everybody.
So today we're going to talk about a bank smackdown.
so many of you may
or may not know that there are, what, these seven banks in trouble
that have either been downgraded negatively rated or are under review.
More on that in a minute.
So there are many rating services.
One of which is Moody's. Another one is Fitch.
essentially these agencies rate banks just like they rate you.
They basically have a credit score just like yours.
so when you go in to get a home loan and you have a credit score
that's bad, it's harder to get a loan.
And of course, they look at you as more of a risk.
So Moody's and Fitch, some of the other rating services
have a system of ratings, which we're going to go into in a minute.
So these are three articles that are reset.
Moody's downgrades U.S.
banks rewards possibly cuts of others.
course, those are the ones that are under review.
Moody's Downgrades Banks Affirmed U.S.
Recession forecast.
some people are saying that these bank credit problems could turn into recession.
of course, the last article Moody's downgrades regional banks,
and that's why they're sticking with.
Essentially, what they're saying is move from the small
and regional banks into the larger big banks,
which we're going to talk about in a minute.
So many of the news articles
are just going to focus on the ten banks that are downgraded.
But I also want to talk to you about the other 17 banks
that have moved from stable to negative, or at least are under review.
as you can see here, here are a list of all the banks.
One thing to be clear here is that banks are businesses,
they have assets and they have liabilities.
And when some of those assets turn toxic and when they have liquidity issue
or valuation problems,
that's when they move
from being downgraded stable to negative or even under review.
So what does all this information tell us and what should we be concerned about
Well, all we got to do
is simply take a look at the banks that have already collapsed recently
and see what's happened before, during and after on those specific banks.
So, of course, we know that we had the collapse of Silicon Valley Bank
and I'm signature bank and of course, First Republic.
So it's important to understand that some of these banks are huge banks.
Not all of these are small regional banks like the Bank of New York
Mellon, as you can see, U.S. Bancorp and TRUIST.
These are huge banks that are now under review
that They could move from being negative to, of course, being downgraded.
So what is a bank rating?
As I mentioned before, the banks get rated by many different agencies.
And right now we're focusing on the Moody's ratings, as you can see here.
And essentially what it is, it's a measure of their financial soundness.
That's all it is, just like they do to individuals,
just like your individual personal credit score.
of course, one agency involved here is the FDIC, the federal Deposit
Insurance Corporation, because, of course, they're the ones that are insuring
many people's deposits, just like we saw they became involved
when Silicon Valley Bank went down.
next slide is how Moody's takes a look at the financial factors of a bank.
so just like an individual,
you can see how it's weighted with the four boxes at the top.
You've got asset risk capital, of course.
Is it profitable or not?
The funding structure and of course, liquidity,
Those are the four boxes that make up 100% other.
The financial factors of how Moody's rates a bank.
So there's a lot more detail behind all these boxes.
We don't have time to go into that today.
But as you can see, as assets become less valuable, there's solvency issues.
And of course, as the capital starts to be at risk, there's liquidity issues
both of course,
reduce our financial profile, which is at the very bottom of the slide.
It's important to know that since 1933, not one person has lost
deposit money due to a bank failure, says the FDIC on their own website.
This was certainly the case recently at Silicon Valley Bank. so.
Let's take a look at what I think are the potential problems
and something that maybe you should be looking at as well.
Number one, we've addressed deposits.
So number two is what we call the counterparty risk.
And counterparty risk is essentially just debt investors.
And oftentimes you guys don't completely understand what a debt investor is.
are people that invest in debt.
And that debt is, again, some kind of a collateral.
And when that collateral goes down in value,
then those debt investors have a problem that's called counterparty risk.
Another way to think of counterparty risk is somebodys individual credit score.
If you're going to lend money to somebody and they have a poor credit score,
therefore a lower credit score might be riskier to you.
So you might ask from that borrower more deposits, more reserves,
for example, to be able to cover the payment
in the future based on their actual credit score.
the counterparty risk is now a big deal because these bank ratings have gone down
just like if a bank was looking to you
to provide more capital just to keep the asset,
Now, as you can see from the circle on this graph,
we've got the higher interest rates, the loan maturities, liquidity,
which we talked about in the prior slide, and of course inflation
Which are the next four red stars in the slide as you can see,
each one of those stars represents some kind of debt.
that date, of course, rolls back up to the counterparty risk,
which is sitting at number two.
so higher interest rates mean higher costs.
Loan maturities means that some of those values have gone down
The liquidity is being sucked out from the higher interest rate cost.
And of course, inflation is affecting everybody.
so behind counterparty risk are these four red stars
all representing debt that have a higher rates
potential long maturity issues their liquidity might be gone
as a result of them using reserves just to pay for the higher interest costs
and of course inflation, which is affecting everyone at the same time.
This all leads to defaults and we're definitely starting to see
that on a lot of commercial real estate and of course in some single family.
so let's take a look at what are some of the bank options
so there's only two is a bail in and a bail out
and they're designed to prevent the complete collapse of a failing bank.
seen this before.
And the difference between the two lives primarily
and who actually bears the financial burden of rescuing the actual bank
with a bail out, the governments actually inject money back
into the troubled banks and corporations to help them avoid bankruptcy.
We definitely saw that back in 2008, 2009.
in the bail in the banks, use the money from depositors
and unsecured creditors to help them avoid failure.
This is more like what happened with Silicon Valley Bank, where the investors
of the bank actually lost all their money, but the depositors were made whole.
So nobody is talking about what happened with Silicon Valley Bank after went down.
But this is actually what happened.
Silicon Valley Bank's new owners are First Citizens
Bank, which is a billionaire family out of North Carolina,
and they are quietly building a banking empire.
Well, let's take a look at all the moves that happened.
Number one official from the Treasury, the White House and the Fed
all tentatively agreed to bold moves as they finalize
announced late Sunday night, as you guys remember this, that the government
would ensure that all depositors would be repaid in full.
I think this is important and this is what everybody's freaking out about.
I don't believe that depositors are going to have a problem.
and the Fed would offer a program that provides attractive loans
to other financial institutions in hopes
of avoiding a cascading series of bank failures.
in a sense, this was a government bailout because the government got involved
and provided loans to first citizens.
Well, the purchased Silicon Valley bank, So how did the actual deal go down?
So First Citizens Bank took on $110 billion in assets at 56 billion of
that is in deposits and 72 billion are loans from Silicon Valley Bank.
They are now one of the top 20 banks in America.
on the $72 billion
loan portfolio, they actually acquired it at a $16.5 billion discount.
This is what the FDIC said in the press release.
Then you can actually see from the SEC filing
that they actually received from the FDIC a $35 billion
five year loan at three and a half percent fixed rate to finance the actual deal.
So most of you might not be in the mergers and acquisitions of banks.
But if you start to think like a bank, it's no different than the way
you're trying to acquire real estate.
These banks are actually after the assets and the deposits and the customers
of those individual banks that are in trouble,
just like you would be on a value add piece of real estate.
So as I always say, be the Fed because these banks are actually buying assets.
And as you can see, these loans that were toxic were discounted,
and then they got financing through the FDIC,
just like you would do on your own individual real estate portfolios