Good morning, good afternoon, good evening. Depending on the part of the world you’re in. This is Jonathan Satovsky of Satovsky Asset Management. Today’s episode of “Seeking Wisdom, Wealth, and Wellness,” is a special edition on bank runs.
Why are bank runs happening? Well, typically, to try to give a simple explanation, when a bank takes in a deposit, these days it’s 0% interest, and they loan it out. They can invest it. They might buy ten-year Treasuries, they might buy mortgage bonds, or they could loan it out to businesses or consumers to get a mortgage or a business loan, or whatever the case may be. Now, what’s fascinating is they generally loan out their leverage ten to one. So if everyone wanted their money back, they generally don’t have more than ten cents on deposits. So if the value of the assets they invested in dropped by ten cents, the firm’s net worth is basically bankrupt.
In the financial crisis in 2008/2009, because of the complicated assets and the very difficult-to-value securities, the government changed the rules to enable them to not adjust the valuation until maturity. If you have a loan that’s maturing in three years, if it’s paid off and good, it doesn’t need to change in value. That’s not how the market works. If a consumer was looking at your balance sheet, you’re marked to market every single day. So banks had a little bit of a different regulatory structure. Well, now that people are contemplating that, and they say, “Well, what is the valuation today?” There are many insolvent institutions because when the prices of securities decline significantly, their net worth is underwater. So you got a little panic situation going on. Some of it real, some of it imaginary, some of it promulgated by the unintended consequences of bizarre rules, but perhaps you should contemplate that for your own purpose, and to take a really conservative view on your path to Wisdom, Wealth, and Wellness, so that you’re never underwater.
Have a great day.