GLOBALT Spotlight: Stop Me If You Think You’ve Heard This One Before

By J. Keith Buchanan, CFA, Senior Portfolio Manager

At this point, most market watchers have had another crash course in interest rate risk, credit risk and contagion risk over the past four days that we’d all rather not learn again after the Great Financial Crisis. If you’ve heard the story of interest rates rising and exposing the latest and greatest financial innovation before the price drop that laid bare underappreciated vulnerabilities in financial institutions that were themselves the hottest assets due to the aforementioned exposure to the hot asset class, please stop me. This should sound eerily familiar…substitute venture capital and crypto capital for real estate and you have, in a nutshell, the beginning of the Great Financial Crisis. The focus is on the “beginning” as there were several dominoes that much of the market had no idea were related to the last crisis, such as the AIG troubles and the credit default swap debacle. credit.

However, the current financial turmoil is of a very different nature.

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First, the current crisis stems from a classic bank run. The traditional banking model accepts deposits and lends to borrowers. A bank run begins when depositors withdraw funds more aggressively, causing the bank to struggle to meet its obligations. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to protect banks from what happened here. In theory, if bank deposits under a certain limit (the current limit is $250,000) were backed by the full faith and credit of the United States, then depositors would not be so panicked to withdraw their deposits at the sign of hazard. In that case, Uncle Sam could heal them. So there’s no need to worry, is there?

However, there were three things that made this bank unique. First, applicants were concentrated in a few industries. As its name suggests, Silicon Valley Bank expanded its deposit base largely thanks to technology companies that had raised funds in recent years. As one would imagine, several of these companies had more than $250,000 on deposit with Silicon Valley Bank, and anything over $250,000 would not be FDIC insured. For example, Roku had approximately $487 million deposited with Silicon Valley Bank. Second, the bank invested much of that money in long-term principal-safe but interest-rate-sensitive treasury and agency bonds, which, if sold, could cause the bank to realize associated losses. Third, news and rumors move quickly in the age of social media, and withdrawals can be made anywhere in the world through a smartphone app at most financial institutions.

These three elements collided at the end of last week and over the weekend. On March 8, SVB announced a capital increase after realizing a loss of $1.8 billion on the sale of securities in an effort to meet the liability obligation requirements of its customers. On March 9, depositors withdrew $42 billion, leaving the bank with a cash balance of about -$958 million at the close of business.

Our view has long been that a rising rate environment would cause a ‘breakout’. Typically, the things that break are the ones that have benefited most recently and on the largest scale from liquidity-induced imbalances. That said, we have no direct exposure to Silicon Valley Bank, nor do we own any regional banks in our equity strategies. We remain conservatively positioned and diligently await the weight of evidence for the direction of our next move. As always, we view diversification as invaluable, particularly when dealing with assets with low or negative correlation to traditional equities.

GLOBALT has been a registered investment adviser with the SEC since 1991 and, as of July 10, 2013, remains a registered investment adviser through a separately identifiable division of Synovus Trust NA, a nationally chartered trust company . This information has been prepared for educational purposes only, as general information and should not be considered a solicitation to buy or sell securities. This does not constitute legal or professional advice and is not tailored to the investment needs of any specific investor. The registration of an investment adviser does not imply any level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, additional information may be required to make informed investment decisions, depending on your individual investment objectives and the specifications of adequacy. Investors should seek personalized advice and should understand that statements regarding future financial market prospects may not be realized as past performance does not guarantee and/or is not indicative of future results. The content may not be reproduced, distributed or transmitted in whole or in part by any means without the written permission of GLOBALT. For authorization, as well as to receive a copy of Parts 2 and 3 of GLOBALT’s Form ADV, contact GLOBALT’s Compliance Officer, 3400 Overton Park Drive, Suite 200, Atlanta GA 30339. You can get more information about GLOBALT Investments and its advisors via the Internet at advisorinfo.sec.gov, sponsored by the United States Securities and Exchange Commission.

The opinions and certain comments contained in this document reflect the judgment of the author, as of the date indicated.

The investment products and services provided are offered by Synovus Securities, Inc. (SSI), a registered broker-dealer, Member FINRA/SIPC and SEC Registered Investment Adviser, Synovus Trust Company, NA (STC), Creative Financial Group, a division of ISS. Trust services for Synovus are provided by STC.

Regarding the products and services provided by GLOBALT:

NOT A DEPOSIT. NOT FDIC INSURED. NOT GUARANTEED BY THE BANK. MAY LOSE VALUE. NOT INSURED BY ANY FEDERAL AGENCY

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.