May 10, 2023 • 31 mins
It’s been a bumpy ride for banks lately – but context is everything! That’s why Josh Bretl, our fearless host and founder of FSR Wealth Strategies, is here to decode the collapse in recent weeks of Silicon Valley Bank, Signature Bank and First Republic.
When we talk about these bank failures and the role of the FDIC (Federal Deposit Insurance Corp.) in bailing them out, it’s important to understand the customer base of the institutions involved.
You’ll learn on this episode of Retirement Equals Freedom about the three key factors that have driven topsy-turvy ledger sheets and exposure for banks in general – but most especially among those serving primarily high-tech players holding lots of cash.
Interest rates at an all-time low converged with pandemic stimulus checks that produced a massive influx of cash deposits.
What happened next (you’ll have to tune in!) had everything to do with how those deposits and other cash holdings were invested and what occurred when interest rates started to rise.
Some banks – like those that specialize in serving the tech industry – have proved especially vulnerable. Risk mitigation is critical for just such situations, explains Josh, but you can rest assured that the banking system overall is fundamentally sound.
And remember: any account with a balance of up to $250,000 will always be covered by the FDIC.
It’s been a wake-up call for many of us who have been in an economic “dream state” the past 15 years, but there are fortunately lots of great financial planning strategies to help you navigate our new economic realities.
Josh and his Co-Host, Dave Schmidt, also leave you with some bonus advice to help manage the stress: Be kind. Go out there and live your life. We can make the world a better place!
Want to understand why it’s actually a bad thing for yields on investment vehicles like U.S. Treasury Bonds when interest rates go up? Listen to Episode 19 of Retirement Equals Freedom: "Do Bonds Have a Place in My Portfolio?"
If you’re feeling queasy about the recent banking roller-coaster, now may be the time to chat with Josh directly. He and the team at FSR Wealth Strategies are dedicated to ensuring your personal finances are safe – and growing! Click here to schedule your free 15-minute call.
Finally, here are a few fun links to explore if you’d like to dive into our podcast community:
- Sign up for FSR’s page-turner of a newsletter here.
- Join the R=F private Facebook group at this link.
- Visit this pod link resource to get one-click access to your favorite platform for listening to past episodes!
- You haven’t read "Harry Potter and the Sorcerer's Stone"? Book 1 is the very best!
- Click here for more about the behind-the-scenes FDIC negotiations that brokered the deal for Chase Bank to take over First Republic.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Josh Bretl (00:02):
Where banks were preparing for massive
losses, what actuallyhappened was there was a
massive cash inflow to banks.
The amount of cashsitting on a bank balance
sheet went up tenfold,overnight, it felt like.
So a bank that had ahundred million dollars
all of a sudden had $120or $130 million dollars.
That sounds like a good problemto have, but they have to do
(00:24):
something with that money.
they can't let itjust sit there.
They have to earn intereston it, otherwise they're
going to be losing money.
You have to weigheverything together.
But overall, it was kind of agood wake-up call for people
to get back to fundamentals.
And I feel like, actuallya lot of 2022, and even in
2023, it's been that wake-upcall out of the dream state,
(00:45):
that was the last 15 years.
Dave Schmidt (00:49):
It's been a bumpy ride for banks lately,
but context is everything.
that's why Josh, our fearlesshost, is here to decode the
collapse in recent weeks ofSilicon Valley Bank, Signature
Bank, and First Republic.
When we talk about thesebank failures and the role
the FDIC had in bailing themout, it's really important
to understand the customerbase of these institutions.
(01:10):
Interest rates at an all timelow, combined with pandemic
stimulus checks, produced amassive influx of deposits.
What happened next hadeverything to do with how
those deposits other cashholdings were invested, and
what occurred when interestrates started to rise.
Risk mitigation is criticalfor these situations, but rest
(01:30):
assured that the banking systemoverall is fundamentally sound.
It sure has been a wake upcall for many of us who have
been in an economic dreamstate the last 15 years.
But fortunately thereare many great financial
planning strategies thatcan help you navigate our
new economic realities,
And hey, Josh and I leave youwith some sound advice on how
(01:53):
to deal with all this stress.
Be kind.
Go out there andlive your life, man.
Because hey, we can makethe world a better place.
You're listening tothe Retirement Equals
Freedom Podcast.
Your host, Josh Bretl, is theowner of FSR Wealth Strategies.
And for the last 20 plusyears, Josh has been helping
(02:15):
fine folks like you, gain theconfidence to make retirement
the best part of your life.
And me.
Who the heck am I?
Oh, hey, I'm Dave!
Josh's longtime friend,co-host of the podcast and
big fan of dried mangoesfrom Costco and Sam's Club.
You gotta try 'em.
All right, all right, all right,enough of my voice, let me let
(02:38):
you let me end this introductionso we can get on with the show.
FSR Wealth Management is aregistered investment advisor
located in Elmhurst, Illinois.
Information and opinionscontained in this audio
have been arrived atby FSR Wealth advisors.
All information herein isfor informational purposes
and should not be construedas investment advice.
It does not constitute an offer,a solicitation or recommendation
to purchase any security.
FSR is not providing legal,tax, accounting, or financial
(03:00):
planning advice in this audio.
These views are as of thedate of this publication
and are subject to change.
Josh Bretl (03:24):
Maggie's in first grade.
Maggie loves to read,but she's in first grade.
She doesn't have thatsame level of experience.
Dave Schmidt (03:29):
Naturally.
Josh Bretl (03:30):
So Harry Potter, there's certain words,
plus it's a British author,there's just certain words
that she can't let go withoutasking, "What's that mean?
What's that mean?"
So it's like every page is like20 questions, "What's that mean?
What's that mean?"
We try to teach hercontext and just listen.
I've now gotten the factthat I'm not going to answer
you until the page is over.
And then we can go back, ifthere's anything you didn't
understand, we'll talk about it.
(03:52):
There was a thing in the bookyesterday where they're talking
about they heard somebodywhooping in celebration.
And I wouldn't go backand answer that to her.
Because I was like, sheunderstands what whooping is.
I mean, the girl,whoops her whole life.
And so we're sitting atbreakfast this morning and
we're talking about HarryPotter because I read the books
and Missy didn't last night.
(04:12):
So she was asking, "What'dyou learn in Harry Potter?"
And Maggie goes, "Dad wouldn'ttell me what whooping means."
Dave Schmidt (04:18):
oh, no.
Josh Bretl (04:19):
All four of us are going, "Whoop-whoop!"
She goes, "Oh, okay."
Dave Schmidt (04:26):
That's awesome.
That's funny.
Landon sees commercialsfor Harry Potter.
He sees pictures ofthe amusement park,
and he's intrigued.
I'm slightly concernedhe wouldn't enjoy it.
I don't read books.
I'm like Jason Bateman, booksare just foreign language to me.
Josh Bretl (04:44):
Without a doubt.
Dave Schmidt (04:45):
I don't know, how do I introduce him to it?
Josh Bretl (04:47):
I actually think Harry Potter is
right up your alley.
The two of you could read books.
Just start with book one.
Book one is the easiest.
It's Missy's favorite.
As she says, all the laterbooks, they have dark
symbolism and all sorts of...
Now I don't understandsymbolism, I barely
understand what a metaphor is.
But Missy's very goodat English, I'm not.
(05:09):
But she says, bookone's phenomenal.
It's a great...
Between the fantasy and thedescriptive characters and
just the thought process, bothyou and Landon will love it.
It's an easy read.
You can do it a heartbeat.
And if you don't like toread, the audiobook is one
of the best audiobooks I'veever heard my entire life.
Dave Schmidt (05:27):
Really?
Josh Bretl (05:28):
The narrator is great.
Dave Schmidt (05:30):
Are you looking at that name now?
Josh Bretl (05:33):
Yeah, I kind of want to play it here.
I kind of want to put aclip of it in there for you.
Dave Schmidt (05:37):
All right.
Josh Bretl (05:38):
This is the audiobook here real quickly.
Dave Schmidt (05:41):
Yeah, sure.
"'... Harry Potter Narrator (05:42):
make you, get out of the way,
Potter!' Harry made up hismind in a split second.
Before Snape could takeeven one step toward him,
he had raised his wand.
'Expelliarmus!'"
Josh Bretl (05:56):
the narrator, whoever the actor is
reading this, I think it'sJim Dale or something.
He's phenomenal.
It's Jim Dale.
I'm looking on my screen here.
But do it that way.
Listen to it.
Dave Schmidt (06:06):
Okay.
Josh Bretl (06:06):
Buy the audiobook.
It's worth it.
It's really cool.
In fact, try your local libraryand see if you can download it.
Dave Schmidt (06:14):
We're doing an event at the Glen Ellyn Library.
Maybe I could just get it there.
Josh Bretl (06:17):
Good call.
It's worth it.
You both, you and Landonwill thoroughly enjoy it.
I'm assuming Carla has read it.
Dave Schmidt (06:24):
No.
She stays away from anythingfantasy and supernatural.
Josh Bretl (06:30):
Really?
Even as a teacher, Ifigured you'd have to
know all that stuff.
Dave Schmidt (06:33):
No.
Josh Bretl (06:34):
She is so boring.
Dave Schmidt (06:36):
I agree.
She's like, if they make booksabout "The Real Housewives",
maybe I'll read them.
But not to good stuff likeHarry Potter and stuff.
I'm going to get my buttkicked for imitating her.
Josh Bretl (06:48):
I'm worried about you leaving that in, but we
know she doesn't listen to thepodcast, so it doesn't matter.
Dave Schmidt (06:52):
It's true.
Josh Bretl (06:52):
If anyone, Annette, if you're listening to this,
please don't tell Carla.
Dave Schmidt (06:57):
Yeah.
And guess what, Josh and Iare going to have a really
good lunch, but you'll neverknow because you don't listen.
Josh Bretl (07:04):
All right.
Let's not tempt them.
Dave Schmidt (07:07):
Not tempt fate.
It's true.
Leslie may actually betalking to our wives behind
our back and telling themeverything that we say.
Josh Bretl (07:15):
Leslie, we've talked about Leslie before,
our show notes writer.
We're going on vacation to SanFrancisco after school is out.
We wanted to take the kidssomewhere different and we're
going to stay up in Muir Woodsand it's going to be cool.
Dave Schmidt: "Everywhere you look. (07:26):
undefined
Everywhere..."
Josh Bretl (07:29):
Our kids don't care about that.
Dave Schmidt (07:30):
Right.
Josh Bretl (07:31):
I've been to San Francisco a bunch of times.
It's been probably 10 yearssince I've been there.
But Leslie lives out thereand I asked her if she had
any recommendations and inher own words, snowballed me.
And it was the most helpful.
And Missy and I have checkedout books from the library.
We've read all these websites.
But Leslie's 30-page email,this is what it felt like,
(07:53):
was the most helpful thingwe've ever read to it.
If anyone's going to SanFrancisco, let me know, I will
forward you Leslie's email.
It was great.
Dave Schmidt (08:02):
Leslie is just awesome.
Hidden Gem.
I don't actually don'twant other podcasters and
marketing people find outabout her because I want to
hog her out to ourselves.
Josh Bretl (08:13):
Either we need to give her more work....
Dave Schmidt (08:16):
Let's just triple our podcast output then.
Josh Bretl (08:18):
We're going to triple it?
Dave Schmidt (08:18):
Let's triple it.
Josh Bretl (08:18):
I like it.
Dave Schmidt (08:19):
Tripling our podcast output's a
lot like these recentbank failures, I think.
No, that's implying that we'dfail on our adventures here.
Josh Bretl (08:35):
I actually wanted to talk about this.
This came in a headlinein the news recently.
Dave Schmidt (08:41):
What is today's date?
Because we're recording this.
Josh Bretl (08:43):
We're recording this on May 2nd.
And recently there was anotherbank failure over the weekend.
First Republic Bank, whichis a fairly large bank, was
taken over by the FDIC and soldovernight to JPMorgan Chase.
This is the third bankfailure of the year.
Third big bank failurein over the year.
Earlier in March, we had SiliconValley Bank out, not too far
(09:06):
from Leslie, in Silicon Valley.
We had Signature Bank, aNew York bank, and then we
had recently First Republic.
They happened a littlebit differently, but they
seemed to come on quick.
They were kind of all ofa sudden out of the blue.
And I wanted to spend afew minutes talking about
why this is occurring andwhy we're seeing this now.
Because we haven't talkedabout this for a long time.
(09:27):
It's been '08, ' 09, '07 alittle bit, when we started
seeing some of these things.
And it's a different scenario.
It's a different ballpark.
I wanted to kind of set thestage of why this is happening
and what's going on and where wethink it's going in the future.
This is a timely podcast.
The facts could change.
And if you're listening tothis three years from now.
This could be a wholedifferent world.
Dave Schmidt (09:48):
Can I say one quick thing?
In 2005 when I first...
2005?
Yeah.
When I got my job at the bank,everybody around me, including
you, said, "Oh, good Lord.
The chances of thatbank failing are high."
I would like to say forthe record, I have not ever
worked for any of thosethree banks that just closed.
I cannot be blamedfor this one, Josh.
Josh Bretl (10:10):
Charter One, which is where you worked...
Who bought Charter One?
Dave Schmidt (10:13):
Citizens Bank and then Fifth Third
or BMO bought Citizens.
Josh Bretl (10:19):
Actually, David, it's a great way to put it.
Even banks, as a generalrule of thumb, are so strong
that even you working therecouldn't bring one down.
Dave Schmidt (10:27):
I know.
Josh Bretl (10:28):
It took the likes of some really bad
decisions and some differentthings that went out there.
Dave Schmidt (10:33):
Thank you very much for getting
that on the record.
Josh Bretl (10:36):
Yep.
No.
Banks are very strong.
But I do want to talkabout what's going on here
because these are unique.
This is something that peopledidn't see coming here.
Let me talk a little bitabout how a bank works and
how a bank makes money.
When you deposit money into abank, they have to do something
with that because they'regoing to pay you interest.
Now, it may not be a lotof interest, but they're
(10:57):
going to pay you interest.
Let's say they'regoing to pay you 1%.
They have to take that money andthey've got to put it somewhere
else so they can earn more than1% because not only do they have
to pay you 1%, but they've gotto pay their employees, they've
got to buy property, they'vegot those giant buildings
they got to take care of, andthey have to make a profit.
(11:17):
They may need to earntwo and a half percent.
I'm making numbers up here.
3%, 4%, whatever that mightbe, so they can pay you 1%.
Make sense so far?
Dave Schmidt (11:25):
So far so good, my man.
Josh Bretl (11:27):
What they do is they're going to make money
in a couple different ways.
One is they're going tocharge fees, and fees come
out of all sorts differentplaces, but that's not what
I'm talking about today.
They're going to earn interest.
And they earn interestin one of two ways.
One is they send loans out.
They'll make a loan.
You'll deposit your money,they'll turn around and
loan it to somebody elsefor whatever their use.
(11:48):
And loan rates might be 4%or 5%, whatever the bank
charges, so they can turnaround and pay you 1%.
They can't usually loanout all of their money.
If a bank takes in, let'suse a number here, let's
say a hundred milliondollars, they may be able
to only loan out 60 million.
They've got to do somethingelse with that 40.
(12:10):
Does that make sense?
What they do traditionallyis they will use what
they call Tier 1 Capital.
Tier 1 Capital is likerisk-free capital.
It's US Treasuries.
It's a very common thing.
It's really high gradebonds and investments.
Makes sense so far?
Dave Schmidt (12:29):
Yeah, Roger that.
Josh Bretl (12:30):
Roger that.
This is riveting stuff.
This is actually fascinatingstuff, too, to me.
Dave Schmidt (12:34):
Yeah, it would be fascinating to you.
Alex (12:37):
Hashtag tax
Josh Bretl (12:40):
Now, what happens though is during the
pandemic, everybody thoughtthat we were going to have
a mass economic issue.
Banks started preparingfor losses like crazy.
They were allocating cashto get ready for losses.
But the government came inand said, "Whoa, we're going
to stimulize this thing andwe're going to give more
(13:01):
stimulus than we've evergiven in our entire life."
Where banks were preparingfor massive losses, what
actually happened was therewas a massive cash inflow to
banks, bank balance sheets.
The amount of cashsitting on a bank balance
sheet went up tenfold,overnight, it felt like.
So a bank that had ahundred million dollars
all of a sudden had $120or $130 million dollars.
(13:24):
That sounds like a good problemto have, but they have to do
something with that money.
And they can't letit just sit there.
They have to earn intereston it, otherwise they're
going to be losing money.
Follow me so far?
Dave Schmidt (13:36):
Yeah.
Josh Bretl (13:38):
They weren't loans.
You can't all of a suddencome up with that amount
of loans overnight.
So they were putting itback into treasuries.
Dave Schmidt (13:45):
Okay, treasury is a what now?
Josh Bretl (13:46):
Treasury is a government bond,
a government note.
You are loaning moneyto the US government.
They're called US Treasuries,and they would pay you
interest in return.
Dave Schmidt (13:56):
Got it.
Josh Bretl (13:57):
Now, back then, the interest on those treasuries
were really, really low.
Dave Schmidt (14:01):
Back then, as in like 2020-ish?
Josh Bretl (14:02):
2020, 2019, 2018, 2020.
And a five-year treasury waspaying one and a half percent.
Maybe two.
Nothing crazy.
Now, fast-forward to today,at the end of last year, the
end of 2020, treasuries werepaying four and a half, 5%.
(14:22):
But these banks weresitting on all of these old
treasuries that were stillpaying them one and a half.
Now what happens, we'vetalked about this in our
bond episode, if you rememberthat riveting episode,
bonds work on an inverserelationship to interest rates.
As interest rates rise, thevalue of bonds has to fall.
Dave Schmidt (14:39):
Has to.
Josh Bretl (14:40):
Mathematically.
Dave Schmidt (14:41):
Mathematically.
Josh Bretl (14:43):
These banks' balance sheets were showing a giant loss
in their treasury portfolio.
Now, as long as they heldthem, and if it was a five-year
treasury, as long as they heldthem for that five-year period,
they'd get their money back.
But they were showing thishuge loss as it came into play.
Now, the bank regulators, theydon't look at that loss as
far as Tier 1 Capital goes.
And it's not really a big deal.
(15:05):
But these banks are onlyearning one and a half percent.
Now, in the world of SVBBank, is a great example here.
SVB Bank had a lot of really,really high-end depositors.
They worked specificallywith these Silicon Valley
companies that would have-
Dave Schmidt (15:23):
it's hard to say.
Josh Bretl (15:24):
It is.
Dave Schmidt (15:24):
And it's even harder to say when
you follow up with Silicon.
Specifically Silicon.
Josh Bretl: Specifically Silicon. (15:27):
undefined
Silicon Valley Bankspecialized in startups that
had large cash balances.
These companies wouldhave millions of dollars
in their accounts.
And the FDIC insurancewas only 250,000 bucks.
So what happened was the reportcame out that SVB Bank was
(15:50):
losing money because thesetreasuries were underwater.
Well, all the depositorssaid, "Hey, I have 5 million
of uninsured deposits."
And so they said, "Hey, we'regoing to move this money."
And moving money in abank nowadays is as simple
as picking up your phoneand transferring money.
Money would leave overnight.
Dave Schmidt (16:10):
And they can't really control that.
Josh Bretl (16:11):
They can't control it, it's the clients' money.
It's the customers' money.
To the customers' viewpoint,they felt nervous.
They felt, "Hey,what's going on here?"
And we had these uninsureddeposits and we had to make
sure that they were safe.
Now, if you look atthe safety of banks.
All of a sudden it broughtout the safety of banks
that came out there.
(16:31):
And the FDIC came inand they shut SVB and
Signature Bank down, kindof the middle of the day.
And they said, "Hey,we're going to take..."
They created what'scall a bridge bank.
And they did all these thingsand eventually somebody else,
another bank, bought them.
But to save those deposits,the government had to come
in and say, "Hey, there's nomore uninsured deposits, SVB.
(16:52):
If your money is at SVB,we will insure all of it."
And what that did is thatjust kept everybody else
who was still left toleave their money there.
Otherwise, the whole thingwould've collapsed and have
been a massive calamity.
Dave Schmidt (17:04):
Do you know percentage-wise of how much
assets was taken out, howmuch money was taken out?
Josh Bretl (17:09):
I did read that, that number is public.
It was a pretty highnumber, and it was actually
organized via social media.
Dave Schmidt (17:14):
Depositors at the bank went into a Reddit and-
Josh Bretl (17:18):
"Hey, we need to pull money out.
Did you guys see this?
We're transferring money."
Stuff like that.
Which is all legal,it's all legitimate.
Dave Schmidt (17:26):
Totally.
Josh Bretl (17:27):
And it's understandable.
But the Federal Reservehas not done them any help
because of the fact thatthey're the ones raising
interest rates like crazy.
The treasuries are builtoff of and all these
things are built off of.
When they have that giantloss in their portfolio,
which isn't truly a lossbecause they have that money
sitting there, it's becomea giant problem as they've
(17:48):
had to pull money out there.
What we see here is we seekind of an interest rate issue.
We see a timing issue.
And we also see a poorlymanaged risk issue.
I'm having trouble today,a poorly managed risk issue
because they should haveseen this interest rate risk.
But it was a culmination of,there's never been deposits
coming into a bank this fast.
(18:09):
From the stimulus, bankshave never seen this
level of cash input.
Dave Schmidt (18:14):
Got it.
Josh Bretl (18:14):
At a time when interest rates were
record lows, they had todo something with the cash.
They invested that cash in,low rate, US Treasury bonds.
Interest rates went up, had toshow a loss, and that triggered
a fear as that came into play.
Now, the nice thing is allbanks in the country are
pretty much going throughthe exact same thing.
(18:35):
But some of them have hedgedtheir risk better, and they
don't have the same issues,or they don't have nearly the
level of uninsured deposits.
The average depositor, ifthe average depositor only
has 80,000 as opposed to800,000, well the average
depositor is fully insured, itdoesn't matter what happens.
That becomes really no big deal.
(18:59):
Now, Signature andFirst Republic, they had
similar things happen.
They're a little bitdifferent than SVB.
First Republic, though haskind of been on the radar.
And what happened isthe FDIC did not shut
them down overnight.
They did over the weekend.
And they arranged a deal.
The bank closed Friday.
On Monday morning,they announced, "Hey,
JPMorgan's taken it over."
(19:20):
And over the weekend,they negotiated that
whole deal as it came in.
Those First Republicdepositors never really knew.
They just said, "Hey, nowyou're part of Chase."
Similar to, you did sogood at Charter One, all
of a sudden overnight, theybecame part of Citizens Bank.
Dave Schmidt (19:38):
Citizens Bank.
Overnight though, we allof a sudden had our name
all over the, I think it'sa Pittsburgh Pirates or...
Josh Bretl (19:43):
Citizens Bank field?
All of a sudden youguys had a field.
Dave Schmidt (19:46):
Yeah.
We all of a sudden had a field.
And I'm like, "See, I did that.
Might be the Phillies.
I can't remember."
Oh, boy.
So do you know was Chaseforced to take this on?
Or they asked to?
Josh Bretl (19:59):
I don't know the specifics.
Boy, I'm just sayingsome fun words there.
I don't know the specifics,but I was reading an article
on FT, Financial Times, andthere was a bidding war.
And Chase put in somemoney as did the FDIC.
Chase put in the most, orwhoever, whatever happened here.
And this is somethingthat you wouldn't see.
They don't really letChase buy banks anymore.
(20:20):
Chase is too big.
But, First Republic, theywaive that because they
can come in and support.
Dave Schmidt (20:27):
Emergency.
Josh Bretl (20:27):
They have the financial strength to do that.
The government will beout some money on this.
They will lose somemoney, the FDIC.
But Chase is going toprotect all the depositors
as that comes in.
So bank failures, they'realways out there, but this
is kind of a unique one.
With the sudden influx ofcash, the interest rate
changes, the way you cancommunicate on social media,
(20:47):
the way you can instantlytransfer money nowadays.
This is something thatI don't think we're done
seeing the end of this, butI think for the most part,
our financial institution,the the banks in general are
extremely well capitalized.
Dave Schmidt (21:03):
I think what adds a level of fear is just how
much uncertainty and volatilitythere is in general with
our financial institutions.
I'm not going to pretend like Iknow the fancy words for it, but
what I am more concerned with ishow does this affect everybody?
Like the normal peoplelike your clients?
And does this affectpeople that don't even have
(21:23):
money with those banks?
Talk to me, goose.
Josh Bretl (21:26):
That's a great question.
I mean, this is partof risk management.
This is part of...
Dave Schmidt (21:29):
I know it's a great question, Josh.
Don't patronize me.
Josh Bretl (21:34):
Talk to me Goose.
I like the line.
This is something as owningyour retirement, when you
have to decide where you'regoing to have money sit.
This is part ofthat safety thought.
As you're looking at whereyou're going to stick your
money, looking at the strengthof banks is something we always
want to take into consideration.
Now, I got more calls aboutFDIC limits the weeks after SVB
(21:56):
Bank, then I probably did allof the last 10 years combined.
Dave Schmidt (21:58):
I bet.
Josh Bretl (21:59):
Banks are still strong.
Things are still ingood stead out there.
But you still want tomonitor that because this
could happen to a retiree.
And now what does that mean?
For the most people, it does notmean you're going to lose money.
People who are losing moneyare the giant corporations.
They're the giant investors.
The hedge funds, thingsalong those lines.
For the average Joe, theaverage client that we're
(22:22):
working with, what it couldmean is a giant headache if
you're not planned for it.
Because just because the FDICcomes in and insures you,
doesn't mean your money isback in your account overnight.
It might take a few weeks.
That's one of those, havingthose emergency funds,
having those things out therebecomes really important.
And it's also spreadingout your wealth.
(22:42):
It's spreading out thethought that there are certain
institutions that aren'timpacted by the volatility
of interest rates the waybanking institutions are.
But banking institutionsalso provide something.
They're not subject to thefluctuations of the market.
You have to weigheverything together.
But overall, it was kind of agood wake-up call for people
(23:03):
to get back to fundamentals.
And I feel like, actuallya lot of 2022, and even in
2023, it's been that wake-upcall out of the dream state,
that was the last 15 years.
Dave Schmidt (23:14):
Yeah.
Josh Bretl (23:15):
Bank failures.
Dave Schmidt (23:16):
Bank failures, man.
Who would've thought it'd besuch a riveting podcast topic?
Josh Bretl (23:20):
Hopefully you understood it and I figure if
you understand it, the much moreintelligent listeners we have
will definitely understand it.
Dave Schmidt (23:28):
I should be offended, but #truth.
What I was thinking was...
Hey Mr.
Josh, let's take a break.
You've been talking for solong and my ears are sore.
Let's not make them snore.
Listening shouldn't be a chore.
So let's get to know Josh andDave and watch our ratings soar!
Josh Bretl (24:00):
I have a hard enough time coming
up with actual topics totalk about on the podcast.
If you make me start researchingbird sounds, I'm really
going to have an issue.
Dave Schmidt (24:08):
I try not to LOL it's my own music there,
because that "Chickedy"got me laughing, man.
That was good.
That was really good.
Josh Bretl (24:16):
I went back to the pod deck here.
And I'm going to getserious on this one.
Dave Schmidt (24:21):
Oh, crap.
Josh Bretl (24:24):
Look at your face.
Dave Schmidt (24:25):
I don't do serious well.
Josh Bretl (24:28):
What do you feel people complain too
much about these days?
Dave Schmidt (24:33):
Something that really grinds my gears, maybe.
Josh Bretl (24:36):
Yeah, what grinds your gears?
Dave Schmidt (24:38):
Okay, I'll tell you what grinds my gears.
I know you see it a lot.
I see it a lot, too.
I have always had a deepappreciation for those that
work in the service industry,because I did myself.
And you did to some extent.
I cannot tolerate when peopleare impatient with people
in the service industries.
(24:59):
Restaurants specifically.
It drives me bonkers.
And I just want to go say, "Heyman, how about you put yourself
into their shoes for a second?
You have no idea whatthey're going through."
I've always gone out of myway to be super friendly with
these people and never blamethem for what's happening.
(25:20):
That, Josh, thatis my complaint.
Josh Bretl (25:23):
I do find it funny, and I realize this, that we're
complaining about complaints.
Dave Schmidt (25:27):
Yeah, that's so meta.
Josh Bretl (25:31):
What people complain about too much
to me is other people.
Dave Schmidt (25:34):
Oh, I like that!
Josh Bretl (25:37):
I feel like we've become a us-versus-them society.
It's always, "Well,they said that."
And, "They believe this."
Dave Schmidt (25:44):
it's gross.
Josh Bretl (25:46):
We agree at 98% of things as a country.
If we could solve a fewthings working together, and
just stop complaining andenjoy and live your life and
be kind and go out there.
I think we can make theworld a better place.
I feel a little JohnLennon ask on this one.
Dave Schmidt (26:01):
Or Michael Jackson, Make the
world a better place.
To that point, I heard this,I don't know who said it.
It was probably on "SmartLess".
Somebody really smarterthan I said this.
But people are so much nicerthan we think they are.
Josh Bretl (26:16):
Yes.
They're all goingthrough the same stuff.
And if you would just notcomplain or judge or do
something, or sit and listento them, I think we'd have
a whole new world out there.
Dave Schmidt (26:26):
A whole new world!
This is the Aladdin theme song.
Come on now.
Josh Bretl (26:30):
Let's just let it go.
Dave Schmidt (26:31):
You got me.
Let it go.
Now we're singing.
So many Disney songs are justso relevant to life, am I right?
Josh Bretl (26:40):
Disney doesn't complain.
Dave Schmidt (26:41):
No, but speaking of Disney, Dave
relates to retirees.
Josh Bretl (26:50):
I was talking about bank failures and really
wondering how the heck you'llrelate this to retirees.
Dave Schmidt (26:55):
Sure.
Now, first of all, you do knowthat my sister Julie and I can
sing any number of Disney themesongs at the snap of a finger.
"Little Mermaid" will do it.
You want us to do a duet?
Josh Bretl (27:06):
I challenge the two of you.
Jules, if I can get youand Dave on this podcast.
Oh, man.
Dave Schmidt (27:13):
Well, with the new "Little Mermaid" coming
out, I'm curious to see howthey kind of redo those songs.
Because we knew that onetop to bottom, it was crazy.
Retirees, soon-to-beretirees, and just everybody
else out there who likesmoney, I can relate to you
with these bank closings.
In fact, that's why I justchoose not to have money.
(27:35):
Instead, I've chosen tolive a life of bartering.
Did you know that?
I barter everything.
Josh Bretl (27:40):
Sleepy Hollow dolls?
Dave Schmidt (27:41):
That could be one of them.
But I've never made amortgage payment in my life.
Did you know that?
Josh Bretl (27:48):
Really?
Dave Schmidt (27:48):
I just go out and I play harmonica for
local charities, and thenthey pay for my mortgage.
Did you know that?
Josh Bretl (27:52):
Oh, that's really nice.
Dave Schmidt (27:53):
Do you pay for your own food?
Josh Bretl (27:56):
I do and yours.
Dave Schmidt (27:57):
Yeah, you do.
But see I don't-
Josh Bretl (27:58):
when this podcast is done, I think
I'm buying you lunch again.
Dave Schmidt (28:02):
When you're not around, I don't
pay for food either.
Instead, I go out in thestreet, I let people stare
at my big legs and, inexchange, they give me food.
Did you know that?
I barter for food.
Yeah.
And finally, this one'sone's pretty private, I
haven't really shared it withanybody, but the clothes I'm
wearing, I don't buy them.
No.
I go arm wrestle monksin Joliet, and they
(28:23):
buy me these clothes.
I, dear friends, had nevertrusted cash and said, "I
live a life of barter."
Am I totally setting you up forthe best full house moment ever?
Josh Bretl (28:34):
I'm going to try and distract
from what you just said.
Dave Schmidt (28:39):
Sure.
Josh Bretl (28:40):
People, once you get to know Dave, you
wouldn't complain about him.
You would think he'sa lovely human being.
Dave Schmidt (28:47):
There's really nothing to- Well,
Carla would argue that.
Other than Carla, no one hasany beef with me, I don't think.
Josh Bretl (28:52):
No, I doubt it.
But you can keep cash at banks.
They are safe.
They will take care of you.
But I think it's good that youhave another way you're planning
for your future by also havinga system of bartering in place.
Does this mean I don'thave to pay you anymore?
Dave Schmidt (29:11):
No.
That's another part of my barteris I'm your friend and then,
in exchange, you buy me food.
Josh Bretl (29:21):
I'm worried that you are viewing banks differently
than a lot of the retireesand soon-to-be retirees are.
But if they're so concernedabout the safety of banks
that they think theyhave to work with...
Where'd you getyour clothes from?
Monks in Aurora.
Dave Schmidt (29:39):
I had to arm wrestle Monks in Joliet.
Josh Bretl (29:41):
Joliet.
Dave Schmidt (29:41):
Yeah, there's a whole clan of them out there.
Josh Bretl (29:42):
They're not as strong as the Aurora monks.
Dave Schmidt (29:44):
No.
True.
Right.
Josh Bretl (29:47):
But you should worry about diversifying
and making sure thatyou have other systems.
Because one day, whatif your legs don't look
as good as they do now?
And you actually, I feellike this is demeaning to
other people with large,hairy legs, but you can
feel safe in banks now.
I'm not worried about yourmoney because you're insured.
Dave Schmidt (30:10):
We are insured.
I think if anybody doeshave any fear about these
bank closings, jump onour fsrwealth.com/podcast.
Book a complimentary15-minute call with Josh.
Josh Bretl (30:21):
Actually having too much cash is not just
a risk inside the banks.
It's also interest rate riskinternally for yourself.
Inflation risk, thingslike that can hurt.
It's always good to have moremoney than less, but having
too much cash can hurt.
And not because of bankfailures, but just because
it doesn't fit well intoowning your own retirement.
(30:44):
Dave?
I think your DR2R is alittle bit of a stretch.
The way you tied that lastpart together there, brilliant.
Dave Schmidt (30:53):
I know.
What would thispodcast be without me?
Let's be honest here.
Josh Bretl (30:56):
Nonexistent.
Dave Schmidt (30:57):
Nonexistent, no.
Josh, you know how weusually kind of end this
on a witty note here.
I am about to pee my pants.
And as you know, Idon't buy clothes.
I barter for them.
I'm going to have tocut this podcast short.
I need to run and pee.
Bye!
Peeing in my pants is cool.
Alex (31:16):
Hashtag tax nerd.
Where banks were preparing for massive
losses, what actuallyhappened was there was a
massive cash inflow to banks.
The amount of cashsitting on a bank balance
sheet went up tenfold,overnight, it felt like.
So a bank that had ahundred million dollars
all of a sudden had $120or $130 million dollars.
That sounds like a good problemto have, but they have to do
(00:24):
something with that money.
they can't let itjust sit there.
They have to earn intereston it, otherwise they're
going to be losing money.
You have to weigheverything together.
But overall, it was kind of agood wake-up call for people
to get back to fundamentals.
And I feel like, actuallya lot of 2022, and even in
2023, it's been that wake-upcall out of the dream state,
(00:45):
that was the last 15 years.
Dave Schmidt (00:49):
It's been a bumpy ride for banks lately,
but context is everything.
that's why Josh, our fearlesshost, is here to decode the
collapse in recent weeks ofSilicon Valley Bank, Signature
Bank, and First Republic.
When we talk about thesebank failures and the role
the FDIC had in bailing themout, it's really important
to understand the customerbase of these institutions.
(01:10):
Interest rates at an all timelow, combined with pandemic
stimulus checks, produced amassive influx of deposits.
What happened next hadeverything to do with how
those deposits other cashholdings were invested, and
what occurred when interestrates started to rise.
Risk mitigation is criticalfor these situations, but rest
(01:30):
assured that the banking systemoverall is fundamentally sound.
It sure has been a wake upcall for many of us who have
been in an economic dreamstate the last 15 years.
But fortunately thereare many great financial
planning strategies thatcan help you navigate our
new economic realities,
And hey, Josh and I leave youwith some sound advice on how
(01:53):
to deal with all this stress.
Be kind.
Go out there andlive your life, man.
Because hey, we can makethe world a better place.
You're listening tothe Retirement Equals
Freedom Podcast.
Your host, Josh Bretl, is theowner of FSR Wealth Strategies.
And for the last 20 plusyears, Josh has been helping
(02:15):
fine folks like you, gain theconfidence to make retirement
the best part of your life.
And me.
Who the heck am I?
Oh, hey, I'm Dave!
Josh's longtime friend,co-host of the podcast and
big fan of dried mangoesfrom Costco and Sam's Club.
You gotta try 'em.
All right, all right, all right,enough of my voice, let me let
(02:38):
you let me end this introductionso we can get on with the show.
FSR Wealth Management is aregistered investment advisor
located in Elmhurst, Illinois.
Information and opinionscontained in this audio
have been arrived atby FSR Wealth advisors.
All information herein isfor informational purposes
and should not be construedas investment advice.
It does not constitute an offer,a solicitation or recommendation
to purchase any security.
FSR is not providing legal,tax, accounting, or financial
(03:00):
planning advice in this audio.
These views are as of thedate of this publication
and are subject to change.
Josh Bretl (03:24):
Maggie's in first grade.
Maggie loves to read,but she's in first grade.
She doesn't have thatsame level of experience.
Dave Schmidt (03:29):
Naturally.
Josh Bretl (03:30):
So Harry Potter, there's certain words,
plus it's a British author,there's just certain words
that she can't let go withoutasking, "What's that mean?
What's that mean?"
So it's like every page is like20 questions, "What's that mean?
What's that mean?"
We try to teach hercontext and just listen.
I've now gotten the factthat I'm not going to answer
you until the page is over.
And then we can go back, ifthere's anything you didn't
understand, we'll talk about it.
(03:52):
There was a thing in the bookyesterday where they're talking
about they heard somebodywhooping in celebration.
And I wouldn't go backand answer that to her.
Because I was like, sheunderstands what whooping is.
I mean, the girl,whoops her whole life.
And so we're sitting atbreakfast this morning and
we're talking about HarryPotter because I read the books
and Missy didn't last night.
(04:12):
So she was asking, "What'dyou learn in Harry Potter?"
And Maggie goes, "Dad wouldn'ttell me what whooping means."
Dave Schmidt (04:18):
oh, no.
Josh Bretl (04:19):
All four of us are going, "Whoop-whoop!"
She goes, "Oh, okay."
Dave Schmidt (04:26):
That's awesome.
That's funny.
Landon sees commercialsfor Harry Potter.
He sees pictures ofthe amusement park,
and he's intrigued.
I'm slightly concernedhe wouldn't enjoy it.
I don't read books.
I'm like Jason Bateman, booksare just foreign language to me.
Josh Bretl (04:44):
Without a doubt.
Dave Schmidt (04:45):
I don't know, how do I introduce him to it?
Josh Bretl (04:47):
I actually think Harry Potter is
right up your alley.
The two of you could read books.
Just start with book one.
Book one is the easiest.
It's Missy's favorite.
As she says, all the laterbooks, they have dark
symbolism and all sorts of...
Now I don't understandsymbolism, I barely
understand what a metaphor is.
But Missy's very goodat English, I'm not.
(05:09):
But she says, bookone's phenomenal.
It's a great...
Between the fantasy and thedescriptive characters and
just the thought process, bothyou and Landon will love it.
It's an easy read.
You can do it a heartbeat.
And if you don't like toread, the audiobook is one
of the best audiobooks I'veever heard my entire life.
Dave Schmidt (05:27):
Really?
Josh Bretl (05:28):
The narrator is great.
Dave Schmidt (05:30):
Are you looking at that name now?
Josh Bretl (05:33):
Yeah, I kind of want to play it here.
I kind of want to put aclip of it in there for you.
Dave Schmidt (05:37):
All right.
Josh Bretl (05:38):
This is the audiobook here real quickly.
Dave Schmidt (05:41):
Yeah, sure.
"'... Harry Potter Narrator (05:42):
make you, get out of the way,
Potter!' Harry made up hismind in a split second.
Before Snape could takeeven one step toward him,
he had raised his wand.
'Expelliarmus!'"
Josh Bretl (05:56):
the narrator, whoever the actor is
reading this, I think it'sJim Dale or something.
He's phenomenal.
It's Jim Dale.
I'm looking on my screen here.
But do it that way.
Listen to it.
Dave Schmidt (06:06):
Okay.
Josh Bretl (06:06):
Buy the audiobook.
It's worth it.
It's really cool.
In fact, try your local libraryand see if you can download it.
Dave Schmidt (06:14):
We're doing an event at the Glen Ellyn Library.
Maybe I could just get it there.
Josh Bretl (06:17):
Good call.
It's worth it.
You both, you and Landonwill thoroughly enjoy it.
I'm assuming Carla has read it.
Dave Schmidt (06:24):
No.
She stays away from anythingfantasy and supernatural.
Josh Bretl (06:30):
Really?
Even as a teacher, Ifigured you'd have to
know all that stuff.
Dave Schmidt (06:33):
No.
Josh Bretl (06:34):
She is so boring.
Dave Schmidt (06:36):
I agree.
She's like, if they make booksabout "The Real Housewives",
maybe I'll read them.
But not to good stuff likeHarry Potter and stuff.
I'm going to get my buttkicked for imitating her.
Josh Bretl (06:48):
I'm worried about you leaving that in, but we
know she doesn't listen to thepodcast, so it doesn't matter.
Dave Schmidt (06:52):
It's true.
Josh Bretl (06:52):
If anyone, Annette, if you're listening to this,
please don't tell Carla.
Dave Schmidt (06:57):
Yeah.
And guess what, Josh and Iare going to have a really
good lunch, but you'll neverknow because you don't listen.
Josh Bretl (07:04):
All right.
Let's not tempt them.
Dave Schmidt (07:07):
Not tempt fate.
It's true.
Leslie may actually betalking to our wives behind
our back and telling themeverything that we say.
Josh Bretl (07:15):
Leslie, we've talked about Leslie before,
our show notes writer.
We're going on vacation to SanFrancisco after school is out.
We wanted to take the kidssomewhere different and we're
going to stay up in Muir Woodsand it's going to be cool.
Dave Schmidt: "Everywhere you look. (07:26):
undefined
Everywhere..."
Josh Bretl (07:29):
Our kids don't care about that.
Dave Schmidt (07:30):
Right.
Josh Bretl (07:31):
I've been to San Francisco a bunch of times.
It's been probably 10 yearssince I've been there.
But Leslie lives out thereand I asked her if she had
any recommendations and inher own words, snowballed me.
And it was the most helpful.
And Missy and I have checkedout books from the library.
We've read all these websites.
But Leslie's 30-page email,this is what it felt like,
(07:53):
was the most helpful thingwe've ever read to it.
If anyone's going to SanFrancisco, let me know, I will
forward you Leslie's email.
It was great.
Dave Schmidt (08:02):
Leslie is just awesome.
Hidden Gem.
I don't actually don'twant other podcasters and
marketing people find outabout her because I want to
hog her out to ourselves.
Josh Bretl (08:13):
Either we need to give her more work....
Dave Schmidt (08:16):
Let's just triple our podcast output then.
Josh Bretl (08:18):
We're going to triple it?
Dave Schmidt (08:18):
Let's triple it.
Josh Bretl (08:18):
I like it.
Dave Schmidt (08:19):
Tripling our podcast output's a
lot like these recentbank failures, I think.
No, that's implying that we'dfail on our adventures here.
Josh Bretl (08:35):
I actually wanted to talk about this.
This came in a headlinein the news recently.
Dave Schmidt (08:41):
What is today's date?
Because we're recording this.
Josh Bretl (08:43):
We're recording this on May 2nd.
And recently there was anotherbank failure over the weekend.
First Republic Bank, whichis a fairly large bank, was
taken over by the FDIC and soldovernight to JPMorgan Chase.
This is the third bankfailure of the year.
Third big bank failurein over the year.
Earlier in March, we had SiliconValley Bank out, not too far
(09:06):
from Leslie, in Silicon Valley.
We had Signature Bank, aNew York bank, and then we
had recently First Republic.
They happened a littlebit differently, but they
seemed to come on quick.
They were kind of all ofa sudden out of the blue.
And I wanted to spend afew minutes talking about
why this is occurring andwhy we're seeing this now.
Because we haven't talkedabout this for a long time.
(09:27):
It's been '08, ' 09, '07 alittle bit, when we started
seeing some of these things.
And it's a different scenario.
It's a different ballpark.
I wanted to kind of set thestage of why this is happening
and what's going on and where wethink it's going in the future.
This is a timely podcast.
The facts could change.
And if you're listening tothis three years from now.
This could be a wholedifferent world.
Dave Schmidt (09:48):
Can I say one quick thing?
In 2005 when I first...
2005?
Yeah.
When I got my job at the bank,everybody around me, including
you, said, "Oh, good Lord.
The chances of thatbank failing are high."
I would like to say forthe record, I have not ever
worked for any of thosethree banks that just closed.
I cannot be blamedfor this one, Josh.
Josh Bretl (10:10):
Charter One, which is where you worked...
Who bought Charter One?
Dave Schmidt (10:13):
Citizens Bank and then Fifth Third
or BMO bought Citizens.
Josh Bretl (10:19):
Actually, David, it's a great way to put it.
Even banks, as a generalrule of thumb, are so strong
that even you working therecouldn't bring one down.
Dave Schmidt (10:27):
I know.
Josh Bretl (10:28):
It took the likes of some really bad
decisions and some differentthings that went out there.
Dave Schmidt (10:33):
Thank you very much for getting
that on the record.
Josh Bretl (10:36):
Yep.
No.
Banks are very strong.
But I do want to talkabout what's going on here
because these are unique.
This is something that peopledidn't see coming here.
Let me talk a little bitabout how a bank works and
how a bank makes money.
When you deposit money into abank, they have to do something
with that because they'regoing to pay you interest.
Now, it may not be a lotof interest, but they're
(10:57):
going to pay you interest.
Let's say they'regoing to pay you 1%.
They have to take that money andthey've got to put it somewhere
else so they can earn more than1% because not only do they have
to pay you 1%, but they've gotto pay their employees, they've
got to buy property, they'vegot those giant buildings
they got to take care of, andthey have to make a profit.
(11:17):
They may need to earntwo and a half percent.
I'm making numbers up here.
3%, 4%, whatever that mightbe, so they can pay you 1%.
Make sense so far?
Dave Schmidt (11:25):
So far so good, my man.
Josh Bretl (11:27):
What they do is they're going to make money
in a couple different ways.
One is they're going tocharge fees, and fees come
out of all sorts differentplaces, but that's not what
I'm talking about today.
They're going to earn interest.
And they earn interestin one of two ways.
One is they send loans out.
They'll make a loan.
You'll deposit your money,they'll turn around and
loan it to somebody elsefor whatever their use.
(11:48):
And loan rates might be 4%or 5%, whatever the bank
charges, so they can turnaround and pay you 1%.
They can't usually loanout all of their money.
If a bank takes in, let'suse a number here, let's
say a hundred milliondollars, they may be able
to only loan out 60 million.
They've got to do somethingelse with that 40.
(12:10):
Does that make sense?
What they do traditionallyis they will use what
they call Tier 1 Capital.
Tier 1 Capital is likerisk-free capital.
It's US Treasuries.
It's a very common thing.
It's really high gradebonds and investments.
Makes sense so far?
Dave Schmidt (12:29):
Yeah, Roger that.
Josh Bretl (12:30):
Roger that.
This is riveting stuff.
This is actually fascinatingstuff, too, to me.
Dave Schmidt (12:34):
Yeah, it would be fascinating to you.
Alex (12:37):
Hashtag tax
Josh Bretl (12:40):
Now, what happens though is during the
pandemic, everybody thoughtthat we were going to have
a mass economic issue.
Banks started preparingfor losses like crazy.
They were allocating cashto get ready for losses.
But the government came inand said, "Whoa, we're going
to stimulize this thing andwe're going to give more
(13:01):
stimulus than we've evergiven in our entire life."
Where banks were preparingfor massive losses, what
actually happened was therewas a massive cash inflow to
banks, bank balance sheets.
The amount of cashsitting on a bank balance
sheet went up tenfold,overnight, it felt like.
So a bank that had ahundred million dollars
all of a sudden had $120or $130 million dollars.
(13:24):
That sounds like a good problemto have, but they have to do
something with that money.
And they can't letit just sit there.
They have to earn intereston it, otherwise they're
going to be losing money.
Follow me so far?
Dave Schmidt (13:36):
Yeah.
Josh Bretl (13:38):
They weren't loans.
You can't all of a suddencome up with that amount
of loans overnight.
So they were putting itback into treasuries.
Dave Schmidt (13:45):
Okay, treasury is a what now?
Josh Bretl (13:46):
Treasury is a government bond,
a government note.
You are loaning moneyto the US government.
They're called US Treasuries,and they would pay you
interest in return.
Dave Schmidt (13:56):
Got it.
Josh Bretl (13:57):
Now, back then, the interest on those treasuries
were really, really low.
Dave Schmidt (14:01):
Back then, as in like 2020-ish?
Josh Bretl (14:02):
2020, 2019, 2018, 2020.
And a five-year treasury waspaying one and a half percent.
Maybe two.
Nothing crazy.
Now, fast-forward to today,at the end of last year, the
end of 2020, treasuries werepaying four and a half, 5%.
(14:22):
But these banks weresitting on all of these old
treasuries that were stillpaying them one and a half.
Now what happens, we'vetalked about this in our
bond episode, if you rememberthat riveting episode,
bonds work on an inverserelationship to interest rates.
As interest rates rise, thevalue of bonds has to fall.
Dave Schmidt (14:39):
Has to.
Josh Bretl (14:40):
Mathematically.
Dave Schmidt (14:41):
Mathematically.
Josh Bretl (14:43):
These banks' balance sheets were showing a giant loss
in their treasury portfolio.
Now, as long as they heldthem, and if it was a five-year
treasury, as long as they heldthem for that five-year period,
they'd get their money back.
But they were showing thishuge loss as it came into play.
Now, the bank regulators, theydon't look at that loss as
far as Tier 1 Capital goes.
And it's not really a big deal.
(15:05):
But these banks are onlyearning one and a half percent.
Now, in the world of SVBBank, is a great example here.
SVB Bank had a lot of really,really high-end depositors.
They worked specificallywith these Silicon Valley
companies that would have-
Dave Schmidt (15:23):
it's hard to say.
Josh Bretl (15:24):
It is.
Dave Schmidt (15:24):
And it's even harder to say when
you follow up with Silicon.
Specifically Silicon.
Josh Bretl: Specifically Silicon. (15:27):
undefined
Silicon Valley Bankspecialized in startups that
had large cash balances.
These companies wouldhave millions of dollars
in their accounts.
And the FDIC insurancewas only 250,000 bucks.
So what happened was the reportcame out that SVB Bank was
(15:50):
losing money because thesetreasuries were underwater.
Well, all the depositorssaid, "Hey, I have 5 million
of uninsured deposits."
And so they said, "Hey, we'regoing to move this money."
And moving money in abank nowadays is as simple
as picking up your phoneand transferring money.
Money would leave overnight.
Dave Schmidt (16:10):
And they can't really control that.
Josh Bretl (16:11):
They can't control it, it's the clients' money.
It's the customers' money.
To the customers' viewpoint,they felt nervous.
They felt, "Hey,what's going on here?"
And we had these uninsureddeposits and we had to make
sure that they were safe.
Now, if you look atthe safety of banks.
All of a sudden it broughtout the safety of banks
that came out there.
(16:31):
And the FDIC came inand they shut SVB and
Signature Bank down, kindof the middle of the day.
And they said, "Hey,we're going to take..."
They created what'scall a bridge bank.
And they did all these thingsand eventually somebody else,
another bank, bought them.
But to save those deposits,the government had to come
in and say, "Hey, there's nomore uninsured deposits, SVB.
(16:52):
If your money is at SVB,we will insure all of it."
And what that did is thatjust kept everybody else
who was still left toleave their money there.
Otherwise, the whole thingwould've collapsed and have
been a massive calamity.
Dave Schmidt (17:04):
Do you know percentage-wise of how much
assets was taken out, howmuch money was taken out?
Josh Bretl (17:09):
I did read that, that number is public.
It was a pretty highnumber, and it was actually
organized via social media.
Dave Schmidt (17:14):
Depositors at the bank went into a Reddit and-
Josh Bretl (17:18):
"Hey, we need to pull money out.
Did you guys see this?
We're transferring money."
Stuff like that.
Which is all legal,it's all legitimate.
Dave Schmidt (17:26):
Totally.
Josh Bretl (17:27):
And it's understandable.
But the Federal Reservehas not done them any help
because of the fact thatthey're the ones raising
interest rates like crazy.
The treasuries are builtoff of and all these
things are built off of.
When they have that giantloss in their portfolio,
which isn't truly a lossbecause they have that money
sitting there, it's becomea giant problem as they've
(17:48):
had to pull money out there.
What we see here is we seekind of an interest rate issue.
We see a timing issue.
And we also see a poorlymanaged risk issue.
I'm having trouble today,a poorly managed risk issue
because they should haveseen this interest rate risk.
But it was a culmination of,there's never been deposits
coming into a bank this fast.
(18:09):
From the stimulus, bankshave never seen this
level of cash input.
Dave Schmidt (18:14):
Got it.
Josh Bretl (18:14):
At a time when interest rates were
record lows, they had todo something with the cash.
They invested that cash in,low rate, US Treasury bonds.
Interest rates went up, had toshow a loss, and that triggered
a fear as that came into play.
Now, the nice thing is allbanks in the country are
pretty much going throughthe exact same thing.
(18:35):
But some of them have hedgedtheir risk better, and they
don't have the same issues,or they don't have nearly the
level of uninsured deposits.
The average depositor, ifthe average depositor only
has 80,000 as opposed to800,000, well the average
depositor is fully insured, itdoesn't matter what happens.
That becomes really no big deal.
(18:59):
Now, Signature andFirst Republic, they had
similar things happen.
They're a little bitdifferent than SVB.
First Republic, though haskind of been on the radar.
And what happened isthe FDIC did not shut
them down overnight.
They did over the weekend.
And they arranged a deal.
The bank closed Friday.
On Monday morning,they announced, "Hey,
JPMorgan's taken it over."
(19:20):
And over the weekend,they negotiated that
whole deal as it came in.
Those First Republicdepositors never really knew.
They just said, "Hey, nowyou're part of Chase."
Similar to, you did sogood at Charter One, all
of a sudden overnight, theybecame part of Citizens Bank.
Dave Schmidt (19:38):
Citizens Bank.
Overnight though, we allof a sudden had our name
all over the, I think it'sa Pittsburgh Pirates or...
Josh Bretl (19:43):
Citizens Bank field?
All of a sudden youguys had a field.
Dave Schmidt (19:46):
Yeah.
We all of a sudden had a field.
And I'm like, "See, I did that.
Might be the Phillies.
I can't remember."
Oh, boy.
So do you know was Chaseforced to take this on?
Or they asked to?
Josh Bretl (19:59):
I don't know the specifics.
Boy, I'm just sayingsome fun words there.
I don't know the specifics,but I was reading an article
on FT, Financial Times, andthere was a bidding war.
And Chase put in somemoney as did the FDIC.
Chase put in the most, orwhoever, whatever happened here.
And this is somethingthat you wouldn't see.
They don't really letChase buy banks anymore.
(20:20):
Chase is too big.
But, First Republic, theywaive that because they
can come in and support.
Dave Schmidt (20:27):
Emergency.
Josh Bretl (20:27):
They have the financial strength to do that.
The government will beout some money on this.
They will lose somemoney, the FDIC.
But Chase is going toprotect all the depositors
as that comes in.
So bank failures, they'realways out there, but this
is kind of a unique one.
With the sudden influx ofcash, the interest rate
changes, the way you cancommunicate on social media,
(20:47):
the way you can instantlytransfer money nowadays.
This is something thatI don't think we're done
seeing the end of this, butI think for the most part,
our financial institution,the the banks in general are
extremely well capitalized.
Dave Schmidt (21:03):
I think what adds a level of fear is just how
much uncertainty and volatilitythere is in general with
our financial institutions.
I'm not going to pretend like Iknow the fancy words for it, but
what I am more concerned with ishow does this affect everybody?
Like the normal peoplelike your clients?
And does this affectpeople that don't even have
(21:23):
money with those banks?
Talk to me, goose.
Josh Bretl (21:26):
That's a great question.
I mean, this is partof risk management.
This is part of...
Dave Schmidt (21:29):
I know it's a great question, Josh.
Don't patronize me.
Josh Bretl (21:34):
Talk to me Goose.
I like the line.
This is something as owningyour retirement, when you
have to decide where you'regoing to have money sit.
This is part ofthat safety thought.
As you're looking at whereyou're going to stick your
money, looking at the strengthof banks is something we always
want to take into consideration.
Now, I got more calls aboutFDIC limits the weeks after SVB
(21:56):
Bank, then I probably did allof the last 10 years combined.
Dave Schmidt (21:58):
I bet.
Josh Bretl (21:59):
Banks are still strong.
Things are still ingood stead out there.
But you still want tomonitor that because this
could happen to a retiree.
And now what does that mean?
For the most people, it does notmean you're going to lose money.
People who are losing moneyare the giant corporations.
They're the giant investors.
The hedge funds, thingsalong those lines.
For the average Joe, theaverage client that we're
(22:22):
working with, what it couldmean is a giant headache if
you're not planned for it.
Because just because the FDICcomes in and insures you,
doesn't mean your money isback in your account overnight.
It might take a few weeks.
That's one of those, havingthose emergency funds,
having those things out therebecomes really important.
And it's also spreadingout your wealth.
(22:42):
It's spreading out thethought that there are certain
institutions that aren'timpacted by the volatility
of interest rates the waybanking institutions are.
But banking institutionsalso provide something.
They're not subject to thefluctuations of the market.
You have to weigheverything together.
But overall, it was kind of agood wake-up call for people
(23:03):
to get back to fundamentals.
And I feel like, actuallya lot of 2022, and even in
2023, it's been that wake-upcall out of the dream state,
that was the last 15 years.
Dave Schmidt (23:14):
Yeah.
Josh Bretl (23:15):
Bank failures.
Dave Schmidt (23:16):
Bank failures, man.
Who would've thought it'd besuch a riveting podcast topic?
Josh Bretl (23:20):
Hopefully you understood it and I figure if
you understand it, the much moreintelligent listeners we have
will definitely understand it.
Dave Schmidt (23:28):
I should be offended, but #truth.
What I was thinking was...
Hey Mr.
Josh, let's take a break.
You've been talking for solong and my ears are sore.
Let's not make them snore.
Listening shouldn't be a chore.
So let's get to know Josh andDave and watch our ratings soar!
Josh Bretl (24:00):
I have a hard enough time coming
up with actual topics totalk about on the podcast.
If you make me start researchingbird sounds, I'm really
going to have an issue.
Dave Schmidt (24:08):
I try not to LOL it's my own music there,
because that "Chickedy"got me laughing, man.
That was good.
That was really good.
Josh Bretl (24:16):
I went back to the pod deck here.
And I'm going to getserious on this one.
Dave Schmidt (24:21):
Oh, crap.
Josh Bretl (24:24):
Look at your face.
Dave Schmidt (24:25):
I don't do serious well.
Josh Bretl (24:28):
What do you feel people complain too
much about these days?
Dave Schmidt (24:33):
Something that really grinds my gears, maybe.
Josh Bretl (24:36):
Yeah, what grinds your gears?
Dave Schmidt (24:38):
Okay, I'll tell you what grinds my gears.
I know you see it a lot.
I see it a lot, too.
I have always had a deepappreciation for those that
work in the service industry,because I did myself.
And you did to some extent.
I cannot tolerate when peopleare impatient with people
in the service industries.
(24:59):
Restaurants specifically.
It drives me bonkers.
And I just want to go say, "Heyman, how about you put yourself
into their shoes for a second?
You have no idea whatthey're going through."
I've always gone out of myway to be super friendly with
these people and never blamethem for what's happening.
(25:20):
That, Josh, thatis my complaint.
Josh Bretl (25:23):
I do find it funny, and I realize this, that we're
complaining about complaints.
Dave Schmidt (25:27):
Yeah, that's so meta.
Josh Bretl (25:31):
What people complain about too much
to me is other people.
Dave Schmidt (25:34):
Oh, I like that!
Josh Bretl (25:37):
I feel like we've become a us-versus-them society.
It's always, "Well,they said that."
And, "They believe this."
Dave Schmidt (25:44):
it's gross.
Josh Bretl (25:46):
We agree at 98% of things as a country.
If we could solve a fewthings working together, and
just stop complaining andenjoy and live your life and
be kind and go out there.
I think we can make theworld a better place.
I feel a little JohnLennon ask on this one.
Dave Schmidt (26:01):
Or Michael Jackson, Make the
world a better place.
To that point, I heard this,I don't know who said it.
It was probably on "SmartLess".
Somebody really smarterthan I said this.
But people are so much nicerthan we think they are.
Josh Bretl (26:16):
Yes.
They're all goingthrough the same stuff.
And if you would just notcomplain or judge or do
something, or sit and listento them, I think we'd have
a whole new world out there.
Dave Schmidt (26:26):
A whole new world!
This is the Aladdin theme song.
Come on now.
Josh Bretl (26:30):
Let's just let it go.
Dave Schmidt (26:31):
You got me.
Let it go.
Now we're singing.
So many Disney songs are justso relevant to life, am I right?
Josh Bretl (26:40):
Disney doesn't complain.
Dave Schmidt (26:41):
No, but speaking of Disney, Dave
relates to retirees.
Josh Bretl (26:50):
I was talking about bank failures and really
wondering how the heck you'llrelate this to retirees.
Dave Schmidt (26:55):
Sure.
Now, first of all, you do knowthat my sister Julie and I can
sing any number of Disney themesongs at the snap of a finger.
"Little Mermaid" will do it.
You want us to do a duet?
Josh Bretl (27:06):
I challenge the two of you.
Jules, if I can get youand Dave on this podcast.
Oh, man.
Dave Schmidt (27:13):
Well, with the new "Little Mermaid" coming
out, I'm curious to see howthey kind of redo those songs.
Because we knew that onetop to bottom, it was crazy.
Retirees, soon-to-beretirees, and just everybody
else out there who likesmoney, I can relate to you
with these bank closings.
In fact, that's why I justchoose not to have money.
(27:35):
Instead, I've chosen tolive a life of bartering.
Did you know that?
I barter everything.
Josh Bretl (27:40):
Sleepy Hollow dolls?
Dave Schmidt (27:41):
That could be one of them.
But I've never made amortgage payment in my life.
Did you know that?
Josh Bretl (27:48):
Really?
Dave Schmidt (27:48):
I just go out and I play harmonica for
local charities, and thenthey pay for my mortgage.
Did you know that?
Josh Bretl (27:52):
Oh, that's really nice.
Dave Schmidt (27:53):
Do you pay for your own food?
Josh Bretl (27:56):
I do and yours.
Dave Schmidt (27:57):
Yeah, you do.
But see I don't-
Josh Bretl (27:58):
when this podcast is done, I think
I'm buying you lunch again.
Dave Schmidt (28:02):
When you're not around, I don't
pay for food either.
Instead, I go out in thestreet, I let people stare
at my big legs and, inexchange, they give me food.
Did you know that?
I barter for food.
Yeah.
And finally, this one'sone's pretty private, I
haven't really shared it withanybody, but the clothes I'm
wearing, I don't buy them.
No.
I go arm wrestle monksin Joliet, and they
(28:23):
buy me these clothes.
I, dear friends, had nevertrusted cash and said, "I
live a life of barter."
Am I totally setting you up forthe best full house moment ever?
Josh Bretl (28:34):
I'm going to try and distract
from what you just said.
Dave Schmidt (28:39):
Sure.
Josh Bretl (28:40):
People, once you get to know Dave, you
wouldn't complain about him.
You would think he'sa lovely human being.
Dave Schmidt (28:47):
There's really nothing to- Well,
Carla would argue that.
Other than Carla, no one hasany beef with me, I don't think.
Josh Bretl (28:52):
No, I doubt it.
But you can keep cash at banks.
They are safe.
They will take care of you.
But I think it's good that youhave another way you're planning
for your future by also havinga system of bartering in place.
Does this mean I don'thave to pay you anymore?
Dave Schmidt (29:11):
No.
That's another part of my barteris I'm your friend and then,
in exchange, you buy me food.
Josh Bretl (29:21):
I'm worried that you are viewing banks differently
than a lot of the retireesand soon-to-be retirees are.
But if they're so concernedabout the safety of banks
that they think theyhave to work with...
Where'd you getyour clothes from?
Monks in Aurora.
Dave Schmidt (29:39):
I had to arm wrestle Monks in Joliet.
Josh Bretl (29:41):
Joliet.
Dave Schmidt (29:41):
Yeah, there's a whole clan of them out there.
Josh Bretl (29:42):
They're not as strong as the Aurora monks.
Dave Schmidt (29:44):
No.
True.
Right.
Josh Bretl (29:47):
But you should worry about diversifying
and making sure thatyou have other systems.
Because one day, whatif your legs don't look
as good as they do now?
And you actually, I feellike this is demeaning to
other people with large,hairy legs, but you can
feel safe in banks now.
I'm not worried about yourmoney because you're insured.
Dave Schmidt (30:10):
We are insured.
I think if anybody doeshave any fear about these
bank closings, jump onour fsrwealth.com/podcast.
Book a complimentary15-minute call with Josh.
Josh Bretl (30:21):
Actually having too much cash is not just
a risk inside the banks.
It's also interest rate riskinternally for yourself.
Inflation risk, thingslike that can hurt.
It's always good to have moremoney than less, but having
too much cash can hurt.
And not because of bankfailures, but just because
it doesn't fit well intoowning your own retirement.
(30:44):
Dave?
I think your DR2R is alittle bit of a stretch.
The way you tied that lastpart together there, brilliant.
Dave Schmidt (30:53):
I know.
What would thispodcast be without me?
Let's be honest here.
Josh Bretl (30:56):
Nonexistent.
Dave Schmidt (30:57):
Nonexistent, no.
Josh, you know how weusually kind of end this
on a witty note here.
I am about to pee my pants.
And as you know, Idon't buy clothes.
I barter for them.
I'm going to have tocut this podcast short.
I need to run and pee.
Bye!
Peeing in my pants is cool.
Alex (31:16):
Hashtag tax nerd.
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