- Michael Mann
Pigs get fat; Hogs get slaughtered
JP Morgan (NYSE: JPM) acquired (i.e. saved / bailed out) First Republic Bank (NYSE: FRC) from bankruptcy.
When the banks lend money out, they receive interest payments and, in exchange, accept interest rate risk.
The risk comes when the Federal Reserve raises interest rates. Imagine a bank has an outstanding 4% interest paying loan when the Fed raises rates to 5%.
Would you, as an investor, prefer to invest in the 4% interest paying loan or the 5% interest paying loan? All else being equal, you’d likely want the higher paying 5% interest loan.
So, the market value of the 4% loan has to be marked down in order to entice investors to buy their loan, at a discount, so that it will compete with the a yield of 5% on a reduced price.
The 4% loan would have to sell at 80 cents on the dollar so that it can compete with a 5% interest paying loan (i.e. 4 / 80 = 0.05). That’s a 20% loss!
This is how the banks can run into an asset shortfall when large portions of customers attempt to withdraw its monies at the same time.
Customers go withdraw money, the banks are forced to sell assets at a discount to cover withdrawals, and eventually they run out of assets to sell and cannot cover shortfalls.
This is what happened at SVB, Signature, and now FRC. In my opinion, these executives erroneously managed this interest rate risk.
You may come back and say, “BS! This is the fastest interest rate hike in the history of the Fed.”
While that may be true, zero interest rate policy could not last forever. Anyone with a bachelors degree in finance should have been able to predict that.
I’m reminded of an old adage:
"Pigs get fat; hogs get slaughtered.”
These banks were overextended, undercapitalized, and it cost them their entire business.
Why does this matter? Many reasons.
Investors just lost a lot of money on these companies
Taxpayers may be the ones to cover the tab that our gov’t is running up by covering deposits through the FDIC program (I predict the gov’t will charge banks higher fees, which banks will find a way to pass onto consumers)
JPM just got bigger, which could make them an even bigger risk to our financial system
So, in total, is this good? Should we have let the bank fail and have taxpayers cover the bill? JPM was already too big to fail… What if they get greedy, take exorbitant risks and go under? Who’s going to have to cover that?
What can you extract from this?
This applies to everything; your health, wealth, and relationship spheres.
As a business owner, spouse/parent, and/or individual driving the direction of a company, family, and your life, respectively, it is equally important to check your rear view mirror for how you’ve done as it is to look ahead through your front window and predict where you’re going.
Health: Are your workouts serving you? Are your eating habits serving you? Are your spirituality habits serving you? Are your meditation practices serving you?
Wealth: Are my business habits serving me? Do I have enough liquidity? Do I know how my strategy pivots during a mild or extreme recession? Are my personal saving habits hitting my goals? Are my tax & financial planning strategies serving me?
Family: Are your parenting habits serving you and your family? Are you showing up for your kids and/or spouse how you’d like to? Are you creating enough 1-on-1 time with these people?
There are a lot of different ways this convo can go from here. However, it usually starts by looking inward.