Your Financial News Roundup
March 15, 2023
1. Economy: Silicon Valley Bank (SVB) and 2 smaller banks went under FDIC control after they succumbed to customer bank runs.
2. Tech: Meta will censor news content in Canada if forced to split profits with publishers; while Southwest cleans up its act after canceling over 16.7K+ flights over the holidays.
3. World: China backed a peace deal between Saudi Arabia and Iran; while the U.S. approved the Willow Project, a north Alaskan oil drilling endeavor, despite intense opposition.
Personal Finance Concept [Part 7/8]: A Primer on Real Estate
🏃🏾♂️ The Ill-Fated Bank Run: Last week, tech and startup customers of Silicon Valley Bank (SVB), the nation’s 16th largest bank, fueled a $42B digital bank run within a day. The day prior, SVB announced a $1.8B loss from selling all of their Available for Sale (AFS) securities portfolio.
With the low-interest rates of 2020-2021, the bank had bought into long-term federal Treasury bonds and mortgage bonds with interest rates of < 2% as a safety net. However, because treasuries made up a large part of their portfolio, that exposed them to interest rate risk — when rates rise, bond prices fall.
SVB was forced to sell some of its deposits at major losses as customers withdrew their deposits due to worsening economic conditions. When the bank announced a $1.75B capital raising to address the shortfall, this prompted concerns among venture capitalists over the bank’s distressed financial position, hence the bank run. (BBC)
SVB Implosion Recap:
- The FDIC took control of SVB and made depositors whole on Monday, but did not bail out its shareholders or management — allowing the bank to fail.
- The FDIC and Treasury Dept. will cover uninsured deposits due to the risks posed to the entire banking system and the Silicon Valley startup space.
- 50% of tech startups bank with SVB, many with deposits in the millions or tens of millions, mainly from VC funding.
- Smaller banks’ stocks are continuing to tank as money flows into the big 4 banks, gold, and bitcoin.
- American taxpayers won’t be on the hook for covering any bank losses.
- HSBC bought out SVB’s UK arm for £1, excluding the parent company’s assets and liabilities, bolstering the UK’s startup community.
- 2 days after SVB’s collapse, New York-based Signature Bank failed on March 12th. The NY government is trying to get the same remedy from the Fed’s handling of Silvergate Capital.
- First Republic Bank secured $70B in funds through JPMorgan, the Fed, and various sources on Sunday night.
Pre-Bank Run Context:
YouTube detective, Coffeezilla (6:32-7:28) noted that SVB’s CEO Greg Becker lobbied Trump admin officials to deregulate his bank. He pushed to increase the asset threshold — freeing his bank (and other regional banks) from post-2008 banking rules for “systemically important” banks. Becker cashed out $3.6M in SVB shares in February 2023, along with other execs.
Our Take: After 2008, the government made significant strides to better regulate the “too big to fail” banks like Citi or Chase. But smaller regional banks like SVB or Silvergate Capital did not receive as much scrutiny. If the Fed continues to raises interest rates, it could trigger further issues with smaller banks that are overexposed to certain assets or facing a liquidity crunch.
✈️ Southwest Airlines’ Holiday Cleanup: During the last 10 days of 2022, Southwest canceled 16.7K+ flights due to staffing shortages and tech issues. As a result, tens of thousands of travelers were stranded and the company is expected to lose as much as $350M from the fallout for Q1 2023, in addition to the $800M loss last quarter. To mitigate potential risks for next winter, Southwest plans on purchasing more equipment, modernizing its tech, and increasing staffing levels. (CNBC)
Our Take: With air travel rebounding to pre-pandemic levels, many airlines have struggled to accommodate the growing demand, which begs the question – what did they do with the bailout money from Congress?
📰 Anti-Social News: Facebook’s parent company, Meta, stated it would stop serving news content in Canada if the parliament passes the Online News Act. Introduced in April 2022, the act forces tech giants, Meta and Google, to negotiate deals with news publishers to share profits. The Canadian news industry has pushed for more regulation as it faced large losses while Meta and Google profited from advertising dollars. In response, Google is testing limited news censorship while Meta publicly pushed back. (Reuters)
Our Take: For years, tech firms have profited from the works of news outlets while the news publishers themselves took big financial losses. This has put smaller news outlets, like local news, in a precarious position.
☮ Peace in The Middle East: Archrivals, Saudi Arabia and Iran, announced they will reestablish diplomatic relations and restart old security and trade treaties. In 2016, protesters stormed Saudi Arabia’s embassy in Tehran, leading to a proxy war in Yemen and regional instability. China helped broker the peace deal under the leadership of its top diplomat, Wang Yi, to showcase the country’s social responsibility efforts. This peace deal could tee up the U.S.’s efforts to normalize relations in the Gulf region. (CNN)
Our Take: China’s peacemaking streak is a big win for its wider soft power plays in SE Asia, Africa, and South America. Its role as peacemaker will help the nation assume a mantle that had been long held by the U.S. This peace deal could help U.S. diplomatic efforts in the region or complicate matters further.
🛢 Arctic Drilling: Breaking its environmental streak, the Biden admin approved the $8B Willow Project, a major oil drilling endeavor in Alaska. With an estimated output of 180K barrels a day, project sponsor and oil giant, Conoco Phillips, claims the project would create local investments and jobs. In response, the White House received 1M+ protest letters, a Change.org petition with 3M+ signatures, and the ire of TikTok activists. (BBC)
Our Take: The Biden administration bowed to pressure from the courts and avoided a legal battle by letting Conoco Phillips develop on its leased land. Estimates state the Willow Project will emit enough carbon over its 30 year lifespan equal to putting 2M cars on U.S. roads each year.
Finance Concept of the Week
What’s This Asset? — A Primer on Real Estate [Part 7/8]
A Series Exploring Different Asset Classes and How to Invest in Them
Real estate investment is all about owning, buying, and financing properties, such as residential homes or commercial buildings. Investing in real estate offers the potential for stable returns and long-term appreciation.
- Potential for Steady Income: Real estate investments can provide a steady income stream through rent payments, especially if the properties are fully occupied.
- Inflation Hedge: Real estate prices tend to rise over time, providing a hedge against inflation.
- Long-term Appreciation: Real estate investments have the potential for long-term appreciation as property values have historically increased over time.
- Tax Advantages: Real estate owners can deduct mortgage interest, property taxes, and other expenses from their taxable income.
- Control Over Your Property: As a property owner, you have more control, including the ability to make custom renovations and improvements.
- Down payment: As interest rates and property values increase, more and more people are having trouble coming up with the down payment to afford properties.
- Illiquidity: Real estate investments are illiquid, meaning it can take a long time to sell a property and receive the funds invested in it, particularly in a downturn.
- Maintenance Costs: Owning property comes with various costs, such as maintenance costs, property taxes, insurance, and time.
- Market Fluctuations: Real estate prices are affected by changes in local housing markets, interest rates, and economic conditions. It’s not guaranteed that your property will be profitable.
How to Make the Most of It:
- Research the Market: Research the real estate market and specific property classes to determine which ones align with your goals. Knowing national trends helps, but the focus should be on local market trends.
- Consider the Location: Location is the most important factor in real estate investment, as properties in prime locations tend to appreciate in value more quickly — think the California Coast. The classic real estate saying is that it’s all about location, location, location.
- Diversify: Consider investing in a variety of properties to diversify and reduce your risk. Buying into ETFs (exchange-traded funds) or REITs (real estate investment trusts) are easy and accessible ways to do this. Common ETFs include:
- VNQ – Vanguard Real Estate ETF that tracks a diverse set of U.S. real estate firms
- IYR – iShares U.S. Real Estate ETF that tracks the Dow Jones Real Estate Index and holds real estate firms that hold commercial and residential properties
- RWR – SPDR Dow Jones REIT ETF that tracks the Dow Jones U.S. Select REIT Index and holds firms that manage income-generating properties
Risk Level: Medium to High The risk level of investing in real estate can be medium to high, depending on the property’s condition, location, type of property, and overall market conditions. Because real estate is illiquid, it takes time to convert it to cash – creating more risk in a rough market.
Common Accounts to Use:
- Individual brokerage accounts (for ETFs and REITs)
- Retirement accounts (IRA, 401(k), etc.) with approved options for real estate investments
- Cash (if you want to pay all-cash to avoid debt)
- Home equity line of credit (HELOC) (to access more equity)
- Mortgage (traditional loan to finance the property)
Tip of the Week
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