What the Silicon Valley Bank Collapse Means for Average Businessman, Real Estate Owner and Consumer

photo I was asked by the Lakewood Scoop to explain what happened at Silicon Valley Bank what are the ramifications what led up to it and what this could mean for me and you so I want to give one disclaimer I'm not a financial financial advisor I'm just a simple person that's reading the news just like you are no inside information and please don't take any advice from this um video to make decisions on it's just more education and then do your own research before you make any decision and consult with the Financial and Professional people that are in your field to give you the advice so what's important to understand how the bank went under is how does a bank make money what does a bank do in the simplest of forms a bank borrows money from us the public collectively we could put a hundred million dollars into a bank now the bank has that money and they're paying let's say two percent they have to now recover that two million dollars they're paying out so what they do is they lend that money out to other people in the simplest form they don't have to lend it just to real estate they claim it on cars they can limit on homes they can run into real estate they could lend it to businesses they could do all different types of things with that money every Bank decides what they want to do with their money and the whole goal of the bank is to make sure that they have enough money um enough profit coming in from the loans that they're collecting that they're making out to cover their overhead and the deposits from all of our money cumulatively there's certain regulations put in place to make sure the banks don't do crazy loans that's why when you want to borrow money on your house or on a business or on a car or on something there's a loan to value the different types of things there's a higher lower loan to value there's different that service coverage ratios the different protective measures that a bank makes sure that are put in place to make sure everything is fine typically they care for two things the first thing they care for is to make sure that the value is going to maintain there so that if God forbid that asset that they lent against had to be sold it could cover and number two there shouldn't be any stress there shouldn't be any issue during the life of the loan there's men of cash flow coming in on a monthly basis to go to make that loan that 100 million dollars using that same example and in the case of Silicon Valley Times that to bring up 200 billion about the number of the Hat of deposits they don't keep in the bank they have to put it out to good use the government requires them to keep a certain amount of that money in cash in the bank that they can't lend out so they're paying interest to us depositors but they can't lend it out they also have to have a certain percent in liquid assets which means they could invest in things that at any minute they could go ahead and sell it for cash treasury bill is a good example for that other things that the bank that the government will make them do is also the government can give them the Lawns that they could get borrow money from the Feds all of these things together is how Bank operates in the simplistic form as Warren Buffett's I think it's Warren Buffett who said you don't lose money until you actually sell meaning if I buy a stock today and the stock is trading at ten dollars and then next year goes down to nine but I don't sell until it's 11. I never lost money while I was at nine on paper I could have maybe lost money while I was at nine but then I actually lose money in the process my actually down no it's what you buy versus what you sell the interim could just be a paper loss every once in a while though a person has to do what's called Mark to Market because when you walk into a bank and you want to borrow money as a mortgage broker I work and I talk on behalf of a client I tell a bank the building is good but you chose to trust this client you know how rich this client is this client is worth a hundred million dollars so just in case this building has an issue don't worry this person is strong enough to cover but what would happen if that person had all their money God forbid in a stock like Silicon Valley that person is not worth zero so that's obviously because it's sold to close down but what happened along the way which is the issue that happened right now with Silicon Valley one of the big issues with banks happened right now what happened Silicon Valley happening to many banks right now is on paper they have to mark to Market some of their losses potentially real estate owners I'll get to that in a minute have a similar type of an issue so let's go with it means to Mark to Market the 10-year treasuries which were were paying out a yield of about two percent two percent so that means if you if you if you gave if the government if the bank took the whole hundred million dollars that we gave the bank and they would buy treasuries they'd be getting two percent from the treasures and pay us two percent they'll be break even not making money there's probably expenses there but what would happen now what happened now that the 10-year treasury went up at one point to four percent if if the if the if the bank had to go tomorrow morning and liquidate sell all the treasuries they're not gonna have to sell it for 100 million dollars because someone's gonna say if I borrow it to me for 100 million still it's and I want to get four percent of my money it's not going to give me that it's only giving away two million dollars that all these all these all these um all these Securities all these all these bonds it's not giving me it's not gonna be it's only give me two percent I'm gonna get four percent so in order for them to sell it they have to sell it now for 50 million dollars go to someone say hey pay me 50 million dollars and then four percent of 50 million dollars is 2 million and it works out perfectly so if the government bar when someone when a bank lends money to the government and the bank bar in effect when you're borrowing treasuries you in fact lending money to the government if you stay till the end of the 10 years and you believe the government's gonna pay you back you're gonna get back to 400 million but if you need money today the value that treasury today is cut in half now it's somewhere not exactly half because it's still a value you could hold it out till the end of the term but simple math that's the issue so what's been happening all along it's going back to the beginning what I said before is that there's a hundred million dollars worth of deposits the gov the bank did different things with it what they believed was regular Securities it liquid Securities they could sell right away they went out to the market they had having a bank they started having issues normal issues in a market what was their issue because what does Silicon Valley Bank do Silicon Valley is Venture Capital almost every Venture Capital firm would want to be involved at some level that's what the Bank of Choice that was the main Bank of Choice so take example G currency G apparently got Venture Capital Money if I wanted to go ahead and borrow money against my shares and I walk into a regular local bank they're not they're not thinking to lend me money against my shares but if I went to Silicon Valley Bank because they have a bunch of VCS are with them they would say oh G currency is worth this amount how much it's worth so Irish shares in this company is worth X dollars the loan to value is not going to be 75 but there's a number that they're going to lend and they they're comfortable because they turn to their network of venture capitals and say if God forbid Ira couldn't repay the loan would you buy Ira's position and then cover that loan that's how they made their money the rates will when they lent that money they they lent it out to to founders of of venture capital firms and they Bank Venture Capital firms it was in real estate but that was a big part how many VC deals were going down in the last few months not that many so then normal business was slowing their regular business was slowing so for them just to operate sometimes they have to go ahead and sell this is the simplistic form not going exactly I'm sure there's other pieces here mismanagement and other points but they have to go out there in the simplistic form they have to go out there and borrow and sell some of the liquid assets they thought they were going to sell 10 billion dollars worth of liquid assets and get 10 billion dollars to keep money in the bank to run their regular operations they went out to the market and let's say they've only got 9 billion for it because rates went up and people didn't want to buy out those assets right away so it came to them is that now they're short a billion dollars they realize oh they're going to be in trouble if they had to now Mark to Mark and adjust everything they don't have enough money to cover all the deposits and run the bank so they have to go out there this could be normal course they have to go out there and sell a piece of the business let me go take it now to a different example to pause this you understand somebody has a regular business they're running the business cost them 200 000 a month to run they have five a million dollars in the bank they're good for five months if they don't get any money at the end of the five months any profits they're closing down if someone if they're about to close them but someone thinks hey a big skate open they're going to one day think about Amazon how many years did Amazon lose money and they kept covering the losses and then look what Amazon is today if someone believes in that business they'll go to the family and say listen here you need another million dollars to carry for an additional five months that's when you start becoming profitable we'll give it to you but we want a certain percent of the business there's no there's no business that happens during the day however if people think that this business will never become profitable and someone chirps into the investors here hey why are you investing in that business it's never going to become profitable and that investor either pulls back totally well says I want a bigger and bigger percent in order to sell in order to invest in your business to a certain extent when there's fear fear is what happens what came together with Silicon Valley Bank had an issues when they actually started saying losses and actually started to go out to go out and raise money and they couldn't secure the money as fast as they want to go raise the money then people got nervous uh oh I have money in the bank silicon bank that's how I run my operations and the FDIC only shows 250 then you had one major VC sent an email out to all the companies he invested and say hey this bank has issues pull your money out and like why keep it there it's like you're making enough money to keep there go to another bank so pull out the money what's called a run on the bank 40 billion dollars is running the bank the bank doesn't have that money so The Regulators have to close down the bank does it mean that everyone's losing their money it just means that insurance is not covering it but there's real ramifications happening as we sit at tonight I'm recording this video on Saturday night what's going to happen by Monday morning is anyone's bet but there's all different theories going on so the fact of the matter is why did this bank close down this Bank closed down because it was a run on the bank I'm on I'm on a chat that has a thousand real estate players on the chat and they start talking about a different bank and I was just watching I don't know what's gonna happen come Monday morning but I was just watching out so many people just because of fear it's a land of just fear it's a blend of why take a risk even if I'm not nervous to a blend of I actually actually nervous about that bank and they can start doing a run on the different bank that could be really happy and fine so this Domino fear fear of fear itself could keep running this issue and could cause major damage going forward the best case scenario now is that the feds go and they get someone to buy this bank over the weekend come Monday morning a new bank bought it and in effect they're telling that new bank to buy it will sell it to you on condition that you make every depositor whole and you'll get all the benefits that the bank has branches that is everything you'll buy it in effect Pennies on the dollar just a few days ago or a few weeks ago this bank was trading at 300 a share so in theory if they could bond his bank tomorrow for fifty dollars a share that they just have to cover the losses after our losses is probably a lot less than the 300 a share and they buy themselves a great Bank to go forward the the consensus in the market is that's what's going to stop happening now is that someone's going to buy it that's the hopeful consent it's going to buy it take it over and no one's going to see a loss to be an isolated issue be a wake-up call to the industry but it'll be a nice little isolated issue however this is where clearly they think the ramifications and the flow is going to be to the to the average person that's me and you is that if tomorrow morning give money in the bank if you have less than 250 000 it's not an issue someone a business or a person has more than 250 000 a kept in the bank we can keep it now it's time tomorrow like why do you want to deal with this that's your safe hard earned money that you are saving for whatever you're saving up for what do you want to do with that money so you're going to keep in a local bank that you don't really understand if they're making smart decisions or not maybe they both treasures at the wrong time even though it's fine if they would stay at the end of the term but what's happening right now why take the risk so the belief is that most people want to take the safe bet by Treasures so in the very short term term because everyone's going to buy treasuries which would happen Thursday Friday the the 10-year treasury bill went down the rate that you that the coupon that they pay went down because so many people wanted it they didn't have to promise how much in effect to keep it simple is that there's there's a treasury like I said before is that 100 million throwing off two two percent or four percent because so many people want to buy that 100 million now because they think the US are safe they're willing to say I don't need four percent anymore I'm going to take three and a half percent or three percent of 2.8 or 2.6 I can keep bringing it down potentially but they think this is just during the fear while everyone's in running in fear when this rolls over and we wake up you know in a couple of weeks and everything settles down that will find this new level we'll go to so relevant what the feds do now it's about me and you my public opinion what we think is going to happen and right now what would you do if you had a million dollars in the bank so some people write about the spread it to a few Banks some people say but even if I would why would I want to take a chance on a Regional Bank a Regional Bank is a bank that has branches and runs in several States why would I want to take a chance on a local bank State Chartered Bank let me put it to the top view the government can't let the belief is Chase or Wells Fargo closed now over the weekend Wells Fargo couldn't handle the influx and trying to help people on board them the regional Banks having people take out money so now think about if you own a Regional Bank you're a banker at a Regional Bank you want to secure your job you want to secure your bank your bank is healthy you you made smart loans because some you you viewed some other bank that's stupid things that you should take the loss but the truth is if when people are nervous they don't want to listen to details they just take the money first and ask questions later so what are they going to have to do to keep your money in the bank they're gonna have to pay a higher interest rate they're going to say hey you want to go to Chase that's let's say paying I don't know what they're paying but let's say they're paying two percent stay with us we'll pay four percent we could afford it because we have good balance sheet we will do loans but what does that mean in order for them to recover be able to pay you four percent they're gonna have to start lending at six percent which includes interest rates to move up even more so irrelevant with it where the feds move their rates the Practical math of where banks are at and their cost of capital to get people to put deposits they can have to entice people to keep money by the bank this issue they think now is going to cause a big part of mergers to happen because all these Banks can survive with the higher cost are there enough loans to put out loans at those higher rates that's where these issues become this is now going to be really the wake-up call where people now begin to understand the concept of Mark to Market and what that's really going to become is when it comes into commercial real estate so it plays out of commercial real estate is as follows when I came in this into this business in 1997 real estate was still based primarily on what's called bricks and mortar which meant you made a decision and someone was discussing a building oh there's a great building the boil at this the the the bricks are strong the sound the foundation the the way the structure of the building is built this is a solid building and therefore has a little bit of a premium because of that today the only thing that the world went to is about financial engineering when you see someone talk about investment they talk about the return the cash and cash the irr the cap rates numbers and financial engineering that will rinse ago where rents are coming how inflation's playing around no one's really talking about the replacement cost is it in there yeah but it's not the key part of the investment so now let's talk about a cap rate take a building for 10 million dollar building just a couple of years ago that building would trade at a five cap let's say that means that someone that building if it had 500 if a building had 500 000 in net operating income net cash flow a personal paid 10 million dollars for that building it's a five cap everything was perfect now that if the cap rates go to six percent well some people think that real cap rates today based on interest rates like in my personal belief that I was training this business from the beginning of time till now is that the Val the cap rate is supposed to be two percent above the borrowing rate so people think rates now a little bit high but they're going to level out that's the belief again this this movie changed over the weekend but that meant that people felt that the 10-year treasury bill because of inflation is up the tenure table now was close to four it dipped to 369 is 370 as we speak right now but the thing when it stabilized it might go down to three when it goes down to three that means that borrowing should be at five or cap rate should be at seven a stabilized deal should be at seven but no one's selling buildings at seven so if you speak to people today they're looking at the market saying what is trading right now on the street deals of Trading still let us six and a quarter cap because it's still some upside but now let's go back to that building what if you believe again this is not my belief it has to go with your belief you as an investor you as an owner if you believe that real estate right now has to be a seven cap minimum that means that that same exact building that was worth 10 million dollars at a five cap is now worth approximately 7 million because seven percent of seven million is four hundred is four hundred ninety thousand roughly that same 500 000. you want to say some uptights you pay a little bit more that means that many real estate deals today are underwater or flat doesn't mean the person's in trouble no because the building is still cash flow but if you have to refinance you have to have an issue you have to come up with cash for another reason you have to sell you have an issue so it's starting but it's going to put a magnifying glass now in the industry is everyone's going to really start doing Mark to Market to see what if someone owns real estate really worth is the person's net net really down 75 percent deals were bought that building a 10 million building that building could have been bought to 9 million that building could have a lower mortgage that building could have spiked up to be worth 11 12 million now it's down to 10. who says know what the numbers are but clearly if the cap rates move up now go back to the beginning of this middle of the story I've seen before if the banks have to stop paying depositors four percent and five percent they have to lend it seven in order to buy a building make a return you have to get a higher percent return so that's where the the the the the reality comes in so the reason why there's not a lot of transactions taking place right now is because why should there be transactions taking place but if you want to see what is the building's really worth under the hood that becomes a whole new Dynamic about ungrammifications what's going to happen there so I have a major investor who's telling me and sparked this thought told me several months ago is that most the reason why many many people now are that have cash are going to stop making Investments is because most of the risks that involved in the past are really gone when you looked came to someone a few years ago they said what what happens when rates go up and you can speculate will they go up you can have what happens if a b and c when someone's buying a real estate deal today they're buying it already post-inflation the buying it where they understand what rents are they're buying it at a cap rate that starts making in their mind more normal sense and such reconciling so I want to really end with two points to put into perspective you talk about mismanagement some people look at the same mismanagement of certain people that took floating rate first Victory right someone who believed that interest rates are on its way down it's best take a floating rate deal pay a high rate today but every day's rates go down some people that believe rates are moving up they should go ahead and take a fixed rate because rates are moving up lock it in as long as you can at this current rate so there are people who are forced to take deals at floating rates and other people took a choice and that if you look back in hindsight everything is always hindsight 2020 but if you look at the market today that's that same issue is that we're going into a world today those people that have floating rates that are coming due now those people are going to have to deal with issues and where they're going to come out of those issues and that's where the big Market is focusing on so if you're going into the marketplace today and you're looking around how it's affecting the typical business the typical business is running as business as usual a business that needs a real estate company that needs to borrow money or raise money in a big world today that's where the question started coming and also based on the world going forward we're we're the winners we're the loser is going to be one thing which I keep keep going to a sentiment of one you know one positive line is that for many years I would ask questions other people ask questions and the answer was this is just the way it is to just the way it is and be gone that's all gone now from this point going forward it's going to stop everything's gonna stop making sense that it's going to point going forward it's going to stop logically making sense every decision and business move that people are going to make you can understand oh it makes sense this building is trading for more because it has a lot of upside and this building is trading for Less because it's really not as nice as the other building this building's a lot of work so I'm not going to just say oh just this is what people pay so irrelevant to those issues this Bank falling apart at this level the second largest bank crash is going to bring it all together for everyone to start seeing a world a little differently so I hope this was the clarity a lot of different moving parts now at least you can start reading the papers and plug in and the discrepancies from here I'll be sharing this video of the next day onto LinkedIn and we're there we could engage in a dialogue between myself you and the whole LinkedIn Network that could really share and give their insights there stay positive God runs the world and he can make the decisions work in spite of everything around you to work perfect for you best of luck in everything you do