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Recently, banks have been failing at a rate comparable to that of McDonald's ice cream machines. Are they really broken or are you just laced? Be honest. And as of this recording, we have seen three of the largest bank collapses in U.S. history within the span of two months, which I'm going to bet is more than most of us are comfortable with. And that's why today we're looking at why some banks are dropping like Snoop Dogg when the pimp's in the crib, ma. And that, my friends, is the whitest sentence you will hear today. I guarantee it. You got a skedaddle.
Plus, you'll learn the best place to keep your money safe. But first, be a pal, be a friend, head on over to that like, share, subscribe trio, and click it like it's hot. All right, before we get into the nitty gritty details, let's talk about how banking works.
So banks get money from customers called deposits, and then the customers get a reward called interest for storing that money there. But where on God's green earth do banks get this bonus money to pay you? Well, when you give your money to the bank, they're actually lending most of that money right back out to other customers through debt products like loans, which they make more money off of through interest and fees. And then they give you back a tiny piece of that money.
Banks will also invest your money in bonds and other securities that are relatively low risk, which if bonds are relatively low risk, James Bond should really change his name to something much more risky like James Crypto or James Powerball or James Public Water Fountain.
Doesn't get more risky than that. Okay, back to banks. They can't play around with all of the money that's given to them. Legally, they have to hold on to some of it as physical cash for when customers like you need to make withdrawals. Then we'll reinvest the earnings into foreign currency accounts with compounding interest and it's gone. So because they only have a certain amount of money on hand, if a bunch of customers get scared for some reason and decide to withdraw...
all of their money at the same time, that is called a bank run, which causes banks to fail because at a certain point, the bank runs out of cash, and that's a problem. It's kind of like the great toilet paper crisis of 2020. Remember when we could go down the aisle the wrong way and people would yell at us? So people got scared, they bum-rushed the stores, and they wiped the shelves clean of any and all crap wrap, making retailers TP broke.
Real party pooper, if you ask me. And that's kind of like a bank run, which is my second least favorite type of run, the first being, of course, an actual run. Everything hurts. Running is impossible. Now, these bank runs were pretty common during the Great Depression era, which is why in 1933, Congress created the Federal Deposit Insurance Program.
corporation, otherwise known as the FDIC. So that stabilized the banking industry by insuring and protecting deposits up to $250,000, which for most banks is the majority of the customers. Now, the FDIC is an independent federal agency that functions kind of like a big insurance company. But instead of insuring homes or cars or even mustaches, which can be insured somehow, just ask Australian cricket player Murph Hughes.
You know, I cannot stand this thing anymore. The FDIC insures bank deposits. They also monitor banks and banking practices to protect customers. And a side note, the FDIC is funded through insurance premiums that those FDIC member banks pay. It does not receive tax dollars from Congress, which is good because Congress is already using your taxpayer money to find out whether or not gingerbread houses are earthquake-proof.
I wish that wasn't real, but it is. Anyways, thanks to the old FDIC insurance, we don't usually see many bank runs these days. But these are not usual times in banking. And it all started with Silicon Valley Bank, or SVB. Not to be confused with SBF, Sam Bankman Freed, the crypto fraud guy, or SBD. Crop dust those comments if you know what I'm talking about. Can you
You nasty. Here's the story. The vast majority of customers of SVB were hedge funds, tech startups, and venture capitalists. They were not your mom and pop's local bank. Remember how we said for a typical bank, FDIC covers most of the deposits? Well, it's usually 75 to 80%. SVB was the opposite of that, where more than 90% of the deposits were not FDIC insured, meaning 90% of the customers had over the $250,000 limit with the bank. And then also remember earlier how we said a bank will invest in things like bonds?
Well, SVB had bought a whole bunch of bonds when interest rates were real low at 1.7%. And fun fact about the bond market, when interest rates go up, bond value goes down and vice versa. So with interest rates skyrocketing, the value of those bonds tanked harder than Geely at the box office. - Yep.
And on paper, it looked like SVB had lost billions of dollars in bonds, which led the bank's CEO to announce that they needed to raise about $2 billion to get their balance sheet back in the black. Obviously, this freaked out a whole bunch of people and caused them to unload their bonds.
then sent the bad signal to the venture capital people to come pull their money out too. So everyone's freaking out and basically money was being withdrawn like crazy, SVB ran out of cash, and the whole thing collapsed like a pyramid scheme. And let's admit that the SVB bank execs were being kind of risky in what they were doing with customers' money. So fast forward slightly, and apparently panicking is the cool thing to do because customers of Signature Bank start to do it too. And you see, Signature was an FDIC-insured bank that catered to law offices, real estate buyers, and crypto companies.
And at the end of 2022, it was one of the largest banks in the nation. And needless to say, Signature had high amounts of uninsured deposits, about 90%. So when SVB went down, customers began withdrawing their money with a vengeance, causing regulators to close the bank to try to contain all the chaos.
Then again, just a few weeks later, First Republic Bank followed suit, causing JPMorgan Chase to ride in on a white steed and buy out most of First Republic's assets in order to bail them out. So are you noticing a theme here? Banks like SVB who cater to tech and venture capitalist firms with a majority of deposits over the FDIC insured limit
$250,000 lost their cool. Meaning this whole mess has almost nothing to do with you and your local bank. These highfalutin banks are the exception, not the rule. You see, most banks have a much larger number of everyday customers like you and me who fall under that $250,000 range. So if that's you, there's no reason to panic.
The FDIC insures trillions of dollars of bank deposits at more than 5,000 banks in the United States. So if a bank fails, the FDIC swoops in and reimburses customers for any lost money, and it takes over the failed bank and works to transfer its loans and deposits to a healthier bank. Although, I'm not sure what happens to all those pens that are chained to the counter. Maybe they just let them go free. Some say love
Your bank's website should have an FDIC logo telling you whether or not it's insured, or you can go to the bank's drive-thru and look for those little fun gold stickers that say FDIC, where those sucky tube things are. The FDIC also insures checking accounts, savings accounts, money market deposit accounts, certificates of deposit, aka CDs, prepaid cards, assuming that they may be insured.
They meet certain FDIC requirements, and you can also have an individual, joint, business, IRA, self-directed 401k, profit-sharing plans, revocable and irrevocable trusts, also protected by the FDIC. But let's make this clear. The FDIC doesn't cover everything, including stock investments, bond investments, mutual funds, crypto, life insurance policies,
annuities, municipal securities, safe deposit boxes or their contents, U.S. Treasury bills, bonds or notes. But investments like stocks, bonds and mutual funds are protected, good news, by the SIPC, Securities Investor Protection Corporation. The SIPC is an organization that will step in and help you recover your money if your brokerage firm fails. To be clear, SIPC doesn't cover investment losses or account hacking. This is only if your firm fails completely and your money's gone. Gone!
It's all God. Remember, investing is risk, and if you lose money on investments, they're not covering you. Also, if your money's with a credit union, those are also protected by something different called the National Credit Union Share Insurance Fund, or NCUSIF.
F. So many acronyms, so little time. - Shouldn't we keep the PC on the QT? 'Cause if it leaks to the VC, you can have an MIA and then we'd all be put on KP. - All that to say, if your bank fails and your deposits are insured, you've got nothing to worry about. In fact, in some cases of bank failures, the FDIC moves so quickly that your banking service is only interrupted temporarily, which leaves you more room emotionally to worry about Taylor Swift's heart post breakup. Thinking about you, girl. What's up with this Mattie Healy stuff?
Also, everyone hates John Mayer now for some reason. He's doing just fine without me. Now on the downside, if your bank fails and you have uninsured deposits, you might just be out of luck. Now the FDIC will work to help you recover your money by liquidating the failed bank's assets, but you might not get all of your money back.
So, did all of those SVB, Signature, and First Republic customers with millions of dollars more than the insured limit lose their cash? Not this time. The Federal Reserve and the FDIC stepped in like a champ to guarantee all the deposits to try to prevent panic from spreading to other banks. The Fed also launched a new program to offer loans for up to one year to help banks and credit unions who are pressed for cash. So, what should you do in light of all of this? Well, I'll tell you what you shouldn't do first.
Panic. Panicking just makes things worse. And if you think your bank might fail, don't panic. If the economy is headed for recession, don't panic. If alien spaceships start hovering over major U.S. cities, okay, that would be reason to panic. I'll be honest.
Welcome to Earth. But if the economy suddenly takes a dip or some other banks fail, there's still absolutely no reason to head to your local bank branch and withdraw a suitcase full of cash. Your money is much safer in a bank than it would be stuffed in your suitcase under your memory foam mattress or buried in tin cans in your backyard. But be aware, there are schemers out there trying to take advantage of people's fear in the wake of events like bank collapses. And these people are telling you, you got to put all your money in crypto or gold as the almighty investment in times like these. And I don't want you to fall for it.
Which, by the way, check out my episode on gold if you want to know why that won't save you in an economic collapse. As always, don't forget to like and subscribe to get more content like this. And share this with a friend who has money in a bank, which is probably all of your friends. Thanks for watching. We'll see you next time.