Emotion, fear and innuendo: A look at last week’s bank failures

Last week, both Silicon Valley Bank (SIVB) and New York-based Signature Bank (SBNY) were shut down by regulators. According to a joint statement issued by the Federal Reserve, Treasury and Federal Deposit Insurance Corp. (FDIC), all depositors, even those over
FDIC limits, will be paid back in full. SIVB had $209 billion in assets, making it the second-largest bank failure in U.S. history, behind Washington Mutual, which failed in 2008. SIVB was apparently invested in longer-maturity securities that experienced losses as interest rates increased. 
While most banks have thousands of individual clients, each with their own unique needs, SIVB’s client base, while in the thousands, were placed primarily through just three venture capitalist (VC) firms. When the VC firms told their clients to get out, after liquidity fears, there was literally a run on the bank for their deposits. U.S. equity markets were down about 5% last week.  
It is important to note that the economy is in a very different place today than when Washington Mutual failed in September 2008. In the three months leading up to the Washington Mutual failure, the economy lost more than a million jobs. In the three months leading up to the Silicon Valley Bank and Signature Bank failures, the economy added more than a million jobs.
What else is different? We are in a place where emotion, fear and innuendo are driving the markets. Recall the meme stock mania with GameStop and AMC? Social sentiment is driving a cult-like following for many investments, including certain types of cryptocurrencies (SIVB’s bank run was partially fueled by Twitter posts).  
Online communities and social media platforms can single handedly drive up a stock or completely destroy a company. Fundamental metrics for measuring a company’s future potential and long-term investing strategies have been stomped on for get rich quick schemes.
This isn’t anything new; behavioral finance identifies this bias as overconfidence. Investors who are blinded by their or someone else’s belief causes them to miss critical red flags in order to participate.
None of the above constitute a sound investment strategy. There are always and will always be powers outside of our control, but a sound financial plan, aligned with a sound investment strategy can serve to insulate you and your family from many of these outside powers.  
A few principles to follow when banking: Do not keep more than $250,000 in any one type of account registration at any single bank; make sure any “excess” funds in cash are either in a money fund or a high yield savings account. Additionally, if the cash isn’t needed for
expenditures in the short-term, look into high quality CDs or short-term treasuries to obtain a better return on your cash.  
When investing, diversification, strategy and measured risk should be your guide. Innuendo, fear and negative emotions cause most rational people to second guess, to react and follow the crowd.   
With a sound investment strategy, you have a lens with which to evaluate all of the noise and chaos that surrounds us on a daily basis. When you hear something and you feel those butterflies in your stomach, ask yourself these two questions: Does this particular event impact my financial goals? Should my investment strategy change as a result of this news? The answers will help to frame a thoughtful response and keep you and your family on the path towards financial success.  
Stephanie W. Mackara, JD, CDFA, is president and wealth advisor with Charleston Investment Advisors LLC and author of “Money Minded Families, How to Raise Financially Well Children,” available on Amazon. To learn more, charlestoninvestmentadvisors.com.

Daniel Island Publishing

225 Seven Farms Drive
Unit 108
Daniel Island, SC 29492 

Office Number: 843-856-1999
Fax Number: 843-856-8555


Breaking News Alerts

To sign up for breaking news email alerts, Click on the email address below and put "email alerts" in the subject line: sdetar@thedanielislandnews.com

Comment Here