In my 30-plus years as an advisor, 2008 was an auspicious year. Dan Nestlerode stepped down as CEO of Nestlerode & Loy, Inc. and I took over the helm of the company. The Great Recession also occurred during 2008. The S&P 500 dropped 56.8% from Oct. 9, 2007, to March 9, 2009, marking one of the worst periods for stocks and the economy. Nothing like taking over an investment firm in the middle of the worst economy since the Great Depression.
The 2008 financial crisis was caused by the real estate bubble bursting. Fannie Mae wanted to make home ownership more accessible and encouraged higher risk mortgages with lower down payments and lower credit scores. People continued to purchase homes with debt and turned them over quickly for a profit, which works well when prices are going up. Banks took on the mortgages and then passed them along to be put into mortgage bank loan instruments with high credit ratings. Everything was going well until home prices began to drop. People couldn’t sell their homes for more and quickly the mortgages that looked like a good bet were going into foreclosure. Banks were caught with loans that were no good and the banks who guaranteed the loans were caught flatfooted. The situation snowballed until the federal government had to step in to rescue banks or set up purchases by other solid banks for those that were in trouble.
In March 2023, Silicon Valley Bank (SVB) failed, and it was the largest U.S. bank failure since Washington Mutual in 2008. SVB specialized in banking for tech startups. While specialized, it was among the top 20 American commercial banks. Several issues hit SVB at once to cause its downfall. Rising rates hurt its customers’ businesses and forced tech startups to withdraw large amounts from the bank. Because new bonds were being issued at higher rates, the existing bond holdings that SVB had to sell to raise the cash were sold at a loss. SVB announced it would need to sell new shares to raise capital to help its balance sheet.
What happens when bank customers learn their bank doesn’t have enough capital? They try to get their money out to save themselves; it’s called a run on the bank. It’s the worst thing that can happen to a bank as their depositors all want their money back. (Think James Stewart in “It’s A Wonderful Life.”)
To avoid further panic, the Treasury, Fed and FDIC announced steps to ensure deposits would be paid in full. FDIC insurance is set at $250,000 per depositor, per insured bank, for each account ownership category. However, depositors at Silicon Valley Bank will get all their money to avoid other runs on other banks.
The concern for the economy and investors is whether the failure of SVB and other recent bank downgrades by Moody’s is leading us to another financial crisis.
Overall, the current crisis seems contained and Janet Yellen and cohorts took immediate steps to shore up banks by covering SVB. Large banks combined to save First Republic Bank and UBS bought Credit Suisse. The system has cracks, but the foundation seems solid. Certainly, the Federal Reserve felt strongly enough about the strength of the economy to raise rates yet again in the middle of this banking crisis.
For the small depositor, the big lesson is to keep holdings at individual banks below the FDIC limits. Yellen won’t always be there to pick up the pieces.
Judy Loy is a Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc. in State College.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.
