Motley Fool Money - Meanwhile, in Switzerland...

Episode Date: March 20, 2023

(0:21) Jason Moser discusses: - UBS buying Credit Suisse for $3.2 billion - The ripple effects of everyone checking with their bank - Why Amazon's latest layoff announcement has him looking at the revenue-per-employee metric (13:58) Ricky Mulvey catches up with Jacob Goldstein, host of the podcast "What's Your Problem?" to talk about bank runs, why they happen, and how businesses could potentially prepare for them. Companies discussed: UBS, CS, AMZN, SIVB Host: Chris Hill Guests: Jason Moser, Jacob Goldstein Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

LinkedIn is pretty amazing at helping you grow your small business. We cannot stop your new clients from emailing you at 3 a.m. We can help you sell, market, and hire in one place. We cannot help you be in three places at once. And while we can't help you organize your calendar, LinkedIn can help you land more clients so you have a calendar to organize. Grow your small business on LinkedIn. Learn more at LinkedIn.com slash small business.

We've got another round of tech layoffs and, of course, the latest drama in the banking industry. Motley Fool Money starts now. I'm Chris Hill, joining me today, Motley Fool Senior Analyst, Jason Moser. How are you? It's Monday. I'm doing well. How are you? I'm fine. I'm just sort of smiling audibly because we are back where we were a week ago today, which is the situation is fluid and banking continues to dominate the investing headlines.

And this time it is overseas where the big story is Credit Suisse is being acquired by UBS in a deal worth $3.2 billion. The deal reportedly orchestrated by the Swiss Central Bank, Swiss regulators, and this is, for a lot of reasons, these are two banks that we don't pay a ton of attention to, but because of the size of the deal, because of the influence, because a lot of investors just sort of woke up to this news Monday morning, naturally, one of the questions is, what ripple effects, if any, come from this? As you watch this playing out across the sea, what goes through your mind? Definitely, you know, we've spent the last couple of weeks assessing sort of the situation here domestically watching sort of the ripple effects of what happened with Silicon Valley Bank

and signature to a lesser extent. And wondering to ourselves, is this something that is contained just to our banking system here? Is this something that's just contained to a couple of banks that perhaps were over-expected? to a certain asset class, weren't prepared to deal with certain macroeconomic conditions. And now, you know, we're seeing this becoming sort of a global, I don't want to say contagion, but I mean, we do see this obviously spreading more on a global, global scale. And it's not to say that, it's not to say this is the beginning of the end, but it is,

you know, we're watching sort of a train wreck in slow motion. And that stinks as investors because you don't really, you don't really, you know, we're watching a train wreck in slow motion. know when this is going to conclude. You don't really know what the ultimate solution is. And there are a lot of external forces at play that really kind of go into this. I mean, at the end of the day, right, every move the banking regulators make and have made over the past couple of weeks is to shore up balance sheets and ultimately instill confidence. And yet, the more they try to help, the less confident investors become, right? Because it's a tacit admission that, damn it, there's something wrong. We did something wrong. And now we're dealing with

some unintended consequences. And so it really, again, it goes to show. We talked about the psychology before when it comes to investing. I mean, I feel like just over the past few weeks, we're really seeing that psychology playing out here because fundamentals of business are one thing, right? I mean, we look at metrics that matter and just general fundamentals of the business. But there is, when you're talking about markets, there is a psychology at play. There are times when you sort of, you know, you've opened up Pandora's box and it's impossible to get things back in. So I'm not certain that there are any moves that regulators can make at this point.

That will fully reinstill confidence in the sector. I do appreciate the fact that they continue to be seemingly on this. I like the fact that they're trying to work within the industry. industry so that this is sort of an industry solution as opposed to a government solution, although I think it's fair to say that government is really kind of pushing for that as optics really matter. But yeah, it feels like, well, hey, listen, it's Monday and we should expect another fresh headline tomorrow telling us something new. Well, and you just touched on something that, look, over the years as we've been doing this

podcast, you and I have talked a number of times. about Company X and something going on with Company X, whatever the industry is. And part of our conversation is, this is kind of a headline risk. This isn't whatever is going on, whatever this challenge is. It's more headlines than affecting the fundamental underlying business. And that's of some relief, but we also talk about the fact that it's like, but it's something that the CEO and their management team, need to spend time on. And as an investor, you don't want to see that. You want to see the management

team focused on the business, growing the business, etc., etc. And you just touched on something, Jason, that I think is a cousin to that, which is that every company in America has spent time over the last two weeks talking about their banking. Even if they are very confident in what they've been doing up to that point. Every company in America has had the conversation. Wait a minute. Let's take a few minutes here. Are we good? Is our cash in a, like, do we, let's have an emergency board meeting or, you know, if it's a smaller company and they don't have a board, an emergency management meeting. Can we just spend time talking about this thing? And I think that's part of the challenge here. And as you said, there's there's not going

to be a bell that gets rung at the end of this to say, it's all over now. It's just going to be at some point in the future, we're going to look back as investors and say, hey, you know what? Over the last few months, we didn't really talk about banking. We didn't really talk about banks and liquidity and balance sheets. And it seems like confidence has been restored to its previous level. And we're only going to know that when it's in the rear view mirror. Yeah, yeah, I think you're right. I mean, when you look at something like a Credit Suisse versus USB situation, you had two different cultures, right? I mean, clearly USB seemed to be the more conservative of the two, whereas, I mean, Credit Suisse

has a bit of a track record for mismanagement and crises, so to speak. So maybe the merging of these two will ultimately create a better. a better entity going forward. But I do think that's right. I mean, you should have, I mean, every bank, I would hope that every financial institution out there has convened a meeting at some point here to do what you just said, right? Are we good? Is our balance sheet okay?

Let's look at our investment portfolio. Because I'd imagine the past few years, it's kind of been cruise control for a lot of organizations, not just in banking, but generally speaking, investing was pretty easy over these last few years. pretty easy over these last few years, right? You could throw a dart and pretty much make money. And that's just not going to be the case anymore. I mean, clearly we're going to need to focus a little bit more on the fundamentals. And I think, should you point on a finish line? No, there isn't going to be a finish line. You need to look for signs that maybe things are better or better than even we think. I mean, you know, you look to that lending facility that

was recently created by regulators for the banking situation here. for banks to be able to tap that lending facility to shore up balance sheets in case depositors were feeling anxious in case there were some questions in regard to their exposure versus their depositors and sort of help protect them against a run. There are signs at least that that facility while it is being, while it's being used, I was reading last night, a lot of the money that is being pulled from that facility is very tied to the West Coast situation. banks like Silicon Valley Bank that have been overexposed to this sort of startup and VC

demographic. So maybe that's a sign that things aren't necessarily as widespread as they could be. But again, yeah, it's not a finish line. It ultimately is just looking for the signs that things are either recovering or perhaps not as bad as they are being reported today. But, but, you But yeah, it feels like we still got a ways to go before we ultimately learn that. Before we move on to the next topic, I just want to correct one thing you said, because I think you misspoke when you said that the acquiring bank, the acquiring bank is UBS. Oh, did I say USB? You said USB and at least a couple of the dozens of listeners who are U.S. Bank Corp shareholders, panicked. I just want to put their minds at ease.

Misspoke and thank you for the correction. It happens. Before I let you go, Amazon announced another round of layoffs. 9,000 employees. This is on top of the 18,000. We talked back in January when Amazon, Microsoft, and other major tech companies were announcing layoffs. And I believe Amazon was the one that we said, I'm pretty sure more rounds are coming. And that was based in large part on just how many employees they have. Because on a percentage basis, I think it was at the time it was something like 1%, or maybe even less than that. But, you know, as expected, another round, which is obviously hard for the people who are losing their jobs. In terms of the underlying business and sort of where Andy Jassy goes from here, I think it's fair to add.

And I say this is a longtime Amazon shareholder. I think it is fair to ask, how much. How many more of these are you going to do before you feel like you've got it right? Because this seems like the opposite of ripping off the Band-Aid. Yeah, I think, I mean, I certainly understand from the perspective of a leader wanting to be slower and more methodical than doing this, right? I think, I mean, you have to believe that from any perspective, job cuts just stink. I mean, you don't want to do it as a leader.

hated if you're the employee getting cut. I mean, the only people who can really perhaps appreciate it would be investors. And that just is, if it really, I mean, this is something that the business needs. And I think what we're seeing more and more is in a lot of cases, a lot of businesses really need this, right? I mean, there was just a level of bloat that we're seeing a lot of these businesses start starting to trim away. And so from the investing perspective, that obviously makes sense. I would think that most leaders would want to try to let go of as few people as possible. So maybe that's why we're see this just coming in stages. And also, when you look at the business like Amazon with

so many different parts of the business, right? I mean, it's not just Amazon, this online retailer. I mean, you've got all of these different dynamics. And these job cuts seem to be tilted more towards the AWS, the advertising, the Twitch side of Amazon's business. And so whether we see more coming down the pike or not is still up for debate. My bet is we probably do. But I mean, if you look at where Amazon stands today versus where it was back in 2019 in regard to employees and revenue. I mean, one of the metrics we like to just look at just to get an idea is revenue per employee, right?

They can just kind of tell you a few things. Are they doing more with less or less with more? If you look at Amazon from back in 2019, from their 10K, they say they employed approximately 798,000 full-time and part-time employees. That was as of the end of 2019. that year, $281 billion, and so they were $352,000 revenue per employee. You fast forward to today, at the end of this year, at the end of 2022, they employed 1.5 million people, actually 1,541,000, full-time and part-time employees.

Now, revenue took off as well, $514 billion for the year, but ultimately what that translates to is $334,000 revenue per employee. So it's less, right? And so that's just a metric that companies want to keep an eye on. Ideally, you want to see revenue per employee growing. That tells you that you're doing more with less in some cases. So maybe that's one thing they'll continue to keep an eye on. But I just think it stood out. When you look at Amazon's employee base now versus then, I mean, 1,541,000 full and part-time employees versus 798,000 just essentially three years ago. I mean, we can see how quickly that employee base grew.

The business is growing as well, just not quite as quickly and they want to try to reverse that. Jason, those are always great talking to you. Thanks for being here. Thank you. Have the events in the banking industry over the past two weeks done anything to change the definition of money? And if so, does that even matter?

Jacob Goldstein is the author of the book Money, the true story of a made-up thing. Ricky Mulvey caught up with Goldstein. to talk about bank runs, why they happen, and how businesses could prepare for them. Right now, the Fed can just digitally send billions of dollars to banks wherever it wants, or not in the gold standard days. Why do we have bank runs? Well, we have bank runs because not all of the deposits in American banks are insured or guaranteed, right? And namely, this month, that's important because at, say, Silicon Valley Bank, the vast majority of the deposits were not insured, right?

So the Fed has the ability to save depositors at any bank at once, has infinite dollars. The question is, when is it appropriate or desirable for the Fed to do that, right? And the people last week, seems like a long time ago, but it was just last week at Silicon Valley Bank, who had their uninsured deposits, knew that their deposits were uninsured, knew that under the law, if Silicon Valley Bank didn't have their money, the gun. government was not on the hook to make them the depositors whole. So it was rational for them to run on the bank. And I mean, you've studied the history of bank runs. I think there's some criticism that those deposits shouldn't be backstopped or which banks deposits do get

backstopped and which don't by the FDIC. What does it look like when there's a bank run and the deposits are not backstopped? I mean, it looks like you're a classic timeless bank run, Right? Like, you know, deposit insurance is pretty new. We've had banks for many hundreds of years. In this country, we didn't have widespread deposit insurance until the 1930s, right? Before that time, it was routine for people who got nervous about their bank to go take their money out for good reason, right? The guys who won the Nobel Prize in Economics last year sort of built this formal mathematical model showing why it's rational for you to run on the bank if you're worried about the bank. the bank doesn't have enough money to give all the depositors their money back. So if you're worried that there's going to be a run, you should run first. You should beat all the chumps so you can get your money before the bank runs out, right? And that's exactly what we saw at Silicon Valley Bank last week. But I'm thinking back to what you've written in money about the Wildcat banking era,

which like, or if you don't backstop deposits, essentially, your two options are doing what the 14th century government of Venice, Italy did, which was behead bankers who aren't able to backstop deposits, or you've essentially just create a system where there's so many banks creating so much money that you have kind of chaos all the time? I mean, yes-ish, right? So there are tradeoffs all the way down here, right? Technically, a bank deposit is a loan to the bank, And the case against deposit insurance is you want depositors, people lending money to the bank, to care how safe the bank is. You want them to look at the bank and say, oh, this bank is super sketchy. I'm not going to put my deposits there because that creates a market force to cause banks

to take fewer risks, right? Like it's regulation by market forces. Now, we've decided that normal people should get to have checking accounts without worrying about that. Some guy who has $1,000 in the checking account or $5,000 in their checking account to pay their mortgage and buy food isn't on the hook to regulate their bank. But we've decided that if you have more than $250,000 in the bank, you should be sophisticated enough to care about your bank's risks to be aware that Silicon Valley Bank is insolvent because of this, you know, bet on long bonds that they made. Now, I think the big problem right now is the government is de facto giving insurance to all depositors. I don't think that's a problem on its own, but the problem is the government is pretending that it's not providing that insurance, right?

Like, officially, it's still the case that you only get FDIC, government insurance, on $250,000 worth of deposits. But in the 2008 crisis, and then again just now, the government's like, okay, actually everybody's deposits are guaranteed. And it's like if, you know, people's houses kept burning down and they didn't have fire insurance and everybody felt bad for them. And the government's like, okay, you didn't have insurance, but we're going to pay for you to rebuild your house because we feel bad for you. Like, that's a dumb way to run an insurance market, right? So it seems like the rational thing is the government can no longer credibly claim that deposits bigger than $250,000 don't have tacit insurance because it clearly do. So the government should like own that, right, and say, okay, some of money. amount of bigger deposits or business deposits up to whatever, a million dollars or something,

are insured, and we will charge, you know, the FDIC is an insurance fund. We will charge for that. Because right now, the government is providing free insurance. That doesn't make sense. The other thing that I've noticed, too, is there's a criticism that banking regulators, government officials, are just changing the rules on the fly. And that seems to be the one consistency throughout pretty much all banking crises with 2008. Hey, we're going to go. go behind the wall to orchestrate these deals with Bear Stearns in the Great Depression with FDR essentially saying, we have enough gold to back up deposits. Don't ask me any more questions. Yes. And then it turned out that he, you know, changed the dollar value of gold, right? I agree.

I mean, there's one particularly sort of, I don't know, grading thing about the recent set of circumstances. And that is, in 2018, if you go back to 2018, there was a, change in banking regulations, a change in the regulations put in place after the financial crisis, where the threshold for being a systemically important bank was lowered, right? It had been, if you have 50 billion in assets or more, you're automatically considered systemically important, meaning if you fail, it could have knock-on effects in the broader economy, which is what regulators care about, right? One bank blowing up doesn't matter, but a bank blowing up and taking down a bunch of the economy, that's bad. So they raise that threshold from

50 billion to 250 billion. Silicon Valley Bank is in the middle there, right? Silicon Valley Bank was bigger than 50 billion, smaller than 250, so not systemically important under the new rules. And then over the weekend, the rationale the federal government gave for making depositors whole was, actually, it is systemically important. We need to do this because if we don't, there might be a broader banking crisis. And so, like, to your point of sort of this ad hoc regulation, that one is particularly frustrating because it is the exact opposite of how the law changed just a few years ago. I mean, the flip side is a banking crisis is very bad. And banks, you know, Silicon Valley Bank, the stock is going to go to zero, right?

The bondholders are going to lose most of their money. The people running the bank are losing their job. So, like, it's not like there is no accountability there. It would be better not to have a banking crisis than to have a banking crisis. So it's hard. Banks are inherently fragile. Even good banks can blow up. You don't want the failure of a bad bank to take down perfectly sound bank.

So it's hard. It's a hard problem. The thing that I find frustrating is, you know, I would think back, let's say three or five years ago, I don't think I would have predicted the Silicon Valley bank collapse. And I don't think that, I actually don't think that most reasonable people would. I think it's hindsight quarterbacking to say, I saw this particular bank failure coming. Now, what is entirely predictable, though, is that there will be bank runs. There always have been bank runs, and there always will be bank runs.

But there is a dynamic between not putting everything in one basket and also, you know, to your earlier point, if you're a business with $10 million, let's say, $10 million in cash, you would need to use 40 different banks to have all of that insured. And I think that's kind of unreasonable for most businesses to do. Yeah, I mean, I'll tell you the truth. I was surprised at how the fact that I guess it was more than 90% of the deposits in Silicon Valley Bank were uninsured, you know, were in very large accounts. I mean, there are other things you can do with cash, you know, if you're a business, you can buy

T-bills, right? You can buy Treasury, money market mutual funds. Now, you can't, like, you know, if you need millions of dollars to make payroll every two weeks, that gets more complicated, right? But I was surprised by that fact, and clearly lots of businesses have lots of money in uninsured bank accounts. And they are, at this point, I think within their, at this point, I think it's reason to feel like those accounts have this sort of tacit backing of the government, even if the government

doesn't come out and say so. And it's that tacit backing that seems suboptimal to me. I feel like there's a, it's weird to me that more people aren't talking about that. Like the only person I've heard talking about it, strangely, is Barney Frank, who was, you know, who wrote Dodd Frank, the banking reform that came out of the 2008 crisis, and then was on the board of signature bank, the sort of other lesser discussed bank that got shut down last weekend. They were a big bank to the crypto industry, and they also got shut down, and their depositors were made whole. So Barney Frank was like, hey, businesses need deposit insurance on higher amounts. To me, that seems like an obvious conclusion from this.

Maybe the reason people aren't talking about it is because there's not like an obvious villain there. I feel like what people want when a bank fails is a villain. And it's not really like talking about insurance is kind of boring. Maybe that's why nobody's talking about it. It's hard to get the people off their seats for insurance regulation. Yeah. Brandon Greeley wrote an op-ed in the Financial Times. It's titled, SVP failure raises a question, who gets to create dollars.

And one of the points that he raises is that there is a decision to backstop all of these deposits. That expands the definition of a dollar. You've written about how the definition of the dollar has pretty much consistently expanded and changed throughout all of human history. Does it matter that the definition of a dollar is expanding, or is that just a natural course of economic life? Oh, it does matter. It does matter. And just to pause and sort of talk through what that means for a sec, I mean, if you go back

a hundred years, right? A hundred years ago, the U.S. was on the gold standard. So the definition of a dollar then was basically a certain amount of gold, right? It was that, I think it was $22 in change, or maybe $20 in change, got you an ounce of gold, right? So people thought of that as the meaning of the dollar, right? So the fundamental thing at that point that was a dollar was basically that much gold. Then the next step was a banknote, a piece of paper, right?

Now, 100 years ago, we had the Fed. So it was a piece of paper, but people still thought of the paper as basically a claim check for the gold. And then the next thing that was kind of like a dollar, but a little less, was a dollar in the bank, right? Because 100 years ago, you knew that your dollar in the bank was a loan. to the bank, and if the bank went bust, you wouldn't get it back, right? As of a week ago, a dollar in an insured bank account was more sound, was a more real dollar than a dollar in an uninsured bank account, right? A dollar in an uninsured bank account is a loan to the bank that you might not get back, right? And so what we've seen, I think, over the past week,

is the government saying, okay, those dollars in your bank account, in your million dollars, checking account, those are actually more solid dollars than we said before. Those are real dollars. Wink, right? So what it means is basically the government is backing, supporting banks more now than the government was a week ago. And that has been the direction of things, right? More government backing for banks. And like, that's okay. I'm not necessarily opposed to that, but like, banks are in this public-private partnership with the government. Banks are in the business of creating money, and they're able to do that because of the set of government guarantees that they get. And in exchange for that, they are subject to strict regulation, and they have to pay for deposit insurance.

And so we just need to make sure that those things seem like they're in balance. The more the government is guaranteeing the banks, the more the banks should be subject to regulation and deposit insurance. Jacob Goldstein, he's the host of What's Your Problem? He has an interview out with Glenn Kellman, the CEO of Redfin. He's also the author of Money, The True Story of a Made Up Thing. Appreciate it as always. Yeah, thanks. It was a delight to talk to you. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against,

so don't buy yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.