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Gene (00:03):

Hey everybody, this is Gene Marks, and welcome to this week’s episode of the Hartford Small Biz Ahead Podcast. Thank you so much for joining me, and I am glad that you’re here. Obviously, you’ve been reading the news and seeing the headlines all about the recent troubles in the banking industry, particularly the failure of Silicon Valley Bank. There have been some others in the news, Republic Bank, Signature Financial, Credit Suisse and all of that. And I wanted to make some comments on that and give you some advice about protecting your cash. I mean, obviously there were a lot of customers with Silicon Valley Bank that suffered losses of their cash or potential losses of their cash. Hopefully the government will bail them out and make them whole. But it’s been a huge, huge issue. And I’ve been getting a lot of questions from my own clients and a lot of my readers like, can this happen to me?

Gene (00:54):

What about you? Is there a chance that your bank is gonna go under like Silicon Valley Bank and could you potentially lose the money that you have there? Well, the answer is probably not. The issue with Silicon Valley Bank is quite isolated. This is not a systemic problem. And I just wanna quickly explain to you what happened here with Silicon Valley Bank. The bank itself experienced a huge increase in cash that was deposited with them because most of their clients were in Silicon Valley or technology companies. And they were raising hundreds of millions, billions of dollars to fund their companies. So Silicon Bank took all that money in. What they did is they said, okay, we need to protect this money and make sure that it’s receiving a decent rate of return.

Gene (01:44):

So they put the money or most of it into U.S. Treasuries which is a very safe thing to do. But there is one thing you need to know, if you’re gonna invest in U.S treasuries… if you’re gonna invest in them, you need to hold them until maturity. Because if you don’t hold them to maturity, you could lose money on them. Why? Because when you have a U.S. Treasury and you buy that treasury and it has a stated interest rate, and then interest rates go up, in order to get a better yield on that purchase, people that buy and sell U.S. treasuries would have to sell them at a lower cost because the lower cost will then turn into a better yield. So because of that, who’s gonna buy a treasury that has a lower interest rate than what the current rates are right now?

Gene (02:31):

So the value of treasuries have been going down. That’s because of the significant rise in interest rates. Silicon Valley Bank had a bunch of money tied up in U.S. treasuries. Well, in the tech industry, as interest rates started going up, capital started drying up. And a lot of the venture capital investors and other investors weren’t making the same kind of investments to fund their operations that they were in the past. So what do these companies need to do? Well, they needed to dip into their accounts to pay for their payroll and their operations. They weren’t getting that funding anymore from investors. So they relied on the cash being available from Silicon Valley Bank. Well, somebody at Silicon Valley Bank made a statement where word got out that much of the bank’s liquidity was tied up in treasuries.

Gene (03:20):

For the bank to sell those treasuries, they would incur billions of losses. And when Word got out, a lot of the people in Silicon Valley, these customers found out about it and they were like, “oh my God, we better get our money. These guys aren’t liquid.” And there was a classic run on the bank, so much so that the bank had to shut down and declare bankruptcy. And now the federal regulators are in there. So this is not 2008 or 2009. This is not a systemic issue. This was just sort of bad policy. Silicon Valley Bank cash managers decided to put all this money into treasuries knowing full well that the value of those treasuries would decline as interest rates go up. And for some reason, nobody really considered the fact that interest rates were gonna be going up despite what the Fed has been saying, despite… because of inflation…

Gene (04:09):

That’s how you counter inflation. Nobody really thought of that. And so because of that, their cash was illiquid in these treasuries. And that became news, people had a run on the bank to get their cash out and that’s what caused the bank to fail. So it’s not an issue, it was an issue for those people and I really do hope that they get made whole. The question is… gets back to what I said at the beginning of this conversation is how does this affect you? Could the same thing happen at your bank and yeah, it could happen at your bank. People make bad decisions all the time, but you can take some steps to protect yourself. And I want to give you some of those steps right now, just so that you can make sure that you’re good.

Gene (04:50):

Your assets are only protected up to $250,000 by the FDIC at a bank. Now if your name, the same name is on all of your accounts, those accounts get combined. So it’s a total of 250,000 for all of your accounts. I have a lot of clients, like for example, if you have a checking account, a clearing account, and a payroll account at a bank, and they all have your same taxpayer ID and business name, those accounts get combined. And anything in that combined number that’s over 250,000 would theoretically not be protected by the FDIC. However, if you bank with some banks, community banks, independent banks, some regional banks, some of them, many of them participate in something called IntraFi. It’s www.IntraFi.com, INTRAFI.com. That is a network where, because so many banks participate in it, they pool all of the money that way, spread the risk among all the different banks.

Gene (05:50):

And in some cases, those banks can provide hundreds of millions of dollars of added protection above the $250,000 that you’re seeing that the FDIC insures. Not all banks do this. You’ve gotta ask your bank. There is a fee for this as well, but it could provide added protection for you and your money if your bank is part of that IntraFi network. So definitely ask them about that. Next, I still like U.S. treasuries. In fact, in my own business, I sweeped out a bunch of money into U.S. treasury funds. You can get mutual funds and Bond funds that only invest in U.S. treasuries. That’s all fine. I just have to make sure that if you’re gonna invest in U.S. treasuries, you’re gonna hold them until maturity. Don’t make the same mistake that Silicon Valley Bank made. So if you’re going to take money out and put it into U.S. treasuries, good for you.

Gene (06:42):

You could return anywhere from a four and a half to close to 4.7% return on that money right now, which is a lot more you’re gonna get in a money market account. But you just gotta make sure you hold those assets until maturity. So only put money in there that you know you don’t need that liquidity. And also consider getting CDs. You can ladder CDs, you can get certificates from one bank that can then be purchased at many other banks. It’s called laddering. So ask your bank about laddering CDs, which means they can take a certificate, you can give them money, they can hold it in trust, and then they can invest that money in a number of certificates of deposits. And that way you can take those, you can spread that risk out among various banks.

Gene (07:31):

Say you’ve got $2 million. You can get 10 CDs each for $200,000 at 10 different banks. That’s called laddering with different maturity dates. And that way you’ve spread the risk among 10 different banks. So if any one of those banks goes down, you’re covered up to $250,000. Does that make sense? So talk to your bank about this. See if they offer laddering of CDs because that way you can diversify, get a good return on your money. Again, like treasuries, you gotta make sure that you are not, overextending yourself. You wanna make sure you realize when you buy CDs, that money is no longer liquid. So you can’t use it until those CDs mature. That’s why you ladder it at different maturity dates. It’s extra work that you have to do is a big spreadsheet sort of exercise.

Gene (08:19):

But if you do it the right way, you can have that liquidity and still get a decent return on your money. Remember, inflation is between five and 6% now. So if you’re earning four and a half to 4.8%, you’re not too far behind the eight ball. And again, it’s way more you’re gonna get, if you leave it in a checking account and you’re covering yourself. You’re less exposing your money, you’re protecting your money under that FDIC insurance. So let me recap. Okay. If you wanna protect your money, you want to ask your bank about the IntraFi network. It’s INTRAFI.com. If they participate in it, I would say pay the extra fee. And that way your money can be protected over and above the $250,000 FDIC insurance. It’s number one.

Gene (09:02):

Number two, despite what we’ve heard from Silicon Valley Bank, U.S. Treasuries is still a great investment to make the one of the safest investments you can make. Just make sure that when you put money into U.S. treasuries, you realize they’re gonna be not liquid until they get sold. So don’t put any money in there that you think you’re really gonna need. I mean, Silicon Valley Bank made that miscalculation. Look what happened to them. And also, and in addition to U.S. treasuries consider certificates of deposits, but ladder them. Talk to your bank and see if they can hold money in trust and then buy CDs at other banks so that you can spread that risk among a multiple of banks and therefore still be under that $250,000 FDIC limitation per institution. So those are my thoughts on the, in the aftermath of the Silicon Valley Bank issue.

Gene (09:50):

Will we see more banks fail? Well, they’ve certainly increased awareness for these banks, so it’s very possible that we will see a handful of others. I don’t know, maybe a dozen, two dozen banks, fail over the next couple of years, which is really still way below what we saw in history and way below what we saw in 2008. But you can still protect your money. And so take those steps to consider doing just that. My name is Gene Marks, you’ve been listening to the Hartford Small Biz Ahead podcast. I hope you found this information helpful. If you’d like more tips and advice for running your business, excuse me, please visit us at SmallBizAhead.com or SBA.thehartford.com. Again, my name is Gene Marks. Thanks so much for listening. I will see you again next week. Take care.

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