Episode 4: What Investors Need to Know About the 2023 Bank Failures

Investment Fraud Lawyer, Jake Zamanky, Outlines What the Recent Bank Failures Mean for the Industry, Inflation, and Your Investments

00:01

Welcome to The Investment Fraud Lawyer Speaks a podcast by Zamansky Law Firm founded by Jake Zamansky one of the top security lawyers in the country. Listen along as we shed light on investment scams, negligence and share how you can recover your investment losses.

00:23

Hello, welcome to The Investment Fraud Lawyer Speaks a podcast by Zamansky Law Firm. I’m Nancy Rapp from PaperStreet and I’m speaking with the Founder of the firm Jake Zamansky. Jake is one of the preeminent lawyers in the country for securities frauds matters and FINRA arbitration. The law firm represents individual and institutional clients in cases against Wall Street firms for investment fraud losses. Today, we’ll be talking about the topic making its rounds in the news headlines, watercooler conversations and pretty much everywhere. The collapse of the banks in the United States, whether it’s the Silicon Valley Bank, Signature Bank, Credit Suisse, there’s got a lot that’s got everyone talking, reminiscent of the banking collapse in 2008. Americans are wondering what this means for banks, inflation, the economy, investments, and more. Hi, Jake, thanks for joining us today.

01:09

My pleasure.

01:10

All right, Jake. Let’s get started with a brief history lesson. There are many mentions of this banking crisis being similar to what happened in 2008. With the Lehman Brothers collapse, is what we’re seeing now similar to what happened then.

01:21

There’s similarities but there’s a bit of difference here. In 2008, you had a bunch of the largest banks, Merrill Lynch, Morgan Stanley, Citigroup having bad assets on their books, mortgage backed securities. Here, it’s much different. We have what’s called a run on the bank. The key bank here is Silicon Valley Bank SBB. It’s been called the Enron of banking. This particular bank was the 16th largest bank in the United States. It collapsed about a week ago, because their depositor base which was mostly venture capital firms and internet startups in Silicon Valley, California, all started pulling out their deposits at the same time creating a run on the bank, which quickly caused the bank to collapse. Now, we can go into some of the details of what happened here. Cuz and you’ll see the difference between that in 2008. So you had these VCs venture capital firms and internet startups depositing over $2 billion, with SBB, when SVP did was they invested that money in short term and long term Treasury notes, say 10 year Treasury notes, paying a low rate of interest, say a year or two ago 10 year notes paying one and a half 2%. As interest rates rose, and now interest rates are 5%. These investments that they held went down tremendously in value. They actually had a $2 billion loss, which was unrealized. But when they were forced to sell those assets to pay out the depositors, they incurred a $2 billion loss, which blew a big hole in the bank.

03:04

Now, why was everybody pulling all their money?

03:07

SVB reported that it had this issue with their impaired assets that they had this unrealized loss problem. You also had with interest rates going up a lot of these firms, the venture capital firms, the internet startups needed money for their payroll and to fund operations. So they weren’t able to get loans from other sources. So they needed that money to pay their own operations. And there also was a tremendous amount of fear when they thought that there were problems with the bank that we’ve since seen this thing rippled throughout what we call the middle size banking sector.

03:46

So then what is going on with the depositors money, I mean, just the FDIC insurance comes in what how what is going on with these investors and these just people add these bank accounts?

03:55

If you have a bank deposit money at a bank, the FDIC insures the money up to $250,000. If you have, say a million dollars in an account, only 250 is insured. And the rest of your money is dependent on the goodwill of the bank staying in business at SVB. The uninsured deposits those in excess of 250 or 95% of the assets, people got nervous all at once. Plus this was a close close knit community. They all talk to each other the VCs and the and the startups. And when they started talking and finding out that people withdrawing their money was like a herd mentality. And they they made a rush and run on the bank.

04:41

This was more of an individual situation of the of the people who had the accounts with this bank, not necessarily a failure of the bank.

04:47

Well, the bank, a lot of people are saying we’re grossly negligent or reckless in the way they manage their money. One of the biggest risks that a bank faces into interest rate risks, as the as they saw the interest rates rising, they shouldn’t have kept all of this money in these long term low paying investments. So it was a big mistake by the portfolio manager, people are claiming that there’s fraud here. So there’ll be a lot of investigations into SVB. And the way they handled it. Also, there’s a big issue of the concentration of their depositors in just one industry. If there’s a problem or if the industry needs money, then you know, there could be a run on the bank. Most banks have a diversified deposit based oil companies, real estate, professional services, this was sort of a one trick pony, this SVB. And they suffered when, when the herd ran the bank.

05:49

I imagine the litigation for something just like this would get complicated, because if they’re accused, and so fod, and then there’s also the herd mentality depositing it once, it’s gonna be a lot of finger pointing, is that correct?

05:59

Yeah, there will be a lot of finger pointing. There’s also an issue about the bank executives, there’s reports that the CEO and the other top executives sold out of millions of dollars of stock before the bank collapsed. That could be insider trading, which is illegal. If you know something, materials happening at a company, you must refrain from trading, and you can’t tip off other people either. So there going to be insider trading investigations and investigations into fraud and mismanagement at the bank. They’re comparing it to Enron. And it’s, you’re gonna find once the investigators look at this, there could be some really ugly things under the hood. There. We’re also looking at how the Federal Reserve Bank of San Francisco, which governs this bank handled it, what kind of oversight did they have, they’re supposed to be watching out that these banks don’t have financial problems. So it’s a real problem that, you know, is affecting the entire middle bank sector.

06:59

Well, we can see that there’s these bank issues popping up and we’ll talk about a couple of other ones. It must be get to them. But what is the sense that this is a contagion to other banks? Is this causing other depositors to fear their fear and cause similar actions? Do we think this could be self contained? I mean, I’m sure this is all speculation. But it would be interesting to get your thoughts.

07:19

Well, we are seeing a bit of contagion. First of all other banks in California, that service, a lot of the same clients first republic is under tremendous pressure. Their stock dropped about 80% in value, their bonds are in jeopardy. What happened was, you know, the government has gotten involved, and they’ve been working over the last couple of weekends. They had other big banks like Citigroup and Morgan Stanley, and JP Morgan deposit, something like $30 billion at the bank to give it a vote of confidence and to give it, you know, some assets that will help it get through this crisis. It hasn’t worked so far there. PacWest and other, you know, Western smallish middle sized bank is also being affected there, they may have the same issues, a lot of these banks do the same thing, investing long term and low paying Treasuries and other notes. As interest rates rise, the value of those assets goes down, and they’re looking at large unrealized losses, if they have depositors that need their money, they could be in the same situation. So the regulator’s have tried to calm the markets. One of the things that’s happened is the FDIC said, Well, we’re going to insure all the deposits at that bank, even in excess of 250. And that’s, you know, held the fort for a little bit, but it’s still a fluid situation. We got another bank to talk about Signature Bank.

08:49

Next, perfect timing.

08:50

Okay, good. Let’s talk about signature signature is has a different story. But the same problem signature is a bank mostly in New York that caters to attorneys, real estate, people and other professional services. They actually give very good service individuals. You know, you have an individual banker, many people have been with them for many, many years, and they liked the service. The problem with signature is they got involved with crypto companies, crypto companies would put their cash deposits at the bank and they had a large amount of crypto deposits as the crypto and Bitcoin sector got slammed, and the values went down. A lot of these companies that had the Bitcoin with signature withdrew their money that created a sense of panic, and a lot of the depositors that signature pulled their money out. It wasn’t the same reason as SVB but it had the same effect. The bank was under distress. Everybody’s pulling out billions and billions of dollars. and that bank just collapsed and was taken over by a new bank called Flagstar. So there’s a lot of turmoil and it hasn’t ended. It’s still going on.

10:11

Should there be a sense of comfort when the banks are bought by these bigger companies or just they’re opening the door to bigger problems?

10:18

Well, good question. Sometimes, an acquisition comes the market we just had, literally to this weekend, the second largest bank in Switzerland. 30th largest bank in the world, Credit Suisse had a huge capital problem. They had about $80 billion of depositors withdrawing money in the last quarter of 2022. That bank also had a lot of scandals, they invested with a lot of shaky characters. And the bank had suffered billions in losses, the most of their businesses in Europe, and in the Middle East. So as that bank started seeing a run on, its on its deposits, the Swiss National Bank, you know, their Federal Reserve, basically had a shotgun marriage between UBS, the largest Swiss bank, and Credit Suisse, which was just acquired this past weekend. So you now have one large bank with at least 50% of the assets of people in Switzerland, that save the bank. But, again, these are not healthy mergers. They’re mergers done in on an emergency basis on a Sunday, which, you know, makes people very concerned what’s next, what’s the next shoe to drop? So it is helpful when a big bank comes in and saves a smaller bank. But is this a sign of things become that there gonna be more problems in the smaller banking sector? That’s the real question people are asking.

11:56

I have to ask. I mean, you and I have talked a bunch and you know, Credit Suisse and UBS, were involved in one of your biggest in the Kansas cases, the yield enhancement, strategy losses and things like that, you know, when there’s those big scandals and those investment fraud scandals, are that kind of like the writing on the wall that maybe bankers should consider taking their deposits elsewhere? Or do you place the blame more on the individuals who were working for the bank at the time? Again, it’s a broader topic, but just something that struck me as interesting.

12:27

These banks are very complex organizations, they have an investment banking department, they have a wealth management department that deals with institutional and retail investors, and they have other departments, executives that are doing other types of things like lending. So you know, sometimes a problem at a bank will bleed over into other areas, the main thing a bank has is its reputation. If it has a good reputation, then you know, people will want to stay there, if they start getting involved in shady activity, you know, potential criminal activity, or abusing investors, people will leave that bank and go elsewhere, money is very fungible, you can check you can you can take your money out on your smartphone, you know, you no longer have to go into the bank and make a withdrawal. So I think the lesson here is, and you raise a good point that UBS has the yield enhancement strategy, they’ve lost a lot of credibility there, a lot of customers have left themselves burned. That was a strategy that had 6 billion in assets that almost completely blew up. Credit Suisse had a problem with our K ghosts, a family office, that was billions, rien sell another situation that resulted in billions in losses. So risk management has to be good at these banks, particularly these large multinational banks, if the risk management is is inept, you know, out to lunch, you’re going to have problems. So, you know, we’re all dependent on the making sure that these banks are solid to put our money in and, and to keep the financial system going. But when you have poor risk management, when you have, in some cases, fraud, fraudulent activity, or just incompetence, it can affect the entire global financial system.

14:23

And that’s actually something that people are looking at, because they’re saying that there’s this poor risk management system and things like that, that maybe the government should be stepping out. I mean, obviously, UBS isn’t in the United States, but obviously signature in Silicon Valley, we’re, you know, is this leading to more heavy, heavy regulations with the government over these banking systems, or is it more going to be a wait and see kind of thing?

14:43

Well, government certainly has a big role to play. There’s yet another bank that we need to talk about first republic, another one of these middle sized banks that the government now is in the midst of propping up they’re trying to get other bigger banks like JP Morgan to invest in those banks to keep it going. We can’t lose. You know, to many of these middle sized banks, it all adds up. When I say middle size, we’re talking about a bank with hundreds of billions of dollars of assets. The large banks like Morgan Stanley, Citigroup have trillions. So the government has oversight. The banking regulators are supposed to be in there checking regularly, do you have enough capital? Are your lending practices sound? Are you losing depositors? So the regulators are there, and they may not be doing a good job either. So we’re now being forced to have this FDIC, which has this $250,000 limit, they may have to up the limit to 500,000, maybe a million, and then people will be spreading their money out at different banks to stay within that coverage. So it’s a real mess, the banks are being lent billions of dollars by the government at some point, you know, people are saying this could be a taxpayer bailout hasn’t reached that point yet. But after 2008 would happen and all the fraud that took place at the banks, there really is no appetite for the in the public to have another government bailout. And hopefully, it won’t come to that.

16:18

It’s interesting, because you raise a point. And, you know, I think a lot of people are wondering, you know, if they should be diversifying their bank accounts more, you know, if this, like, as we saw in Silicon Valley, that if it was okay, well, 250 is insured, the rest of my money isn’t maybe I should pull out and move elsewhere. You know, at what point should the banker say, well, I should move and diversify to protect myself? And what point should he say? Well, by moving I could contribute to the problem by everybody pulling out at the same time, what should bankers be thinking at this point, what you know, people would have lots of investments and things like that, in these banks, what are the best steps of action for them?

16:53

Bankers need to be transparent, and they need to communicate with with their depositors and and with the public about how they’re doing? If they’re in trouble, we need to know about it. If they’re solid, we need to know about that as well. Are they making risky loans? Are the loans unprofitable, if they if they lent money out at 3%, let’s say a year or two ago in, in mortgages, you know, now mortgage rates are climbing towards 7%, those are probably not profitable loans anymore. But you know, there could be 30 year loans at 3%. So the main thing for the bankers is transparency. It’s very inconvenient for customers to have to have their money at three different places. It makes, you know, much more complicated bookkeeping, if you’re making payroll, you have your money at one bank versus another. If you need to make investments or you have family obligations, like, you know, weddings or other things, you know, where’s my money, but most people are now concerned about safety. So I think that’s the main thing. There’s another big issue that we also need to talk about, which are the interest rates, the the cause of this crisis, it’s primarily that the Federal Reserve in order to tame inflation has been raising interest rates for the past year, interest rates were almost zero, about a year, year and a half ago, the Federal Reserve had several 75 basis point hikes, 50 basis point hikes, and they’ve moved the interest rates up from almost zero to about five 5%, which has had a rippling effect throughout the economy. It was supposed to contain inflation, inflation is down a little bit, but it hasn’t worked yet. To curb inflation. Now, the Fed has a meeting this week. And it’s got two competing issues to look at. Are they going to raise rates? Again, when there’s so much trouble in the banking sector? I mean, that could tip some other banks into negative territory. Does the Fed really need to raise interest rates? Again? Do they need to look at the banks and say, Listen, let’s pause the rates this week and take a careful look at what’s going on in the banking sector? Or do they keep fighting inflation? If they pause? Is that a signal that they’re not concerned about inflation? So the Fed has a very difficult job, but they have to figure out whether it’s more important to give some stability to the banking sector, which has been roiled for many weeks, or do they keep fighting inflation? We’ll see what they do with it. It’s a coin flip, whether they raise or don’t raise, and there are so many other industries that are going to be affected by this because essentially, you know, mortgage rates claim that what’s going to happen to the housing market and things like that, so it’s always something else that could topple.

19:55

Yeah, you know, so people really need to work on a financial plan. Oh, If you have an adjustable rate mortgage, your interest rates could go up if you need, if you’re trying to buy a home, you could be paying twice as much in mortgage payments as you did a year ago. So people have to look at their bank account, look at their bank, see what kind of stability the bank has, see what their investments look like. But it’s fine now for for investors and, and bank customers to do due diligence to get their arms around their finances, you don’t want to, you know, wake up several months from now and find out you were at a problem bank, where your deposit is uninsured, or you got into a mortgage that’s going to double. So it’s very important to get your arms around your own financial situation. At this time, a lot of times my grandmother used to say when in doubt, stay put. And that may be the case for many people.

20:49

It’s really a troubled time for everybody. But you can’t put your head in the sand, you really have to get involved know about this. I’m happy to answer any questions, people can email me at jake@zamansky.com. Come to my website, we’ll have additional information about the situation. But it’s an ongoing thing. And people need to be vigilant.

21:11

Very true. And I know you wanted to talk about first republic bank, we didn’t get there yet. So let’s talk about that bank.

21:17

Okay, first republic is another one of these banks, where depositors, you know, took 10s of billions of dollars out of the bank, it started with with SVB. And then people started looking at first republic to see what was going on there. So they’re a bank with some serious problems as well. Like I say their stock has fallen about 80%. And they’re in some trouble. They may be bought by some other larger bank. But that was a very substantial bank that’s now teetering. So we have to look at that bank and see, you know, are the other banks going to step in? is the government going to get involved? We’re talking about hundreds of billions of dollars, and people are running for the exits at that particular bank. So it’s another one we got to keep our eye on.

22:06

Yeah, Jake, I know, we talked about how cryptocurrency and one of your other podcasts that we’ve done. Now there’s some talk of cryptocurrency being blamed for this and how it’s gonna get impacted. Can we talk a little bit about that cryptocurrency is a very risky asset. And it’s seen tremendous increases in value went from, you know, zero to 60,000, and then came down to about less than 20,000. It’s now back up a little bit. People need to be careful with their crypto, I’ve gotten calls from people where the money has been hacked out of custodians, thieves just go in there and hack and steal your money. It’s it’s very ugly. So banks are now afraid to hold crypto for reasons like the Signature Bank that held too much, and there was a run on the bank. So if you’re in crypto really must make sure it’s a small percentage of your assets. A lot of people are saying that it’s just too volatile. People were buying it to trade and hopefully it increased in value. But in any event, it’s another asset class that people need to watch out, you got to look at your stocks, your bonds, your crypto, your cash, you gotta get your arms around it all.

23:21

And on that note, too, you know, they’ve been saying that a lot of this, you know, Silicon Valley was all based on, you know, venture capitalists and the startups. So now the startup industry is concerned that they’ll be seeing a financial kickback, you know, you’ll suffer losses and investors will be worried is that when you forecast as well.

23:38

Investors have to look at what they’re holding and make sure that their crypto is in a secure place, you’ve got to make sure that the bonds that you have or have not been downgraded to junk, the First Republic is was a solid bank, now it’s got junk ratings, you got to look at your deposits, make sure that they’re insured. And you got to make sure that your equities are in a good place. So that, you know, if there’s a stock market reversal, you’re not going to lose a lot of money. Also, people really shouldn’t be on margin margin is borrowing to pay stock to buy stock. So margin, you get charged interest and you can make twice as much if the stock goes up, you can also lose twice as much as the stock goes down. So I guess the best advice is people really understand their financial situation and go over it with a financial advisor.

24:29

What do you predict is the timeframe for when we’ll start getting answers? Is this going to be something that will be resolved in weeks and months? You know it? How should investors look at this timeframe and this cautionary period?

24:41

I think we’re talking about at least three to six months from now we have to see if the economy goes into a recession that could change things dramatically. If there’s a serious recession, the Fed could start lowering interest rates. People are already talking that they’re going to be cuts coming next I think that has to be looked at, I would say you got to keep your eye on the ball for at least the next three to six months, hopefully, the banks and the government will stabilize the banking system. And these will just be a few bad episodes. But we don’t know yet. And perhaps the Fed could help out by lowering these interest rates, which are really punishing companies. And it’s drying up lending, and it’s hurting business. So, you know, if you if you’re running a company, and you need to borrow money, it’s one thing to borrow to two or 3%, it’s another to have to pay six 8%. It cuts into your profits if it results in people being laid off, because you can’t make payroll. So I would say at least another three to six months before we really know what’s going on.

25:46

Now for the people who have lost money, as we’ve discussed, and possibly the gross negligence of the banks taking action, should they be count contacting investment for lawyers at this point, or they should be waiting as well?

25:56

Yeah, we’re hearing from people, investors whose brokers put them into a large percentage of bank stocks, people in first republic, Silicon Valley, and so forth. If you have a large holdings of bank stocks, or bonds of banking companies, you should check with an investment fraud lawyer like me to see if there’s a claim against your own brokerage firm, they should have been aware of this crisis themselves. They have research departments, so they should have been on top of this. And it could be that there’s an over concentration in bank stocks, or you’re in too risky investments, if you’re conservative, once upon a time, you know, banks were conservative investment. But after 2008, we saw that that didn’t hold. So it may be that if you’re in bank stocks and bank bonds, that you could be in trouble. So contact you contact me jake@zamansky.com. Look at our website and see what we’re talking about in terms of bank stocks.

26:56

All right, well, I think you’ve given everybody enough to talk about and I think helped clarify about some of what these glasses mean and what their what projection future is going to look like. So when I suspect that you and I will be revisiting some of these bank issues in our future podcasts. So thanks for joining us today, Jake. And stay tuned for next time.

27:14

Thank you so much. Have a great day.

27:20

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