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Silicon Valley Bank – An Autopsy of the Tech Industry’s Financial Services Partner
Abstract
Bank failures are not an entirely common phenomenon. So saying there have been 563 failures since 2001 might come as a striking antithesis to that statement. However, in 15 of the 23 years since 2001 cited by the FDIC in an analysis of bank failures, there were less than 10 bank failures a year. Thirteen of those years experienced 5 failures or less each year. The five-year period beginning with the financial crisis 2008 – 2013 brought the greatest concentration of failures accounting for 489 banks in the period to close. As of this writing, 2 banks have closed in 2023: Silicon Valley Bank and Signature Bank. While two bank failures do not sound significant, Silicon Valley Bank alone accounts for $209B, or 20.1% of total assets by banks that have failed since 2001. Only 2008 in aggregate saw larger failure by total assets, in a year which saw 25 banks fail at $373B, which notably included the Washington Mutual failure. With recent loosening of regulations, more financial institutions could be at risk without due diligence and corrective action. As such, the sheer size of the Silicon Valley Bank failure alone warrants deeper examination. By studying the characteristics of the bank, the relevant regulations and changes to those regulations, and the prevailing economic environment, we can better understand the profile of Silicon Valley Bank and how it ultimately failed in order to understand the forensic steps to mitigate risk of failure in the future.
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Like many companies in 2022, Nike faces many obstacles with inventory and balance sheet management. Read the article below to review an analysis of Nike at the May 31, 2022 10-K publishing.
Cryptocurrency exchange platform FTX filed for Chapter 11 Bankruptcy protection on Nov. 11, 2022, after a swift fall from grace. According to its bankruptcy filing, FTX which was once valued at $32 billion, has $8 billion of liabilities it can't pay, may have as many as 1 million creditors. Review the two articles to discuss why this happened and whether it's possible to have high returns with no risk.
What is SWIFT? Why is it being used to sanction Russia for it's invasion of Ukraine?
SWIFT is “an interbank telecommunication network that enables firms to process and send authenticated and encrypted electronic messages across its banking network.” Notably, SWIFT is not a funds transfer system, unlike the domestic systems we know and CHIPS. Its importance to the global finance community is that it links the world’s banks through its messaging system along multiple banks to its final destination. The significance of SWIFT is its omnipresent footprint and accessibility to member countries. SWIFT membership allows a country to participate smoothly in the global economy that includes “trade, foreign investment, remittances and the central bank’s management of the economy”.
Removing Russia from SWIFT would increase the barriers to which the country would be able to participate in the global economy. The intended goal is to increase the difficulty of doing business with Russian companies outside of areas not impacted by sanctions. There are approximately $121 billion in assets owed to foreign banks by Russian entities. Russia also has a large presence in energy trade. Increasing the difficulty of doing business with Russia makes the Russian products less desirable because of the increased cost and opportunity cost of cash float of idle funds, especially in a like commodities market.
Much of the world’s financial infrastructure is based on SWIFT participation. However it is not the only means of processing payments internationally. The article points out several other options for the Russians to participate in the global economy by using systems like telex, Russia’s own payments system, and routing payments through China. So while SWIFT is the major and most significant player in the facilitation of international payments processing, it is far from the only means. Complete removal would create a negative ripple effect worldwide. So as a means of enabling western trade and creating an added opportunity cost of doing business with Russia, a partial removal of Russian member banks from SWIFT allows for the action to create the greatest net present value of impact for western businesses and hinders the Russian economy by tying up funds in payments processing removing them from investment activities by increasing float.
The Yield Curve
With so much attention on inflation and the economy, one important aspect to keep in mind is being able to make comparative interpretations with data to tell a story. The US Treasury bond yield curve is one set of data that is difficult to interpret in a time series because it is in and of itself a line charted at a point in time. So here is a start to interpret that data in a time series to help visually compare how our interest rates are changing.
The dates auto-increment from the current (or selected) day then to 20 business days, 60 business days, and 120 business days. These increments roughly equate to 1 month, 3 months, and 6 months. The yield curves are shaded from a darker blue closer to the present or selected date, and shade lighter blue as the lines/curves move further back in time. The auto-increment further allows for efficient historical assessment if in instances we wanted to look back at historical events of change, like March 2020. The data used is from the US Treasury website here. It is dated today (06/08/2022) and historically 03/05/2020.
Whirlpool Case Analysis
This financial analysis actually came from a marketing class project where as a team we were tasked to revise a company's marketing strategy. One of the prompts was to provide financial results, which I took to task. This is my review and forecast of the financial results of Whirlpool's marketing strategy. Please follow the link below.
Inflation will remain a hot topic in at least the near future. In very simple terms, what is inflation? As a result of increasing inflation, a lot of investors are turning to TIPS.
What are TIPS? What are I-bonds? What are the drawbacks of investing in each? Should you hold these in your portfolio?
According to the text, “Inflation is the rate at which the general level of prices is rising”. Inflation correlates to the purchasing power of a currency. Higher inflation corresponds to lower purchasing power while lower or negative inflation is associated with greater purchasing power. In the United States, we use an index called CPI (Consumer Price Index) to help track and measure inflation by measuring the average change in the price of goods over time. The Bureau of Labor Statistics releases its measurements monthly in its CPI section of its website (https://www.bls.gov/cpi/)
In the corresponding WSJ article by Randall Smith, TIPS is an acronym standing for “Treasury inflation-protected securities”. They are “debt securities designed to increase in value as consumer prices rise”. TIPS were introduced in 1997 and are available to be issued in five, 10, and 30 year maturities. The face value of the security rises and falls as the consumer price index changes respectively. Interest is paid at a fixed rate according to the face value of the security at time of payment semi-annually. TIPS do pay at least face value at time of maturity.
Lori Ioannou’s WSJ article takes a deep dive into I-bonds. These bonds are federally guaranteed instruments with interest payments measured as a composite between a fixed rate and a semiannual inflation rate. The fixed rate is set every six months by the Treasury Department and applies for the lifetime of the 30-year bond. The semiannual inflation rate varies and is measured by CPI for All Urban Consumers. The semiannual inflation rate resets on the first business day of May and November. Interest is tax exempt at the state and local level. The interest is subject to federal taxes, but is exempt if used for “qualified higher-education purposes”.
Both TIPS and I-bonds have their respective drawbacks. Firstly, both are generally taxable at the federal level, with the notable I-bond exception for higher education. Next, each type of investment is more successful in times of higher CPI measurements. In the current environment, this is a positive sign. However, there are many analysts that believe inflation will subside, which in the long term would reduce returns. For TIPS holders, there is a federal tax when the face value of their security increases even though the holder will not collect this increase until maturity or sell of the security. I-bonds carry limits for the amount that can be purchased annually. For an individual, this is $10,000 through TreasuryDirect.gov, but can be “creatively” increased if the purchaser desires to do so. There is also no secondary market for I-bonds.
Holding TIPS and I-bonds is very circumstantial. There is no guarantee either will continue to yield optimal returns in the long-term. However, they can be a great inflationary hedge to generate an expected return in a portfolio. Historically, stocks outperform bonds, so an individual early in their savings process may not generate as great or desired of an outcome as someone that is at a generally more mature position with their investment savings. The education qualifier for I-bonds is one that should be considered as well for investors with that goal. Overall, the conditions for whether an investor should hold inflationary bonds is discretionary. If an investor is seeking a lower long-term risk and is at or near their retirement goal should consider these as part of their portfolio.
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