Many surprising details have come to light during the Silicon Valley Bank fiasco.
It was surprising how quickly a bank run set in for such a large institution.
It was surprising how quickly the bank’s customers fled from one of their most trusted partners.
It was surprising how little oversight this now systemically important bank had.
It was surprising that the Fed was somehow asleep at the wheel in terms of understanding the impact of its interest rate hikes on the financial sector.
And it was surprising how many individuals and businesses were so bad at cash management.
Matthew Klein compiled this graph that shows interest-bearing deposits versus non-interest-bearing deposits at Silicon Valley Bank at the end of 2022:
Klein explains:
As recently as the end of last year, only half of SVB’s US deposits ($82 billion) were even paying interest! For some reason, large, seemingly sophisticated entities were still lending nearly $80 billion to SVB at the end of 2022 even if their claims were unsecured and yielded nothing.
It is absurd. Before I even realized how many of those deposits were earning no interest, when the possibility of uninsured business deposits being wiped out first arose last week, my first question was: why would a company have this kind of unsecured exposure to a bank in the first place? After all, there are many alternatives to bank deposits, especially for entities with cash and even a tiny amount of sophistication.
Only half of the $82 billion in deposits earned interest on their money.
And according to Felix Salmon, nearly 94% of those deposits were uninsured, meaning they totaled over $250,000:
That’s a lot of money with no financial management behind it.
I agree with Klein that it’s weird from a cash management perspective.
Why were these tens of billions of dollars not earning interest?
A simple cash transfer account that automatically transfers into a money market account when it crosses a certain threshold would have worked.
Or treasury bonds? I would even accept a checking account that pays interest.
SVB obviously offered other services. And maybe business owners who held their money in the bank would tell you that they were too busy running the business to care about cash management. Or the individuals simply didn’t know any better.
I’m not sure that’s a good excuse, though.
When rates were 0%, you might have been able to get away with ignoring large cash balances, but not anymore.
Managing your cash flow is part of running a business. It is also an important part of any investment or savings plan.
Look, I’m sure SVB customers were very smart when it came to running businesses and creating exciting new technologies.
But it’s a good reminder that having more money doesn’t necessarily guarantee you know how to manage your money effectively.
Indeed, for many people, having more money is detrimental to managing their finances.
For what?
Successful people with lots of money are usually busy and preoccupied with other things going on in their lives.
There are other people with lots of money who assume that their success in one area of life (like business or start-ups or just being rich) will automatically translate to success in another area of life. (such as investing or managing money).
Unfortunately, it doesn’t work that way.
For some people, success in one area of life can actually make it even harder for you to manage your own finances.
I know a lot of rich people who are bad investors because they are overconfident or assume that their level of wealth guarantees them access to secret ways to make money that are only available to the rich or famous. (hint: there are no secrets).
Boring things like cash management won’t make you rich.
But it’s the little things you do around the edges that can build up over time to keep you rich.
Things like having a comprehensive financial plan in place, diversification, asset allocation, rebalancing, tax planning, estate planning, insurance planning, keeping fees to a minimum, and instead of a written investment policy statement.
These things aren’t as exciting as building the next unicorn company in Silicon Valley, but they’re important if you want to keep your financial life in order.
Michael and I talked about the SVB debacle from all angles in this week’s Animal Spirits video:
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Further reading:
Silver Lessons from the White Lotus
Here’s what I’ve read lately: