In this episode of The Millionaire Dentist™, Casey Hiers and Jarrod Bridgeman are joined by CFP® Colin Holmes to help explain why Silicon Valley Bank has been making headlines lately.
Announcer:
Hello everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised we do speak with an honest tongue and may not be safe for work.
Casey Hiers:
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Now that we got that out of the way, let's jump in. Hello and welcome. This is Casey Hiers, back at the Millionaire Dentist podcast, in studio with co-host Jarrod Bridgeman.
Jarrod Bridgeman:
Hey, that's me.
Casey Hiers:
The crowd goes wild.
Jarrod Bridgeman:
How are you?
Casey Hiers:
And special guest, Colin Holmes, Certified Financial Planner, are the letters after his name, CFP.
Colin Holmes:
How's it going?
Jarrod Bridgeman:
We have Colin on for a very special talk over something that I don't know much about.
Casey Hiers:
In the banking world and the financial world, everybody's ... taking a shit's probably too vulgar.
Jarrod Bridgeman:
Taking a poo.
Casey Hiers:
In the banking world, in the financial world, there are institutions who apparently are undergoing stress and collapsing. Would that be a better verbiage? What do the financial people call the banks when they don't have enough money in the bank?
Colin Holmes:
The same thing we would call it, illiquid. So just like you might not have enough money to pay your credit card bill or buy groceries when eggs are $8 for a dozen, the banks don't have enough money if you were to go and try to withdraw money out of your bank account.
Casey Hiers:
With all the rules and regulations basically every time we try to breathe or step, how are there not rules and regulations for these institutions to not be in a position where that thing would happen?
Colin Holmes:
There are some. They have reserve requirements where they have to have so much cash on hand in case this were to happen. Unfortunately, that's not enough in case everyone decides to go at the same time, so that's what we call a bank run. That's what's happened to a couple of these banks, is too many people showed up at the same time asking for their money and it was above those reserve requirements.
Jarrod Bridgeman:
And this was after your buddy, was it, Kramer, told everybody to invest in them?
Colin Holmes:
Yeah, for sure. Bank stocks are where we should be investing this year. Financial industry's going to go really well.
Casey Hiers:
Didn't Jim Kramer, the week before Lehman Brothers went down, said Lehman Brothers was a fortress?
Colin Holmes:
Probably, that's something he would say.
Jarrod Bridgeman:
Yeah, I wouldn't doubt it.
Casey Hiers:
Hey, if you want tips, just watch him and do the opposite.
Colin Holmes:
Yes, the Inverse Kramer is one of the best investment strategies out there.
Jarrod Bridgeman:
So you said it was a bank run, so that meant a lot of people were showing up trying to close out their accounts. Is that what that meant?
Colin Holmes:
Yeah, Silicon Valley Bank, and specifically that one is mainly funded by people in Silicon Valley that got large loans to do these startups. They have tons of money in the bank. As soon as one of them asks for their money, the rest of them start coming, too, because they're afraid that if they don't come soon enough, there won't be any money left for them. So it's one of those things where we see kind of a snowball effect. As soon as one large person starts to take money out of a bank, the rest of them start lining up to make sure they get their money before the money runs out.
Jarrod Bridgeman:
Is any of this tied into the deregulation stuff that Trump pushed through?
Colin Holmes:
Yeah, I mean definitely it hurts it. That was some of the reserve requirement changes were due to that, where they might lower those to help some of the banks make more money off lending it out and doing different things. Any money that's just sitting in the bank, just like you don't earn any interest until recently on bank accounts, the banks aren't earning any money as it's sitting in those bank accounts as well.
Casey Hiers:
So the lesson is when you put your money in a bank, fill in the blank for me.
Colin Holmes:
It doesn't actually stay there. The bank has to pay for all those employees, everything. So their goal is to loan that money out. That's how they make money, and they're hopefully charging more in interest than what they're paying you. That's how a bank makes money. In the case of Silicon Valley Bank, they couldn't loan money out fast enough. So to make money, they decided to buy 10-year treasuries. If you've been watching the news recently, you've seen that treasuries are actually earning a rate of return for the first time in a long time as those comes up. They had to sell those to make money available for everyone, and they were selling them at a loss. So that's where they start running into concern. So they had to make money somehow. They couldn't loan the money to the people fast enough. So their idea was, let's go out and buy US treasuries that were earning almost no interest. And now that they're earning interest, they couldn't sell them to anyone.
Casey Hiers:
So in the financial world, are people worried that the big banks here, this is going to happen? We saw Wells Fargo had some mishaps, some glitches if you will. How far does this go? What are people predicting? And again, let's find out what Kramer's predicting this week and do the opposite.
Colin Holmes:
Most of the people that if you're with JP Morgan Chase, any of the big banks, you don't really have any concern.
Casey Hiers:
Whoa, because Kramer actually said JP Morgan Chase is another fortress. He said that three weeks ago.
Colin Holmes:
So maybe that's not a good example. The smaller ones are where we're seeing issues. So there was a regional bank out of California that actually had some issues. Similar thing where they had some very large deposits by some very wealthy people. And essentially the credit bureaus came in and said, "If any of those people want their money, you might not have enough money to give them." So they were actually bailed out by some larger banks that sent them some money to make sure they can meet those requirements. But that's where you're really seeing issues is these more regional banks that rely on a couple wealthy individuals depositing money. If you bank with any of these large banks that have people across the country and one person isn't a large percentage of their deposits, there's not really any issues that we're seeing at this point.
Jarrod Bridgeman:
What's the benefit for the larger bank bailing out the smaller one?
Colin Holmes:
It's just more assets for them. They're just buying out all that debt, the assets. They're just going to make money on that in the future. It's deposits they didn't have before. They're just getting bigger and bigger.
Jarrod Bridgeman:
Would you say? It's time for me to start burying my money?
Colin Holmes:
In the backyard? Yeah, that's a great place to put it. Just bury it next to any dead cats you have in the backyard. It'll do more.
Jarrod Bridgeman:
Too many dead cats.
Casey Hiers:
Now some of these banks, I'm going to play devil's advocate. We'll just throw stuff at the big CFP in the room and see what you say. So the ESG scores, environmental, social, and corporate governance, these have become a big thing. And a lot of times some of these banks has been proven, their focus has been on ESG and all of the woke things that culture and society may be progressing towards. But a lot of these financial institutions are spending a lot of their time, energy, and resources on this, which distracts from their ultimate goals of being a successful bank. Any thoughts to that?
Colin Holmes:
Yeah, there's definitely distractions and different things they can invest and loan in. So that's one of the big things. If they're limiting who they loan to because it doesn't fit these new ESG requirements, that's a potential client they lost. That's a loan that they lost out on, and they're having to find other ways to make money. So they're spending more to meet all these requirements, but also limiting their client base and limiting potential lenders. And that's where you see some of these specialty banks come in. So a lot of them that are failing are actually the ones that are not following that currently, but they're the only ones that ... there's a couple crypto banks that really struggled because major banks won't loan to those types of companies. So they had to make these specialty banks for just crypto, and they're overexposed to one industry where they're running into issues when an FTX fails and there's issues in the crypto world.
Casey Hiers:
Has there been any accountability for that FTX failure?
Colin Holmes:
Who knows where that's at this point? I think the former owner has taken a little too much responsibility. He's just kind of admitting to everything, so who knows? That's
Casey Hiers:
Called a fall guy, Collin.
Colin Holmes:
Yeah, yeah. He's definitely taking the fall. Who knows what else is out there that he's protecting, but yeah, he's definitely taking the fall.
Casey Hiers:
Well, I know that Sri Lanka, the country, has fallen for the most part because they had such an ESG focus. The ESG scores that everybody gets excited about, the higher score you get, that means you're adhering to some central powers wishes, but yet the ones that have the best scores are the countries and entities that are doing the worst. It's an interesting correlation there.
Colin Holmes:
Yeah, you take your focus away from what's most important of running a balance sheet and keeping things financially and in tune, and you're more worried about an ESG score, which it doesn't really hit your bottom line. Like Jarrod asked, what's the benefit of JP Morgan Chase bailing out First Republic Bank on the West coast? How many clients do they already have in San Francisco that, do they really need that many more? Do they need those assets? What is the true benefit to them?
Casey Hiers:
Well, if there's somebody I don't like in the hallway and I'm like, "Jarrod, why don't you go punch them in the face for me?" And then Jarrod goes and punches him in the face and I'm like, "Wow, I'm the good guy here. I didn't do anything."
Colin Holmes:
Yeah, you could probably stop Jarrod after he did it and look like a savior.
Casey Hiers:
Yeah, that's a dub there. I think you're on something there. Yeah, aka, the FTX dude.
Colin Holmes:
Yeah, yeah, yeah. We got the fall guy. It's all built-in.
Casey Hiers:
He did our dirty work and we got the fall guy. Yeah, damn it. What other things, I guess tying this together to, we've said a lot here, bank runs, Central Bank digital currency, banks collapsing, falling, ESG. We've covered a lot of areas, but what does this mean? What does mean to our listeners? What does this mean for successful dentists who have a lot of money and assets? Let's kind of put a bow on this. Ultimately it's either act like nothing's happening or go bury your money in the backyard. Is there a middle ground here?
Colin Holmes:
Yeah, one of the good things that might come out of this, they've talked about increasing the FDIC insurance amount. So a lot of our wealthy dentists, we tell them not to keep a lot in the bank. But if some of you haven't been working with us, you might have a lot of money sitting in a bank account. They might be insuring more of that as part of this. That was part of the issue with Silicon Valley Bank.
Jarrod Bridgeman:
Is that still the 250?
Colin Holmes:
Yeah. They're talking about increasing that because 90% of the deposits at Silicon Valley Bank were above 250,000, so almost none of that was insured. That's backwards from where most banks are, but they're talking about increasing that. None of our clients have 250,000 sitting in a bank earning 0%. We'd rather do other things with that money.
Casey Hiers:
Like grow it.
Colin Holmes:
Yeah. Grow it at more than 0.001%.
Casey Hiers:
Yep, take a lot of risk out and still grow money. Now riddle me this, let's say you're a bank and you've got your FDIC $250,000 guarantee. Let's double it. Who cares?
Colin Holmes:
Yep.
Casey Hiers:
Let's say that you have a hundred entities with money in their account that's worth a lot of money, and then you have 10,000 with much less money. Once that guarantee's gone, they're going to probably help out the bigger folks first. And once it gets down, it's actually, and I'm asking this because I don't know, but it's actually almost like a hope. They see that and they think that everybody who sees it goes, "Well, my money's guaranteed." There's only so much of that guarantee that goes around and the big dogs are going to gobble that up first. Is there any validity to that?
Colin Holmes:
Yeah, I mean that FDIC insurance, that's a federal program where that's going to be backed by the government, not necessarily just that individual bank.
Casey Hiers:
Our government, that's 31 trillion in debt.
Colin Holmes:
Yeah.
Casey Hiers:
They're really that same group.
Colin Holmes:
They just take out more debt to pay off the debt of someone else. They're really good at that. So it'll all get back to us in some form or fashion. But yeah, those FDIC insurance is actually pretty stable in terms of insurance. Obviously, if something were to happen, we have no idea if they're actually going to honor all those. That's where they start asking these other banks to help out and chip in and pay for some of it, too. But that's essentially what it's in place for. And definitely, the big dogs eat first, but they have to figure out a way to make up that difference as well.
Casey Hiers:
I love to look at things, and this is probably a benefit and a fault of mine, but I like to look at worst case, best-case. And literally, if you look at worst case, best case, I don't think either one's great, but I don't know that there's a middle ground here.
Colin Holmes:
No, there's really not. Money in the bank, most people think it just sits at a vault in the back. But if you show up to most banks, there's not much money sitting there. Most of the money in the world is out in la la Land and digital currency somewhere, so it's pretty amazing. You think of you deposit money in the bank and you go and show up. But most money in the world, no one's ever seen.
Casey Hiers:
Here's another question for you, we've been "printing a lot of money". Well, this is certainly a topic that we don't have a crystal ball, but found it interesting that as this is becoming almost a weekly topic now, there was something about Deutsche Bank in the news over the weekend. Certainly a new topic for our country. Bank runs haven't been a thing for our lifetimes. But just wanted to get some insight from you and a little bit more clarity. But I think the best thing I liked is a lot of our clients, they don't just have money sitting in banks doing nothing. It's going to be available to them or growing. And there's a lot of different ways to utilize that money versus when we talk to people who don't work with us or don't have a good external team, they've got $600,000 just sitting in the bank because they don't know what to do with it. They're scared that they might get a tax surprise. They're scared that they don't really have a plan. And so that makes them sleep better at night. And all of this that's been in the news should maybe give them a little pause to just having all that cash sitting in the bank.
Jarrod Bridgeman:
Well, and if you're looking for more real advice from the specialist in the dental field, we are going to be in several places in April, by the way. We're going to be in Tampa.
Casey Hiers:
April 7th.
Jarrod Bridgeman:
That's right, Tampa. And then we're going to be outside of Dallas at the Colony on April 21st. That's pretty exciting. We're going to be also appearing at a couple different little shows as well. Go to fourquadrantsadvisory.com/events. We've got all the April events listed where we're going to be. So if you're in the area, come check us out. Or if you're not in the area, give us a call and we'd love to chat with you about what we can do for you.
Casey Hiers:
Boom, thanks, Colin. Appreciate it.
Colin Holmes:
Yeah, thanks for having me on.
Jarrod Bridgeman:
Thank you.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, going on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.
