March 11, 2023
Bank failures are like buses: You don't see one for ages, and then two arrive at once. This week's were broadly foreseeable, but still came as a surprise to the markets.
- In this week's newsletter, I talk a bit about both Silvergate and Silicon Valley Bank — and also about using housing as a funding source for retirement. It's 1,467 words, a 5.5-minute read.
1 big thing: Crypto's bedrock implodes
The implosion of Silvergate Bank is an existential event for what remains of the crypto ecosystem. Silvergate underpinned almost every American crypto company; without it, it's hard to see how the industry can possibly thrive.
Why it matters: If Silvergate didn't exist, it would have been impossible to invent it — regulators would not have allowed the creation of a de novo crypto bank in the past, and they certainly don't seem minded to do so in the future.
The big picture: Substantially all of crypto is based on a fundamental assumption that various coins, including bitcoin, are worth money. Which is to say, they can be traded, in meaningfully large quantities, for real dollars.
- In order for that to happen, crypto companies like Coinbase need a place they can hold dollars. For most U.S. crypto companies, that place was Silvergate Bank, both because it was very friendly to the industry and because very few other banks wanted to bank such operations.
Where it stands: Now that Silvergate has announced it is entering voluntary liquidation, there is no other U.S. institution that can realistically take its place. Silvergate's only real competitor in the space, Signature Bank, has already announced that it is deliberately — and rapidly — reducing its crypto-related deposits, rather than seeking to increase them.
- Bank regulators have repeatedly made it clear that they don't trust crypto and aren't likely to smile on banks that embrace the industry. That's one reason no larger savior has stepped in to rescue Silvergate, or at least take over its formerly valuable banking relationships.
- Even Silvergate only really managed to achieve its position as a regulated crypto bank through historical accident. It was founded in 1988, long before any cryptocurrencies were invented, and its crypto business, which started in 2013, grew organically in a way that was hard for regulators to stymie.
Reality check: Many crypto companies, including the largest crypto firms in the world, have found it almost impossible to meaningfully incorporate in the U.S. at all.
- Basing themselves in friendlier foreign jurisdictions, however, doesn't mean they're beyond the reach of U.S. regulators.
- The dollar is internationally ubiquitous, and everywhere there are dollars, U.S. financial regulators aren't far behind.
Between the lines: Crypto true believers tend to mistrust regulators and the dollar. But that in turn only reinforces the tendency of regulators to want to get involved.
What they're saying: "In the absence of regulatory compliance, customers don't have the information they need to assess and mitigate their risks," said Federal Reserve vice chair for supervision Michael Barr on Thursday.
- "Investors do not have the structural protections they have relied on for many decades. As a result, many have been victims of classic cases of fraud and abuse."
The bottom line: Crypto will remain little more than a wild-west financial outpost in the absence of a steady and reliable connection to the U.S. financial system. Silvergate was that connection. Now it's gone.
2. How SVB's rescue plan backfired
On Thursday morning, Silicon Valley Bank (SVB) had a plan to shore up its balance sheet. Clearly, the plan didn't work.
Why it matters: When SVB announced a plan to raise $2.25 billion of fresh capital on Thursday, it should have put worries about its solvency to rest. Instead, it precipitated a run on the bank, which has now been nationalized and is being run (at least until Monday, and possibly for much longer than that) by the FDIC.
The big picture: The now-defunct capital-raising plan involved issuing two different classes of stock, with pricing meant to take place after the close of trading on Thursday.
- The dilution of existing shareholders was therefore unknown. SVB planned to issue $1.75 billion of new common stock, for instance — which would be 8.75 million new shares at $200 each, or 17.5 million new shares at $100 each, or 44.5 million shares at $39.27, which is the last pre-market price at which the stock traded before it was suspended on Friday morning.
- The lower the share price, the greater the dilution. So when the stock started falling, the deal looked increasingly bad for SVB, putting extra pressure on the stock.
- Eventually, a distinction started being drawn between SVB Financial Group, the bank holding company that also has substantial outstanding liabilities, and Silicon Valley Bank itself. Even if the latter retains real value, the holdco could easily be insolvent.
Between the lines: It wasn't just stock-market investors who were fixated on the SVB share price. Depositors were too, especially given that Silvergate had announced that it was liquidating just one day earlier.
- Because SVB was now in the middle of a securities offering, it considered itself to be in a "quiet period" where it couldn't communicate anything substantive to depositors, investors, or the press beyond what was in its SEC filings.
- So the only real up-to-date information that depositors had about the health and viability of the bank was the plunging share price — and the ever-growing number of stories of other depositors pulling their deposits.
Be smart: Only a small handful of U.S. bank depositors have lost money in a bank failure in living memory, even when they had much more than the FDIC maximum on deposit.
- Still, the cost of moving money to a different bank, even if only temporarily, was tiny — so a lot of people did it. That's a bank run, and a bank run is an existential crisis for any bank.
- SVB CEO Greg Becker then did his bank no favors when he told customers to "stay calm" on a call, while also conceding that they were "starting to panic." Such talk has broadly the same effect on the market as it does on your spouse.
The bottom line: Between dilution worries and bank run worries, the share price just couldn't find a level at which there was any real buying interest — let alone enough buying interest to support a $2.25 billion share sale. So it just kept going down, deposits kept on flowing out, and eventually, on Friday, Silicon Valley Bank became the largest U.S. bank failure since the global financial crisis.
3. When your house funds your retirement
When Americans retire, they often move from expensive areas to cheaper ones. That frees up home equity that can rival or even exceed retirement funds held in 401(k) plans and the like.
Why it matters: People still need a place to live in retirement and rarely take advantage of reverse mortgages to get money out of their homes. Moving somewhere cheaper, however, is much more common.
Be smart: The people buying in expensive cities and states are the younger generations who want to live near good schools or high-paying employers. The cash they're borrowing in the mortgage market is being turned into retirement money for older Americans.
By the numbers: About 80% of Americans over the age of 60 are homeowners, per a new Vanguard report entitled "Home is where retirement funding is."
- By relocating, the median American over 60 can unlock about $100,000 of home equity — and even more if they downsize at the same time. That's a meaningful sum given that the same median American retiree has about $223,000 in financial retirement accounts.
Where it stands: About 25% of U.S. retirees sell their homes and relocate to somewhere cheaper over any given 10-year period, per Vanguard's Kevin Khang, one of the authors of the report.
- That doesn't just free up cash; it also reduces their day-to-day living expenses.
How it works: Let's say a homeowner sells her house in Denver for $600,000, and moves to a similarly-sized house in Florida costing $400,000. That means she's cashing out to the tune of $200,000 — 50% of the value of the new home.
- In fact, in 2019, that ratio averaged 73% in Colorado, up from just 12% in 2007.
- "Given what happened to housing values in Colorado during the pandemic, it's very likely that this number is even higher now," says Khang.
- Other states with lots of cashing-out potential include California (77%) and Hawaii (116%). Importantly, the cashing-out figures include moves within the state, not just moves to a different state entirely.
The bottom line: High housing prices are not the reason why younger Americans move to expensive cities and suburbs. But "when you’re retiring, you’re hyper sensitive to retirement resources," says Khang.
- For older folks who moved to expensive neighborhoods when they were younger, those resources often include their home — which can prove to be a source of substantial liquidity.
4. Building of the week: Inagawa Cemetery Chapel, Japan
Inagawa Cemetery Chapel and Visitor Center, just outside Osaka in Japan, was designed by English architect David Chipperfield in 2018.
- The chapel, lit by indirect light through two large windows on either side, is cast in simple pigmented concrete.
Chipperfield is this year's winner of the Pritzker Prize, architecture's highest award.
- The announcement praises him as being "radical in his restraint."
Many thanks to Kate Marino for editing this newsletter, and to Lisa Hornung for copy-editing it.