Avoid Crisis

March 24, 2023 - Avoid Crisis hosts Reynaldo Arellano and Allen Plyler caution the tentacles of contagion have spread to the world as Credit Suisse is sent to the bank penalty box.  The SEC warning on Crypto and the Wells notice to Coinbase could mean a crisis in crypto is on the way.  Block and Cash App are targeted by a short report.  Inflation may lead to a new wave of layoffs.

Key Points from Rey:

• Avoid Crisis is going to cover more than just the banking crisis, but right now it is the topic of the day.
• To avoid crisis you have to look at the signs in front of you.   The tidal wave of information, good and bad, makes it difficult to focus on the macro issues and avoid a crisis.
• This is a podcast for the real world and in real time.
• Correlation and coincidence are distinct.  You have to look deeper.
• People are moving their money around.  Sweeps at Banks are getting larger.  Technology makes moving money easier today.
• Integrated Consolidated Sweeps are something to look at to avoid uninsured deposit risk.
• The Fed raising rates this week impacts the economy.  
• You are a fool if you are not minimizing the risk of an uninsured deposit. 
• Avoid Crisis by minimizing the risk by spreading cash around in banks so your deposit is insured, but you have to maximize your returns and make sure you don’t incur operational risk as you do that. 
• Speculation by short sellers seems to focus on the deposits that are uninsured but we could be looking at short squeezes on regional banks as information from the banks come out. 
• Square, renamed Block has been hit by the Hindenburg report.
• There is a seesaw here, if inflation continues to go up you might have to fight it with interest rates, but layoffs may be about to snowball into a recession.
• In the middle of an information storm, you have to find multiple reliable sources to separate the good from the bad information.  To avoid crisis avoid a single source of information in making decisions.

Key Points from Allen:

• This is a whirlwind.  This interpretation of information from the media has to be understood in light of the bias of the presenter and their agenda.
• Now we have Signature Bank, the tentacles of contagion go around the world.
• The CDS went up and now Credit Suisse is at risk.  Assets from SVB might get sold this weekend.
• FDIC is to make depositors whole, now with Biden saying depositors even beyond the FDIC limit will be taken care of, does it represent a guarantee.
• Everyone is talking about banks now.  What is the backstop for the uninsured deposits in the system from the government?
• What other banks will get support like the $30 Billion that went to First Republic Bank.
• At the beginning of 2023 if you thought Credit Suisse would be around in the same form at the beginning of the year at the end of the year, you would have been wrong.  It won’t even be there anymore at the end of the first quarter.  
• As more people seek to get more of their total deposits covered under FDIC limits, the total insured liability risk for the FDIC is going up.  Where will that money come from?
• When rates go up, purchasing power to buy a residence goes down. 
• Shorting regional banks right now should remember that during the financial crisis there was a freeze on shorting bank stocks, what happens now if there is put in place a ban on shorting regional bank stocks.
• In a display of sarcasm, the question was posed on “How did interest rates get below zero, could regional banks stock prices trade below zero?”
• People need to believe in their government, without faith in banks, this crisis continues.
• The Hindenburg report goes point by point through a large list of items, but has a lot of focus on Cash App, and how it is used in sex trafficking, drugs including fetanyl, and how many fake users are on the account.  The report says Cash App Fake accounts include Elon Musk and Donald Trump. 
• The charge of Fake accounts was aimed at Twitter as well.  Twitter and Block, both public companies, should be investigated by the SEC based on their disclosures.
• The SEC is saying stay away from Crypto.  Coinbase got a Wells notice.  More to watch there.
• Inflation around the world is a major problem, Argentina over 100% but China around 1%.  The US is around 6%.  It can continue to rise.
• The risks are becoming more elevated, and the pace of the change is rapid.
• Think through what we are observing as far as information and think deeper.

Connect with Rey
linkedin.com/in/reynaldoarellano

Connect with Allen
linkedin.com/in/allen-plyler-cpa-mpm-3803992a/

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March 16, 2023 - Avoid Crisis hosts Reynaldo Arellano and Allen Plyler point to Jerome Powell as missing the mark on the timing of interest rates and claim the acceleration of rates ultimately destroyed certain Banking Franchise values.   Rey gets pointed and calls for Jerome Powell to resign, as he calls it, a “fall on the Sword”.  Both agree the Fed should pause and wait for more information before embarking on more rate hikes.   

Key Points from Rey:

• Major moves to stabilize the financial system.  Other big banks coming in to provide funds to support First Republic bank.
• First Republic Bank can show a rebound in a month.
• Use Limit Orders if you are going to be in the market.
• If you don’t have the right information, you might be the bait and not the shark.
• The FDIC should come out in a minute and a half and raise the FDIC limit to $500,000
• ECB rate hike may influence Fed interest rate move.
• Chairman Jerome Powell should tender his resignation
• The raising of rates was wrong and Powell should fall on the sword.
• The market is trading in a good range, but financials are losing investor confidence.
• As a guest on The Cloud Accounting podcast I made the point the SVB exposures were more than just uninsured depositors, it also impacted employees, investors, debt holders, equity holders, and vendors.   We don’t know all the impacts yet.
• Assessing risk is really important to avoid a crisis.

Key Points from Allen:

• If you just look at the moves today in First Republic Bank, this could turn into a lot of volatility.  Reminder of the moves seen on GameStop.
• FRC Options time value two days from expiration is really high
• Ripple effect and tentacles of contagion is real.  The ECB raised rates to fight inflation, but that is hard given financial stability issues.
• Crisis is risk related, the unknown becomes known, and there is a high cost to a crisis.
• To gain in life you must risk, but it needs to be acceptable risk.
• The FTX chapter is still being written, SVB ripple effect continues, and there is unseen risk.
• What is really in this deal, is there an underlying option to purchase First Republic Bank?
• Credit Suisse has over 9% investment coming from Saudi Arabia.  There is risk there.
• Limit orders to sell on FRC are out there at 150.  The last time the stock price was in that range was in the beginning of February in 2023.
• If you positioning in FRC, you have to be really smart and know what the banks are doing in order to get it right.
• FDIC limit has not been raised since 2008.  In 1934 the limit was 2,500.  It was designed to protect the little guy.
• The valuation of intangibles is not on the balance sheet.  How are the equity holders being compensated for taking the investment risk?
• There are times where you should just wait.  Agree that Jerome Powell should pause now.
• Crowd psychology is important here.  Does the assistance to First Republic create calm?
• When Covid hit stock prices collapsed.  But we recovered.  Even so psychology impacts decisions.  What happens on Wall Street impacts what happens on Main Street.   And what happens on Main Street impacts what happens on Wall Street.
• Not long ago, interest rates going up hurt tech, now people are turning to tech even though interest rates are still potentially rising.
• There are other crisis situations to consider, think about the risks.
• The Fed needs to pause and wait.  
• Credit Suisse credit default swap price rise is alarming.  Similar to 2008 crisis with banks.

Connect with Rey
linkedin.com/in/reynaldoarellano

Connect with Allen
linkedin.com/in/allen-plyler-cpa-mpm-3803992a/

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March 12, 2023 - Avoid Crisis hosts Reynaldo Arellano and Allen Plyler kicked off the maiden voyage of the Avoid Crisis Podcast with a deep dive into the developing financial crisis and a stern warning to the FDIC calling on them to do their job and do it fast. In addition, the crisis of uninsured deposits at risk was focused on with the hosts advising listeners to heed their ability to effect transfers to maintain their balances under the FDIC single depositor limit of $250,000.

Key Points from Rey

•  Silicon Valley Bank went into receivership March 10, and this crisis will not be limited by geography or isolated to the tech industry. This crisis is different and there will be awakening by the end of next week. 
•  There will be winners and losers now and listeners should prepare. 
•  SVB UK branch is shut down and with Monday coming soon, London will need to work on the unwind. This is a global situation. 
•  Take out any money in SVB now, even if it is less than $250,000. 
•  If you have uninsured deposits, try to move them into other banks and stay under the $250,000 limits. 
•  California laws require paying payroll timely, and IOU’s for payroll don’t count. 
•  Liquidity is key. You have to access to cash to get through this time. VC, founders, investors are going to have to step up. 
•  In the CFO seat you don’t get to wait, you don’t get to punt, you have to deal with what is in front of you. 
•  There is risk of fraud when banks fail. 
•  SVB workforce will need incentives to stick around and work. 
•  First Republic Bank is a regional bank that is at risk now based on the uninsured deposits. 
•  This crisis could accelerate the path to a recession in the economy, and this crisis will impact the global economy. 
•  Look for banks that are stepping up now, they may be the winners. 
•  SVB had skin in the game, and a fire sale won’t allow the intellectual property to monetize the same way. The triangle between SVB as a lender, VC as a sponsor of a startup, and the founders of startups, is now broken. 
•  SVB started from a poker game. Traditional banks didn’t understand how to value tech. 
•  Nobody understood how Amazon was spending money to build infrastructure that ultimately paid off. 
•  Risk has a cost, the sword cuts both ways. 
•  People may have 30 to 40 banks now. 
•  Diversification of your risk is important now. Be aware of concentration risk. 
•  Immediate need is cash flow. If you don’t have it go find it. This can be a cash flow crisis. Keep your powder dry. 

Key Points from Allen

• Silicon Valley Bank was second most searched item in internet, second to Daylight Savings Time 
• In the 2008 financial crisis there were three banks that failed first in 2007, then nine others, way ahead of Lehman Brothers. We have three big failures now, especially since SVB is the second largest ever. 
• Because of the interest rate moves, bank balance sheets have been corroded and eroded. 
• SVB was so integral to the VC community and Silicon Valley tech scene, that in California, there may only be two or three degrees of separation before someone you know is connected in some way to SVB. 
•  FDIC paper (certificates) won’t pay your payroll 
•  Startups may not have very good treasury management, and they need to be developed 
•  Once you see a crack in the windshield (start of a crisis), the crack is going to get bigger. You don’t want the whole windshield to collapse. 
•  SVB financials disclosed losses from fraud in their financials 
•  This is a serious problem and it has the attention of Joe Biden, Janet Yellen, and Gavin Newsome 
•  The biggest risk now is the contagion of fear 
•  The law of small numbers is a risk now as individuals may take their money out of banks. 
•  Banks can’t sit on deposits 
•  Interest rates over last 200 years averages around 6% now Fed is inching toward that number 
•  SVB got big upside in its earnings when a company with a warrant from their lending went through an exit in an IPO. There is a large amount of intellectual property that is not on the balance sheet because of the account rules. 
•  It is critical the right actions are taken now to contain this crisis. 
•  Tech and Innovation has changed the economy of the US. The 360 view of how innovation gets funded is why Y Combinator and Sam Altman have achieved. 
•  Take the Amazon challenge, what can’t you find on Amazon. 
•  Bigger companies absorb startups sometimes because of their niche intellectual property. That may now be at risk if startups don’t have liquidity. 
•  Spreading uninsured deposits to keep under the $250,000 limits sounds like a startup. 
•  SVB employees should be looking for a new job and companies should try to hire them 
•  Avoiding Crisis is about making good decisions every day. 
•  What existed a week ago doesn’t exist anymore. We need to adapt.

Connect with Rey
linkedin.com/in/reynaldoarellano

Connect with Allen
linkedin.com/in/allen-plyler-cpa-mpm-3803992a/

Leave a review on Apple Podcasts or Podchaser

Subscribe to the Avoid Crisis podcast in your favorite podcast app!