Power Lunch - Bank Blowup, and Cracks Forming? 3/10/23

Episode Date: March 10, 2023

Silicon Valley Bank has been shut down after efforts to raise cash reportedly failed. The pressure is spreading through the banking industry. We’ll survey the damage being done to stocks, and ask an analyst what the contagion risk is too.Plus, we added 311,000 jobs in February, much more than expected. But the unemployment rate rose, and wage growth slowed. Is the job market finally cooling? We’ll debate. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch on a very busy Friday. Alongside Kelly Evans, I'm Tyler Mathes. I'm glad you could join us. Coming up, the big bank blowup, Silicon Valley Bank, shut down after efforts to raise cash failed. The pressure is spreading now throughout the banking industry. We'll survey the damage being done to stocks and ask an analyst how real the contagion risk may be. And don't forget the jobs report, 311,000 added in February, more than expected.

But the unemployment rate rose and wage growth slowed. Could it be signs the job market is cooling? Before that, let's get a check on these markets as we head through two new session lows. Dow's down almost 400 points. The Russell 2000s with big financial exposure are down 3.5%. All right, let's get to Dominic Chu for a little more detail on Silicon Valley Bank. Its effect on the broader market today and more. So Tyler Kelly, that word halted.

It hasn't traded at all in the regular session today. So the embattled Silicon Valley Bank is no more, at least not in the official sense. the bank that basically serviced so much of the venture capital-backed startups and tech entrepreneurs in America was officially taken over by government regulators today. The Department of Financial Protection and Innovation in California moved to shut down SVB and then asked the Federal Deposit Insurance Corporation or FDIC to oversee the bank's wind down, as well as oversee the return of deposits to customers. Now, the FDIC said that all insured deposits will be available to customers,

No later than this coming Monday morning, March 13th, those customers with deposits in excess of the federally insured $250,000 per person per bank, will receive an advanced dividend payment over the next week with any remaining balance paid contingent upon the selling off of SVB's assets. Now, shares of the company, again, have not traded so far today. So that number that you're seeing up there, 3940, is not really official in that sense. But they've been absolutely crushed. They were as high as nearly $600 in just the last 12 months. And you can see the pre-market indication earlier today was $39.40. Other Western U.S.-based regional banks also hit hard for a combo with different reasons,

including that fear, as Tyler pointed, a possible hardship contagion, spreading to other banks, and the availability to trade shares of those stocks like Pack West, First Republic, Western Alliance, amongst others, with no trading happening in SIVB. shares. So the big question, Tyler Kelly, left to be answered is whether the actions to ring fence or separate SVB from the rest of the financial system was enough to quell depositor and, of course, investor fears as well. Back over to you. All right, Tom, stick around. We're also going to bring in now Bob Pazani and Mike Santoli to dive deeper into this. Let me begin with you, Bob. We just looked at those numbers for some of the peer banks, I guess you would call them, of SVB. SVB.

and the numbers were not in any sense reassuring. What do you sense in your spidey sense? And you've been watching these stocks for years and years now. What do you sense the contagion risk really is? Well, there's two separate stories here. One is the rising costs of deposits and the hit that banks are going to have from that and the hit to net interest income. That's a legitimate story.

And that's obviously going to happen. I've been joking about my mother taking money out of her. bank account and buying short-term treasuries. When my mother's doing it, that's a big story. But there's a separate story, a contagion story with Silicon Valley that's very unique to them. You know, they're part of the, I call it the innovation economy. They're part of the funding ecosystem for biotechnology and technology. You can look at sectors this week, like the S&P biotech index, the XBI. This is an equal weight index. It's down 10%. I mean, there's no other news out there other than this that's really pressuring this. So the question is, is it really too big

to fail for the innovation economy? Are they going to have to step in the government and try to make them whole above and beyond the deposit insurance? And if they don't, what's the impact on the innovation economy? What happens when tech entrepreneurs don't have any cash or don't have any money or don't have any interest? What does it mean for the innovation in the U.S. economy? And you could say, well, that's just too bad. But remember, these tech startups use huge amounts of service. from the much larger S&P 500 companies. So you can see like little pieces of contagion going on in companies that don't appear to have anything to do with this

simply because it's part of the whole food chain issue out there. So two very interesting questions here. Mike Santoli, who might take SVPs, SVP's place? I don't know if there'll be a single institution that would do it. This is about a 40-year franchise that kind of grew up alongside the venture economy and the tech industry out there. I mean, there's going to be plenty of other institutions that are going to be happy, if not certainly, to swallow up SVB and all of its liabilities, then to hire some of its people and try to kind of pick up some of those relationships. I think that the stock declines in some of those adjacent banks are largely because of perceived overlap in borrowers, in depositors.

If you can't get all your money out of SVB, you can, maybe you're going to be pulling it out of the other banks. And also, it's not great for the local kind of real estate and just in general, the liquidity of the area. So I don't know if anyone knows anything. One of the things we have to keep in mind in terms of market reactions is we have a case of the Fridays here. And, you know, if you remember at the extreme example, back in 08 and 09, Friday was,

uh-oh, what's going to happen over the weekend? What's going to surface in terms of things that we have known about? It doesn't mean something's there. It just means that we have to ask what if it is there. I guess on that note, Dom, the thing that makes this a little bit different from, you know, we all remember big failure Fridays and that sort of thing when that was going on for some time. But we didn't even wait for the market close here. No.

And there wasn't a buyer. And the really important thing, if I'm, you know, the Fed, if I'm regulators and I want to make sure that this stays a unique situation, is not to scare people in other banks who look at this and go, oh, I guess the people who got out right to have gotten out here. So you bring up an excellent point about the lessons learned during the great financial crisis, right? If you look at the way things have shaped up, when Mike Santoli brings up this idea of maybe, you know, what other banks are out there, who else could take them over, you remember that when there were these kind of takeovers, right? You know, Bear Stearns by J.P. Morgan, Wells Fargo with Wachovia slash First Union back in the day,

there were oftentimes certain problems that arose once those bank operations, you know, were taken over. You didn't kind of know what was really wrong with the bank until after you had to deal with them post your takeover. The lessons learned there right now are that you wait for the asset sale and then you try to pick up those pieces without having to assume the liabilities associated with some of those banks. That might be one of the reasons why you're waiting, or at least some of these possible other lenders who could be looking at assets for Silicon Valley Bank to wait for a little bit to see how the auction process plays out and see how the liquidation goes before they actually step in and kind of take some of these positions on, as opposed to what happened in the

great financial crisis? Apart from all of the circumstantial differences, and I'll ask you, Dom, since you're right across from me here, was the fact that this bank was so exposed to one sector of the economy? Was that the fundamental risk here? It was one of them. I'm thinking back, I'm thinking back to 1989, 1990, when SNLs and Texas banks and Arizona banks went bluey because they were so singularly exposed to real estate risk in Texas. You know, it gave rise to Gerard Cassidy at RBC's Texas ratio, right? Because he was looking at the financial solvency and the credit risk associated with some of these Texas lenders.

That Texas ratio aside, yes, there was a concentration risk in some ways. But it was also the business model geared towards this kind of higher risk funding for some of these types of companies. It's not that they weren't compensated for it. But as soon as the Fed started to raise interest rates in a dramatic fashion, that does a lot of things to change the capital structure of that particular bank, the value of the assets it holds to collateralize the deposits. And they had bought a ton of long-dated treasuries and MBS.

Yes, and those values come down. So what do you do? Now you don't have enough to kind of make good on the deposits that you have. So it's not that they don't have enough deposits to cover what they have. It's the fact that they are now in a situation where they may not be as well-caly. capitalized because of the... Well, they've taken a lot of their deposits, as most, as banks do, and put them into into investments.

Right. And those investments lost value over the last year. And that's why we have reserve ratios, right? Mandated amounts that banks have to hold in order to kind of do their lending activities. All I know is, I think this is just going to look worse over the weekend and the weeks to come that it does right now, unless there's a way to make sure that all these businesses are able to keep their operations going, retain the funds they had over that FDIC cap, make payroll. why would regulators let this happen?

Not because we aren't saying this is a failure of management. It is. That's fine. But you want to make sure this doesn't spread to other institutions where depositors perceive there could be a problem, and the precedent they've set today is not a good one. Well, the precedent is also, first of all, we don't know how things are going to go. This is not being perceived right now as a fire sale of SBB assets, all right?

In the FDIC even made allusion to the fact in their kind of statement about this, that there are over $200 billion, worth of assets at SIVB at Silicon Valley Bank. If there is an orderly disposition of those assets, everybody might be made whole. And there would be no issue whatsoever. The concern was during the great financial crisis when there was stress everywhere that you couldn't find a bid. And that when you did find a bid, it was 10, 20, 50 percent below where the other asset sale was. That's a fire sale. That means that people don't get made whole. But if you can get a decent amount, fair market value call it, for what you have right now, then there's a good chance.

everybody gets made whole in the situation. We hope so. It's a great point. We absolutely hope so in this regard. Guys, we'll leave it there. Thank you. Dom Chum, Mike Santoli, Bob Pisani. All right, let's stay with this topic and get to today's tech check. And let's get out west to Deirdre Bosa. Deidreck, take it away.

Hey, Tyler, great conversation there. And let's continue it with Upfront Ventures, Mark Suster, who joins us. Mark, thanks so much for taking the time to be with us today. Yesterday, you were one of the first and certainly one of the most prominent to tell the V-C community to not panic. What were you telling your portfolio companies? Did you advise them to stay calm and keep their money in SVB? Well, let me start with the fact that I don't believe anything was fundamentally wrong with SBB. What happened during the global financial crisis is banks were lending money to people who shouldn't have had money, but that isn't what was happening

here. I believe SBB was largely solvent, hadn't violated any of the banking ratios that were just talked about. What happened was a classic panic. everybody said race for the door, and then all of a sudden you're in a movie theater, people stampeding for the door, everyone trying to get out first. So what I think the feds did today was an important move. By the regulator stepping in, they stem the outflow of cash. And I believe, I don't have any inside knowledge, but I believe you'll see this bank purchased by the end of Sunday night or soon after.

Okay, Mark, as you said, everyone panicked. But when everyone was panicking, you were saying, don't, stay calm. What did you tell your portfolio companies to do? We believe that portfolio companies should have been diversifying where they hold their money in the first place. It's a message we've always given people. You should have money in multiple financial institutions and that diversifies your risk. I do not believe, we don't know, but I do not believe depositors are going to lose money. What we talked about it.

Yeah, go on. Sorry, Mark. They may not lose money in the long run, but for cash burning startups, some of those in your own portfolio, timing is of the essence. They have to make payroll. What do you tell them, especially the ones that didn't take their money out? I mean, there was a big scramble yesterday, and you were voicing to hold steady. In retrospect, do you take any responsibility for not telling your startups to get their money out? Deirdre, if you're in a movie theater and it's not on fire and you yell fire and everyone races out, are you the person congratulating yourself that you got out first while other people are laying on the floor? I think right now that what, What's going to happen is depositors are going to be made whole. We are in a problem over the next week, which is there's a period of time where people have payroll to meet and may struggle to make payroll. So we're all going to try and help portfolio companies get through this.

Most sound VCs were giving the exact same advice to portfolio companies that I was. And I know that because I was on industry calls where they were saying that. So listen, end of day, we all in our country have a vested interest in this thing quieting and the contagion not spreading. Okay, you talked about the quality of assets at SVB Bank. It's, of course, a storied name. It's been around for decades, hugely respected here in the Valley. But I wonder, did it deserve that much respect? Did they get complacent in an era of easy money and the tech boom that we've seen?

They have loans to wineries, to innovation economy influencers, 9% of their loans. The repayment was dependent on borrowers' ability to fundraise or else. exit. This is a problem that we've been seeing going on in the market for a year now. Why did they wait so long? Can you really still say at this point that they were doing everything right risk-wise? I didn't say they did everything right risk-wise, to be clear. But let's put things into perspective. Their loans, the wineries are stub 2%. They are based in Silicon Valley. They've been doing that for 30, 40 years. That's not what happened here, Dirdre. What happened was they bought long-term bonds and long-term treasuries that were yielding 1.25 percent.

and the Fed raised money. They raised the interest rates. And the interest rates now will yield you north of 5%. Let's call it 5.15%. So what they tried to do was sell their long-term positions, take a $1.8 billion loss. And then by short-term positions, if people hadn't yelled run for the door,

it would have been fine. They were going to shore up their balance sheet. They had $500 million committed from General Atlantic. And they were in a quiet period because they were trying to raise $2.25 billion. But, Mark, startups are not long-term depositors. So why were they buying long-term treasuries and not shorter-term ones? Listen, SVB understands the normal orderly outflow of cash from their business.

They've been doing this for 40 years. They did not have a risk unless everyone ran for the door. What any sensible bank does, every bank, they take deposits and they make money on those deposits by lending them out at higher rates. What SVB did is they put them into very secure things, treasury bills. It just happens that the interest rates went up. That would have cost them money. They would have lost money on that.

But their business was sound. It's only running for the door that started to hurt the SVB. And regulators stepped in today to stem the outflow so that a purchase and orderly purchase can be made this weekend. I'm pretty sure that's what's happening. So, Mark, the lessons are always learned in retrospect. One thing I would say, though, they were not in Treasury bills. They were in long-dated Treasury securities, as I understand it, and mortgage back security. It wasn't like they were in six-month, 12-month bills. That's number one.

And you said that the real exposure here was when everyone ran for the exits at essentially the same time, when the depositors did. Run me through one more time. What was it? What was it that caused those depositors to hit the eject button in such a flurry all at once? What was the proximate cause here? Was it concern about the other, the crypto lender that was going to liquidate? What was it that triggered it? So first of all, let me say you are correct. They had U.S. treasuries, but not T-bills, because T-bills are shorter term, but they had U.S. treasuries that were longer term.

But let me say this. I think what happened, and we'll only know through history, is some prominent VCs started telling their portfolio companies to pull their money out. The reason that they were saying that is, first of all, it may have been the crypto bank that went under. But I think more likely the fact that SVB said they were outraising capital $2.25 billion and people were worried, uninformed people were worried they weren't going to have access to cash. So VC's rushed to tell their portfolio companies to head for the door. Most VCs did not do that. I want to be clear. But enough of them did it. And SBB, because they were in

a quiet period, couldn't speak up. And as a result of not speaking up, panic ensued. And it ensued in less than a day. Very interesting. Fascinating, a story, a screenplay, whatever it's going to be. Deirdre Boza, thank you very much. Mark's sister, thank you as well. Thank you. What a day. What a weekend. Coming up, fallout from Silicon Valley Bank, being felt in the bond market. Take a look at what's going on with yields. We have the tenure down at least 20 basis points, down like 30 this week. There was a big jobs report out today. Should have had them going the other way. Maybe. We'll dig into it and talk about how it's all affecting the financial markets coming up.

As we head to break, let's also look at shares of Apple. Tim Cook saying today at the annual meeting that they continue to plan for dividend increases. Apple yielding less than 1% right now, and the shares down 1.5%. We're back in a moment. All right, nervous investors buying bonds today, sending yields down. Rick Santelli in Chicago for us. Rick, explain it. Yes, and maybe let's start with the most aggressive maturity, the two-year note.

And if you recall, two weeks ago to the... it closed above its fall high yield at 4.725%, which really kicked off a lot of aggressive selling pushing yields higher, and it even dragged the three-year note this week above its fall high yield closed. Well, not anymore. If you open the chart up, you can see that early November high yield at 4.725, we are now well, many are saying, well, it doesn't really matter because this is a flight to safety. It's different.

Yes, it is different, but it does matter. If we close below a key level, technicals kick in. Now, at 460 current yield, we're down 27 on the day, 26 base points on the week. HYG, high yield ETF, LQD investment grade over the last three days. See the differentiation there? That's important to pay attention to. And if we look at the dollar yen, usually the yen is a safety trade, and it's definitely that way at this point.

Look at the dollar dropping. Granted, it's coming off a three-month high. And finally, the dollar index, as you can see there, the dollar isn't where everybody's going, even though they are going into treasuries. And one thing I will say, you know, being an alma mater of Drexel Burnham-Lam-Lamberr, that it's not about how many assets you have or how big your balance sheet is. It's about how high-quality, liquid assets you have, because when things get ugly, it's liquidity, liquidity, liquidity.

Ellie, Tyler, back to you. Rick, thank you. For more on what we're seeing in the bond market and what it all means for the economy and the Fed, we're joined by Gilbert Garcia, Garcia Hamilton and Associates owner and CNBC contributor, along with Lindsay Piagsa, who's People's Chief Economist, welcome to both of you. Gilbert, I'll start with you. Give us some kind of real world wisdom here.

You know, there's some people talking about his 50 basis points for the Fed on the table as a cut in the wake of this. You got any sense about what's going down here? Sure. First and foremost, thank you for having me. I think the Fed would be making a big mistake to be raising rates at all anymore. You got to go back in time. When we were back at this point of inflation, back in the fourth quarter of 21, we were still doing quantitative easing. We were still doing all those things with inflation with just where it is now. And here it is, it's back. And here we are tightening money. We got quantitative tightening, money supply growing, negative growth. I think they should stop raising rates now and let the economy settle. It was inevitable that they were going to break something. And I think this could be just the tip of the iceberg. Lindsay, react to what Gilbert just said provocatively there. Well, I think I'm going to take the other side of the coin. I don't think today's events are going to impact the Fed's policy decision in just about two weeks time now. As long as the Fed views this as an isolated event and not an indication of a broader trend of contagion or crisis in the financial

And assuming the former, I do think, coupled with this morning's employment report, the still hot level of inflation, the Fed is going to continue to raise rates. And in fact, looking out to next week's CPI and PPI report, if we do see a hotter than expected number, the Fed is likely to keep the door open for an even larger 50 basis point increase. Well, let me, let me press a little bit because Gilbert's point is an important one. And that is that there are often unintended consequences of policies, whether they're monetary policies or fiscal policies or whatever. And here may be one of those unintended consequences, i.e. that banks or other investors who bought Treasury securities or other securities at low interest rates are now finding that the value of those assets on their balance sheets have been cut very, very dramatically. And that puts them in some cases, in this case of SVB Bank, in a truly precarious position. So speak to me about that and how sensitive the Fed may be to the idea that, oops, here's an unintended consequence that could be rather more, I don't mean to say systemic, that may overstate it, but more widespread than just one isolated incident. Well, I think maybe I would push back on the notion of unintended consequence.

The Fed is well aware of what they're doing and the consequences that are likely for not just financial markets, but businesses and consumers alike. And so the Fed has been very clear that as they continue to raise rates, again, they have been communicating this to banks, to financial institutions, to the markets. And so they're trying to get us well positioned to anticipate this further back up in rates. But they've been very clear that not only is a period of pain likely, but it's necessary to get price stability back in place. You don't seriously think they wanted a bank as big as Silicon Valley with as many business customers as it has. You don't seriously think they wanted it to fail. No, certainly not. And that's not their intention to cause further bank failures at this point either.

But we do have to be cognizant of the limitations of Fed policy. The Fed, again, has been communicating to these institutions that rates are. going higher. So it's not on the Fed to handhold risk management of individual financial institutions. It's their proxy to reinstate price stability and ensure maximum employment. Let me close that. Button that point off and go back to Gilbert. Lindsay makes a good point there, does she not, that it's not on the Fed to guide the risk management policies of individual banking or other kinds of institutions. And they've been really clear, he points out. They've been clear. We're raising rates, man. We're taking them up to 5%. And if that

cuts the value of your bonds by X percent, that's all. That's on you. You've got to be nimble enough to move and redeploy. I don't agree that they've been clear. I think if you look, remember the old, we're not even thinking about thinking about raising rates. And here we were, we already had inflation at 5, 6 percent in the fourth quarter of 21. And they were still quantitative easy. And I think they clearly now recognize they've made a mistake. I agree with that. But really, over the past year, you've got to say they've been bloody clear. I mean, hold that thought.

Because at the end of the day, I think what is important about this failure, number one, is its size and its magnitude. This is not an everyday failure. This is not like a small business closing. This is significant in the financial system. And what makes it more significant is the mere fact that about 60% of their assets, were private assets. And if for some reason that would trigger a mark-to-market of private assets throughout the system, that could be devastating because of the amount of private assets that we have in the marketplace today that are not marked to market. But Tyler, if I could real quick,

I think the real key here, it all goes back to money supply. They flooded the system with money, in two year-over-year grew it almost 30 percent, and now it's growing negative. And nothing good happens when you have negative money supply growth. It is inevitable that a recession will come, and you see it with all the forward indicators. Why they're fixated on employment, which is a lagging indicator, in my view, is a mistake. They should be looking at the shape of yield curve, money supply growth, other leading indicators. They're all saying red hot to stop raising race. Just look at the inverted yield curve, which is almost 100 between two to bonds. Anytime we've had that type of inversion, of course it's going to put extraordinary stress on the banking system.

All financial institutions. And so in my view, they should slow down, they should stop raising rates. Inflation is already moderating. And I think they should get out of their mind this concept of we got to get to two. We got to get to two. And my view is they're going to wreck the economy to get there. Clearly put, really a good conversation, Lindsay and Gilbert. I thank you. We'll have you back soon. That was good. That was fun. Enjoyed it. Thank you. Enjoyed it. All right. Still to come. It's an engaging day, isn't it? It is.

Kel. More on the markets and the economy. The jobs report showing the labor market is still strong. Clean energy, one industry, seeing a big boom. But are there enough workers? That story is next. Welcome back to Power Launch, everybody. On this Jobs Friday, we look at where the jobs are, and there are a lot of them in clean energy, but not enough workers to fill them. Pippa Stevens joins us now with those details. Hi, Pippa. Hey, Tyler. Well, jobs in the clean energy space are booming on the heels of the Inflation Reduction Act. In the six months since the bill passed, more than 100,000 jobs have been created, according to data from climate power. That's because we've seen a wave of factory announcements, including for solar panels and electric vehicle batteries, and these

new projects come with new jobs. In terms of where the jobs are, we've seen additions across more than 30 states, with Arizona, Georgia, Kansas, and Tennessee. see seeing the most. Types of jobs include everything from specialized sciences to mechanics, construction workers, and electricians. Moving to a greener grid means an overhaul of current systems, and some are warning that electricians specifically are in short supply. Here's Michelle Hicks from Schneider Electric. No matter where you go, you see that electrification is everywhere. I mean, look at the need for EV vehicles, right? So we are estimating 48 million homes are going to need upgraded energy panels over the next few years.

So really, where are the electricians and where are the installers to do that? We have to do a lot of outreach to get people into this industry. She said it's both about retraining existing workers as well as educating young people around new opportunities. But Hicks added, there is interest from workers in other industries, including the oil and gas sector. Guys? And that may help explain why construction employment, for instance, holding up relatively well,

even with what the housing market's doing. Fed Titans fiscal gives. Pippa, thank you very much. Pippa Stevens. Let's get to Sima Modi now for the CNBC News Update. Cima. Kelly, good afternoon. Here's what's on our radar. Large areas of northern and central California are covered by excessive rainfall alerts and floodwashes as another Pacific storm comes ashore with heavy rains. It's being fueled by what meteorologists are calling an atmospheric river, a stream of dense subtropical moisture coming from the warm Pacific waters around Hawaii. Florida Governor Ronda Santis is not a presidential candidate yet, but he's increasingly looking like one. Today he's in Iowa signing copies of his new book and promoting what he calls his freedom blueprint. Eleven months before GOP voters in the state will decide who they want to be the party's nominee. And tomorrow, American skier Michaela Schifrin will be trying to set a new record with her 87th career World Cup win. Her 86th win today put her in tie with Sweden's Ingmar-S Denmark, who has held the title for the past 30.

34 years. Kelly and Tyler. Wow. Seema, thank you very much. Still to come on Power Lunch, we're looking at the regional banks down as a result of SVB's demise, but we'll speak to an analyst who says this is not contagion and recommends some of them as a buy. We're back after this. Welcome back. The regional banks are under a lot of pressure, as you can see, following the failure of SVB financial.

Despite that bank collapsing, our next guest is upgrading Key Corp to outperform today, saying the SVB problems are unique. joining us on the phone, the analyst behind this call, David George, he's the senior bank analyst at R.W. Baird. David, it's great to have you here. Welcome. Hi, good afternoon. And in some ways, we're coming full circle this week because it was Key Bank on Monday that sent the regional banks lower when it took down its guidance for net interest income and what it could make from that this year. There's a lot of headwinds facing the banks on the asset side, on the net interest income headwinds. You're not changing your stance despite what we see playing out today? I'm not. I actually would say, and again, thanks for having me.

That's the, with the stocks down today, I think it's providing probably one of the best buying opportunities for regional banks since the COVID lows. Again, just to give you some context, we don't cover Silicon Valley banks, but this bank grew fourfold during the 2021 and 2022 timeframe. As a result, they had over 160 billion of their 200 billion in deposits over the $250,000, $250,000. limit. Keep in mind, Silicon Valley only had 17 offices. If you were to contrast that with most of the regional banks, many of them have an average deposit size per branch of just 15 to 25 million per branch. So from our perspective, it's just not something that is really relevant and should not be construed as a meaningful read-through for a lot of these regional banks. I should add, and we appreciate you're joining us basically in the airport right now as you're trying to move through. No, no, no. We do appreciate

And I want people to hear what you're saying about the difference maybe in business models fundamentally. That said the market, David, is looking to banks that have, for instance, a high share of uninsured deposits and worrying that those are going to be flighty. And are you concerned about your coverage space in that regard? We're always mindful of liquidity. And liquidity, as we learned during the crisis, is obviously paramount and of the utmost importance. But again, the other thing I should mention, Kelly and Ty, is, Silicon Valley was not a party to the stress test or the liquidity coverage rules that govern essentially the top 25 to top 30 banks, including key fifth, third, regions, CFD, etc.

So this is something that regulators have been testing for for the last 15 years. So it is something we're obviously keeping an eye on. But again, the lower the stocks go, and it seems counterintuitive, but the lower the stocks go, in our opinion, the less risky they actually are. So, again, we think it's an opportunity. Do you like these stocks as a group, in other words, as a kind of index fund play, or would you be more selective? And if so, tell me which ones or how to separate the wheat from the chaff here, the ones that might have a little more liquidity risk or business risk from those regionals that do not. Yeah, it's a fair question.

I would say, Tyler, that given the move down in the group, I think the entire group is particularly attractive. I think there's been pronounced weakness in a number of the regional banks that you mentioned, Comerica, 5th Third, Huntington, PNC, M&T Bank. We think all of those are super attractive here. The valuations are as low as they've been since the COVID lows. And we think over time, these business models are going to prove to be very resilient. And again, their customers are not big VC funds. Their customers are Main Street customers, small businesses, consumers. The average checking account for most regional banks is about $4,500.

Not a million to $2 million like you saw at Silicon Valley. So I think it's important to really differentiate the liquidity profiles and the funding profiles of these banks when kind of making blanket statements like many in the media are making. David, would you comment finally on the securities portfolio, some of these. So if we look sort of say, okay, they only have 4,500 in deposits on average. Maybe that stickiness isn't a risk. But at the same time, if they forever, whatever reason, need to raise funds, will they have to turn to their securities portfolios where they may also be facing some haircuts? We don't think so. We expect bank management teams to start to manage these

balance sheets even more for economics. And if it doesn't make sense to make loans on a profitable basis, I think you'll see maybe loan growth a little bit a little bit. Many of these banks have the ability to access the federal home loan bank as well for borrowing. So it's not really something that we're particularly concerned about. Obviously, we're keeping an eye out for deposit trends, and certainly there's heightened competition for funding. That's something that I think has been out there in the market for some time, but it's just now finally coming to the forefront given the failure of Silicon Valley today.

But the answer to question, it's not something that we're particularly concerned about. Again, given where the stocks are trading, many of these are trading. below their tangible book value today. David, thank you very much for joining us, joining us from the airport. Hope your flight leaves on time. David George, appreciate it. And more on the markets and SVB next. We'll be right back. Welcome back to power lunch. The shutdown of Silicon Valley Bank has Wall Street on edge. The banking sector putting pressure on stocks today. Our next guest expects stocks to test the October low of 3650 on the S&P 500. Let's bring in our friend and CNBC contributor Michael Farr, Chief Market Strategist at

High Tower Advisors. Michael, good to see you. I've rarely seen you quite as cautious as I sense you are right now. Among other things in my note, you say not going into a recession would be unprecedented. A few moments ago, Gilbert Garcia said fundamentally the same thing and urged the Fed to stop raising interest rates right now. Do you see it that way? Do you think the Fed will stop raising interest rates? Do you think they should in light of the fact that you view a recession as the sort of base case? I think that when you look at the data, Tyler, and this isn't me just holding my

finger in the wind when I say these sorts of things. I've been doing this for a long time, as you know, when you look at the data that says, look, every time, 100% of the time we've seen an inversion of any part of the yield curve versus the 10 year right now, we've gone into recession. And a lot of other factors also say recession. So if you were going to Vegas with like eight of your historical indicators saying 100%, it's going to be red, would you actually bet on black? You know, I mean, probably not with your own money, even though you don't like to be negative. So if, in fact, all of the... of the data does argue for a recession. I think it's a reasonable expectation. Also, recessions

are normal. Economies contract and they expand. I think that the Fed is still trying to tighten rates and what should they be doing is a much tougher call. Because the one thing every Fed governor will tell you over and over again is we don't want to make the same mistake twice. The Federal Reserve of all of its things that it wants to do is never make the same mistake twice. They backed off too early in other cycles and it's been kind of disastrous leading to runaway inflation. Powell doesn't want to do that. They're going to stay with it.

Now the question is, should they? Have they done enough? And knowing that a Fed intervention takes about 12 months before you see the results in the economy, there's a very good argument to be made to say that they should pause in here and wait a couple of months and look at the data again.

Given the current inflation data that continues to hammer, particularly the jobs data and low unemployment, they feel they need to keep with it. So it seems to me that they're going to keep with it. That's going to be the excess in this cycle, and that's going to be the cause of the recession, and that's my reason for caution.

All right. We're expecting a little bit of a news break here shortly, but I want to get one more question in regarding Silicon Valley Bank and whether you see its demise as potentially a systemic risk, that there could be some contagion. A lot of investors today are thinking, 2008, here we co again. Yeah, I don't. This is very different. This is not an

asset problem. This is not a credit issue. This is an interest rate issue. This is a concentration of a certain type of tech, volatile, fragile kind of an investment investor base. I've gone through my other banks. I own PNC and I own Truist. I see Truist down today. The coverage ratios at Truist are very, very different. These people had 60% of their assets and securities.

27%. Lots of liquidity, very different animals. So while I think there's something of a canary and a coal mine, you raise rates this much, something's going to break. This was probably the most fragile bank out there. And when you look at the other banks and you listen to the last Baird analyst David was just on, he's coming out with some buy recommendations. I think you look at a truist and some others. There's some value to be here, found here, as the prices are getting beaten up today. I believe it's unrelated. This is an interest rate issue. not a credit issue. This is not 2008. Michael Farr clearly stated. Thank you very much. Always great to see you, sir.

Thank you. Thank you. Bye. You bet. And more power lunch right after this. Stay with us. Welcome back some breaking news. The government, federal government, is starting to take notice of the SIVB fallout. Kayla Tausci joins us with the story. Kayla, what's happening? Well, Kelly, Treasury Secretary Janet Yellen convened financial regulators this afternoon specifically to discuss the situation. around Silicon Valley Bank in a statement that we just got from Treasury.

Janet Yellen, the Treasury Secretary, said that she met with the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency, and said that she has full confidence in regulators to take appropriate actions around the bank, that the banking system, in her words, remains resilient, and that regulators have effective tools to deal with this situation. It comes just a few hours after she appeared on Capitol Hill and went out of her way to tell lawmakers while testifying on the federal budget, that she knows that the Treasury Department is monitoring the situation

at SVB. They're monitoring it closely, but that at this time, you know, she feels confident in the financial system. And we should also note that on the note about the tools that regulators have in this situation, the FDIC after the last financial crisis made banks go through a process to design what we call living wills, or essentially if a bank were to go belly up, how would its assets get wound down? Now, that's what you can imagine the FDIC is pouring through behind the scenes, trying to separate out, separate out the good and the insured assets at Silicon Valley Bank from the bad assets, the underperforming assets, or whatever deposits are uninsured.

And then if there's enough to sell the good portfolio of assets, perhaps they might still pursue that path. But that's what regulators are doing behind the scenes, combing through those assets. And they essentially have a roadmap from the bank because of the regulations that were put in place the last time around. Tyler and Kelly. You know, it's interesting. It takes me back to 2008 when we had the idea of separating the good bank

from the bad bank. And in that case, I suspect the differentiation between the good assets and the bad assets may have been a little bit simpler because it was a lot of garbage-backed securities in those portfolios. This is a case where, if I'm understanding it correctly, the bad assets were long-dated U.S. Treasury securities, and they were bad because they lost value

because interest rates went higher. Yes. Well, certainly there was that big portfolio of U.S. treasuries that the bank had sold at a $2 billion loss, forcing the bank to sell shares against it, to shore up its capital levels. And we're still reporting out exactly what the catalyst was that got the bank to make that sale in the first place. Was it regulators raising questions? about the bank's capital levels, or was it the bank itself looking at its own balance sheet and saying, we can't announce another quarter of earnings and have these numbers look the way that they did? That's what we still need to know at this point, Tyler. And certainly, you know, we'll need to know more about what's under the hood and exactly who the bank was lending to,

what some of these underperforming loans looked like and whether they had exposure to other industries, specifically like crypto, where some of that exposure could be a little bit more troubling. That was the crypto exposure was the one in the other bank there, Silvergate that liquidated, that certainly is not totally unrelated to this one, but a different case. Kayla, great to see you. Have a good weekend. Sure. You too. All righty. That's it. What a day. What a day. Another hour to go and then a long weekend.

Yeah, that's right. It may be a long weekend. Thanks for watching Power Launch, everybody. Closing bell with Scott Watmner starts right now.