increase of more than half a percent over five consecutive weeks. Turbulence in the financial markets is putting significant downward pressure on rates, which should benefit borrowers in the short-term. During times of high mortgage rate volatility, homebuyers would continue to benefit from shopping for additional rate quotes.

News You Can Use

• Collapse of Silicon Valley Bank, Signature Bank Calls Fed Interest Rate Path Into Question WSJ

• Mortgage Rates Tumble in the Wake of Bank Failures CNBC

• 11 Banks Deposit $30 Billion in First Republic Bank WSJ

• Investors Have Wiped $165 Billion of Value in US Bank Stocks This Month Financial Times

• Here's How the Second Biggest Bank Collapse In US History Happened In Just 48 Hours CNBC

• NY Fed Report Shows Near-Term Inflation Expectations Retreating Sharply Reuters

• US Regulators Protect SVB Depositors and Shore Up Financial Systems Financial Times

• US Inflation Cooled in February as Fed Confronts Bank Failure WSJ

• KPMG Stands By Its Audits of SVB and Signature Bank Financial Times

• Bank of America Gets More Than $15 Billion in Deposits After SVB Fails Bloomberg

• FDIC Returned $40 Billion in US Treasury Funds, Reversing Withdrawal After SVB Takeover Reuters

• Credit Suisse Shares Tank After Saudi Backer Rules Out Further Assistance CNBC

• Deutsche Bank CEO Sees Inflow of Deposits in Flight to Quality Reuters

• Wholesale Prices Post Unexpected Decline of .1% in Feb, Retail Sales Fall CNBC

• SVB Execs Sold $84 Million in Stock Over Two Years CNBC

• SVB Paid out Bonuses Hours Before Seizure Axios

• Government Races to Reassure US that Bank System is Safe AP

• Signature Banks Becomes Next Casualty of Banking Turmoil After SVB Reuters

• Payrolls Rose 311,000 in February, More than Expected CNBC

• What Do We Know About the SVB and Signature Bank Collapse BBC

• Argentina Inflation Shoots Past 100% For the First Time Since 1991 Reuters

• UK Will Not Enter a Recession This Year CNBC

The Deep Insight

Puppy of the Week

Will return next week!

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Feel free to reach out to discuss more in-depth about your real estate goals, share your thoughts about my newsletter, or lobby me to have your dog featured as the dog of the week in my monthly newsletter. Looking forward to hearing from you!