What Really Brought Down Silicon Valley Bank, and What Happens Next

Christopher Whalen, Chairman of Whalen Global Advisors and author of the Institutional Risk Analyst newsletter, joins the Express to explain how SVB's mismanagement and the Fed's lack of awareness on the impact of rising interest rates brought down the 40-year financial institution. We also look into the overall health of the nation's banks amid these rising rates, and the prognosis isn't great. Also, commodity prices have come off their highs and could finally lead headline inflation lower.

Meet Christopher Whalen

Richard Christopher Whalen is an investment banker and author who lives in New York City. He is Chairman of Whalen Global Advisors LLC and focuses on the financial services, mortgage finance, and technology sectors.

Over the past three decades, Chris has worked as a writer and financial professional in Washington D.C., New York, and London. He has held positions in organizations such as the House Republican Conference Committee, the Federal Reserve Bank of New York, Bear Stearns & Co., Prudential Securities, and Carrington Mortgage Holdings.

Christopher holds a B.A. in History from Villanova University. He is the author of three books, including his most recent work Ford Men: From Inspiration to Enterprise (2017), a study of Ford Motor Company and the Ford family published by Laissez Faire Books. His other works include Inflated: How Money and Debt Built the American Dream (2010), and Financial Stability: Fraud, Confidence & the Wealth of Nations,” published by John Wiley & Sons.

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Terms of the Week: Federal Deposit Insurance Corporation (FDIC) and Certificate of Receivership

This week's term comes to us from Ganjali Gupta, who reached out to us in an email suggesting 'FDIC', given the news surrounding Silicon Valley Bank. The FDIC—the Federal Deposit Insurance Corporation—is the regulator in charge of the nation's banks and front and center in the drama surrounding all the banking activity these days.

According to my favorite website, the Federal Deposit Insurance Corporation (FDIC) is an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures. The FDIC was created in 1933 to maintain public confidence and to encourage stability in the financial system through the promotion of sound banking practices. As of 2020, the FDIC insures deposits of up to $250,000 per depositor as long as the institution is a member firm.

The FDIC was born out of the ruins of the Great Depression. America's financial markets were in terrible shape in the early 1930s. More than 9,000 banks failed by March of 1933, and a lot of that was triggered by the stock market crash of October 1929, which kicked off the worst economic depression in modern history. Congress took action to protect bank deposits by passing the Emergency Banking Act of 1933, which also formed the FDIC.

The FDIC's purpose was to provide economic stability to the filing banking system. Officially created by the Glass-Steagall Act of 1933, the FDIC guaranteed a specific amount of checking and savings deposits for its member banks—that's that $250,000 figure we cited earlier.

And since the FDIC is in the news and investors may be wondering what happens if you have more than $250,000 in the bank, we're going to give you a two-for-one special this week.

Dax on Instagram hit us up suggesting 'certificate of receivership' for this week's term. According to our favorite website, a certificate of receivership, or receivership certificate—as it's often called—is a debt instrument issued by a receiver that serves as a lien on a property and provides funding to continue operations, or to protect assets in receivership. In the case of SVB, the FDIC said "customers with uninsured assets, or those with more than $250,000 in the bank, will get a receivership certificate for the remaining amount of their uninsured funds.

Good suggestions, Ganjuli and Dax! Investopedia's finest socks are coming your way.

Links for Show Notes

• The Institutional Risk Analyst Newsletter
  
• What to Expect in the Markets Next Week
  
• Federal Deposit Insurance Corporation (FDIC): Definition & Limits
• FDIC Press Release: FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank
  
• Milton Friedman on the Great Depression, Bank Runs, and the Federal Reserve
• Birinyi Associates Inc.