The Future of Disability in Society

Plus: Understanding what happened to Silicon Valley Bank

Ric Edelman: It's Tuesday, March 14th. All this week, we're focusing on how the future is changing the future of society. Yesterday, I told you how the institution of marriage is changing, expanding actually from traditional marriages between a man and a woman of the same race or culture, to biracial marriages and gay marriages to now polygamous partnerships. If you missed yesterday's show, go listen.

Today, we're going to talk about another aspect of society that's changing our attitude about disability. The poster child for this conversation is Senator John Fetterman of Pennsylvania. He suffered a stroke during his campaign last year and he had to take time off the campaign trail. He was elected anyway. Some people say this was a political issue, not a social issue - Democrats saying they'd rather elect a disabled Democrat than a healthy Republican. I get that. I'd rather push a Ferrari than drive a Porsche.

Or is this society's way of saying, hey, everyone has a health issue of some kind or we might have one tomorrow. We can't exclude people from a job they want just because they've got some medical problem. The debate is a big one. Part of the debate is about competency and capability.

You might say that a surgeon with a broken hand can't operate, but really with robotics, he sure can. daVinci is a robotic surgeon operated with a joystick by surgeons remotely. They don't have to be in the operating room. In fact, they don't even have to be on the same continent. daVinci performed more than 8 million surgeries last year. So is a surgeon with a broken hand really unable to be a surgeon anymore?

So is Senator Fetterman incapable of being a senator? He apparently has trouble understanding speech, and so he uses a captioning device to follow along conversations. Conversing is pretty much all that senators do. They just talk and talk and talk, right? And so some people say that being unable to converse is like a pilot who's unable to see - simply not qualified to do the job. This is clearly weighing on the senator's mind. He's so distraught over it that he checked himself into Walter Reed Hospital for treatment of depression.

We've seen other incidents. In Denver, City Councilman Chris Hinds is paralyzed from the chest down. And when he showed up to speak at an event, he discovered there was no ramp to let him get on stage. So they asked him to climb out of his wheelchair and crawl onto the stage. And he did. He later said, "I felt like a circus monkey". He called the experience humiliating. And let's not even mention the fact, well, okay, I am going to mention the fact that the Americans with Disabilities Act requires that there be accommodations for people who are disabled in exactly the kind of a situation that Councilman Hinds found himself in. 

Rep David Ortiz, he's also paralyzed, also uses a wheelchair. He said Chris Hinds’s experience is, "unfortunately, a common occurrence for those of us who live with a disability". And then there's President Joe Biden. His age is a huge part of the national debate over whether or not he should run for reelection. He's 80 years old. But Nikki Haley is 51. She's also announced she's running for president. Is she too old? On CNN, host Don Lemon said on the air, that she's past her prime.

So where do we draw the line if 80 is too old? Is 26 too young? 26 is how old Maxwell Frost is. He's the youngest member of Congress representing Florida's 10th District. And remember all the stories about how Franklin Roosevelt wouldn't let the press photograph himself getting in or out of his wheelchair? Or Thomas Eagleton, who was the running mate for George McGovern back in 1972. Eagleton was kicked off the ticket when everybody found out he had been hospitalized for depression. In 1975, George Wallace was running for president, and columnist Garry Wills said Wallace was unfit for office not because Wallace was a racist - which he was, but because Wallace used a wheelchair (the result of an assassination attempt). If you own a business and you have more than 15 employees, the law requires that you provide reasonable accommodations to people with disabilities. The only exemption is if the accommodations would represent an undue hardship or if it would threaten the safety of either the employee or others. 

Thanks to technological innovations, we have lots of assistive tech these days: magnifying glasses, wireless headphones that can work like hearing aids, cameras that collect for colorblindness, speech recognition programs, Zoom for remote connections, auto spellcheck, it's a long list what our tech does for us. But if you're a plumber, you still need to be able to crawl under a sink.

The bottom line is this: In past generations, people with disabilities were put away into institutions. They were segregated from society. People who had serious illnesses were hushed up. You couldn't even say cancer. We called it the C-word. Mental illness. Hello? Insane asylum. 80-year-old presidents, senators with stroke and depression, congressmen in wheelchairs or carrying babies onto the floor of the House of Representatives. Yeah, that's what Congressman Jimmy Gomez of California did in January.

All this is a way of saying, hey, we've got issues, we're not perfect, but we won't be sequestered or isolated or outcast any longer. When's the last time you saw someone with an obvious disability in public? In the future that question will be absurd. Like me asking, When's the last time you saw someone in public wearing blue? If this conversation is making you feel uncomfortable, get over it. Because this is the future. And as far as inclusion of folks who might have a disability, we can't get to the future fast enough. 

A Tale of Two Banks: Silvergate Bank and Silicon Valley Bank

Next, let’s turn to what's going on in the banking world. There has been a lot of questions and a lot of confusion about what's been happening. And the story's not over yet, but I can tell you where we are, how we got here, what it all means, and what you maybe ought to be thinking about as a result of all this. First of all, if you're wondering why I haven't talked about it yet, well, that means you haven't been following my Twitter or LinkedIn feeds because I have been tweeting about this and I've been posting on LinkedIn as well. And I did that on Sunday immediately during the fiasco and strongly encouraged the federal regulators to act immediately to prevent another 2008. None of us are happy about the government's need to intervene in this situation. But quite frankly, while we might be unhappy about the need for intervention, that doesn't eliminate the fact that there was a need for intervention and had the government not done what it did, I fear that we would have gone down the rabbit hole of 2008 scenario meltdowns like we saw with the collapse of Bear Stearns and Lehman Brothers. And that led to what we all painfully recall in the 2008 credit crisis. So what exactly happened? How did we get here? What does it all mean? In a nutshell, it began with Silvergate Bank. 

Silvergate Bank is a bank in California that did an awful lot of its business with crypto companies. Picture this. You're in the crypto business. Crypto is brand new, innovative, a lot of people uncertain as to its legitimacy, its permanency, its stability. And so if you're an entrepreneur and you're starting a business, known as a startup, and you get some funding from some venture capitalists, the first thing you've got to do with your money is to open a bank account to receive the deposit of the funding that you're getting so that you can use that money for operations and most importantly, payroll. And those are the two accounts that all young businesses create. They create one checking account as an operating account. That's where you pay your bills in the business and you have a separate payroll account, which is an account you hook up with a payroll processing company. ADP is the largest payroll processor in the country so that you can facilitate the payment of salaries to your employees on a weekly or biweekly basis.

So the first thing you've got to do if you're starting a business is you've got to raise capital. The second thing you've got to do is open a bank account to store that capital. And a lot of banks have been reluctant to open accounts on behalf of small businesses in the crypto field because a lot of these banks are saying, we're not sure of how stable these companies are, we're not sure how legitimate they are. And so a lot of banks have been a little bit reluctant to do business with crypto companies.

We had a similar problem a decade ago with cannabis companies. They were finding it difficult, if not impossible, to find banks willing to allow them to have bank accounts because of the nature of the business they were in. That's not so much the case today, but it was a decade or so ago for cannabis, and that's where crypto companies found themselves as well.

Along came Silvergate. Silvergate was a bank in California that was an ordinary everyday bank, small bank, a regional bank. And they were like other banks, looking for ways to drum up business. How do we attract depositors? How do we get companies to do business with us? And they realize that crypto companies were new and up and coming. They were also having trouble finding banking relationships, and so Silvergate decided to welcome them. And frankly, it was pretty much the only bank in the country willing to do so with such open arms. Well, you fast forward 5 or 10 years and you discover that most of Silvergate's accounts were with crypto companies. And that raises an eyebrow, frankly, because the reason that we use banks is because we have to have somewhere to put our money and we want that somewhere to be safe and secure. 

We want two things from our bank. Number one is safety. We want to know that the money will be there. And number two, we want liquidity. We want to know that the money will be available to us any time we want it without any threat of the value of our account being less than what we had deposited.

Think back to the 1800s through the, you know, the Wild West. We hear phrases like that all the time when people are referring to shaky environments. Oh, it's like the Wild West. Well, the Wild West really was wild. And we all love those Western shoot 'em ups - those movies and TV shows where bank robbers would rob the banks out in the Old West.

Well, if the bank robber robbed the bank and they stole the money, that was your money. Your money was now gone. Well, that made banks risky. How confident are you that the bank won't go out of business or that the bank won't get robbed? That introduced eventually FDIC, the Federal Deposit Insurance Corporation, a federal agency that basically says don't worry if the bank collapses or even gets robbed, the bank will be protected, the deposits will be protected up to $250,000 per depositor. Great news.

This created confidence among consumers willing to now put their money in banks, knowing that if something bad happens, the government will reimburse you your deposits up to $250,000. And let's face it, how many people have $250,000 to put into a single bank or bank account? This covers pretty much every consumer in the country. Certainly 95 to 98% of Americans are going to have less than a quarter of $1 million in a bank.

But what about businesses? Businesses routinely have far more money than a quarter of a million. They have millions of dollars. Tens of millions, hundreds of millions of dollars. Think about IBM, General Motors, Delta Airlines, these massively valuable companies dealing with hundreds of thousands of employees. Imagine the size of their payroll account in their bank. Every two weeks, they have to give payroll to hundreds of thousands of people. That's a pretty big bank account. And that bank account is not protected by FDIC. So we want to make sure that our banks are safe. Not just to protect the consumers and your measly little $10,000, but to protect the big corporations that are dependent on those banks to allow them to operate their businesses and meet payroll every couple of weeks. This is why we have such stringent bank regulations. This is why we have bank examiners coming in from the federal government to verify the business practices of the banks and they want to know a couple of things. What are you doing, Mr. of Ms. Banker, with your assets? When a depositor places money with you, what are you doing with that money? Where are you placing it to make sure that it's safe?

Well, banks do one of two things. They themselves lend it out. They make mortgage loans and car loans and business loans. And they also simply put excess cash with US treasuries to make sure the money is super safe and super available. Now, those loans are an issue, aren't they? Because if the bank makes bad loans, that's how the bank will go broke.

And all you got to do is watch the movie, It's a Wonderful Life, to get the sense of what happens when a bank makes bad loans or there's a panic and a run on the bank. That movie articulates it really effectively. So bank examiners want to know that banks are making safe loans, meaning the people they're loaning money to are going to repay the loans.

And one way that we help make sure that the bank is being careful is that we don't concentrate. Meaning we're going to lend money to a wide variety of people, a wide variety of businesses. We don't want to lend too much money in too narrow a way, because if there's something that goes wrong in that specific sector, meaning we don't want to lend money just to people who live on the same street. What if that street gets flooded or destroyed by fire or a hurricane or tornado? We also don't want to lend money to businesses that are all in the same industry because what happens if something goes wrong in that industry?

And now you know what happened to Silvergate Bank. They were lending money predominantly to crypto companies. And we've been experiencing a crypto winter for the past 18 months. Bitcoin's price of $70,000 back in October of 2021 is now only $23,000. We've seen crypto fall 70% in value and a lot of those crypto companies couldn't handle the dramatic reduction in Bitcoin's price and they've gone out of business. And we saw a number of crypto companies collapse last year - Terra Luna, Celsius, BlockFi, Voyager, the list goes on and on, culminating, of course, as we all know, with the collapse of FTX last October/November.

So Silvergate ran into trouble because so many of its crypto companies were struggling in their businesses. What did they do? Well, they used to sell their bitcoin to raise cash, but with bitcoin down 70%, that wasn't going to solve their business needs. So what did those crypto companies do? They withdrew their cash that they had in the bank because they needed it to pay their operations and meet payroll. Silvergate Bank had such a reduction of deposits that the bank itself couldn't continue operating because it had too little deposits. It itself had too little revenue to stay in business and Silvergate Bank collapsed. Well, that was Silvergate Bank in California, a bank focusing on the crypto industry. 

That caused others to say if Silvergate Bank could collapse, which was heavily focused on serving the crypto community, are there any other banks that are running into similar problems? And all eyes turned attention to SVB, Silicon Valley Bank. This bank is in, you guessed it, Silicon Valley, California, the home of the tech sector. We're now moving away from the specificity of crypto into the broader technology sector.

SVB: Too Highly Concentrated in the Tech Sector

And it turns out, where Silvergate was catering to the crypto community, Silicon Valley Bank was catering more broadly to the technology sector. When a young tech startup raised capital from a venture capital firm, they opened a bank account with Silicon Valley Bank, similar to how Silvergate opened accounts on behalf of crypto companies. SVB ended up almost entirely serving the tech sector, did very little business with consumers, very little business with any other companies. It got to the point that this one bank was the bank for half of all technology companies in the entire United States. This is a huge bank, ranked number 16 in the nation.

This bank had so much money - over $210 billion in assets. And because all of it were business accounts, almost all the assets - 90% of it was in excess of $250,000, meaning not covered by FDIC. And the tech sector has been struggling over the past year, just as the crypto sector has been and people began to realize if this bank runs into any difficulties, we might not be able to get our cash out.  

And so venture capital firms, which have been funding these startups started sending emails to those CEOs saying, do you have all of your money at Silicon Valley Bank? You might want to move some of your money to other banks. You should diversify your banks the same way ordinary investors diversify their stocks. It doesn't make sense to have all your eggs in one basket. You should have bank accounts at several banks, not merely one bank. This caused a lot of startups to go to Silicon Valley Bank and make withdrawals, transferring that money to other bigger banks - Chase Manhattan Bank, to JPMorgan Chase, to Citigroup, to Bank of America, to Wells Fargo. The four biggest banks in the country, theoretically are more financially stable.

Well, with so many people making withdrawals so quickly from Silicon Valley Bank, it created the threat of a run on the bank. And that's exactly what began to happen. And as a result, the CEO of Silicon Valley Bank said it looks like they are going to collapse. And sure enough, they did. The result, which occurred over the weekend, created a significant level of concern by a lot of industry observers, and I was one of them. If this bank collapsed with $209 billion in assets, the bulk of those assets not insured by FDIC, it meant that thousands of technology companies would go out of business on Monday, leaving hundreds of thousands of employees not getting their paychecks on Wednesday. Yeah, Wednesday is March 15th, right?

And if you have thousands of businesses going broke, hundreds of thousands of people not getting their paychecks, you can imagine the domino effect this would have on the economy as a whole. It would also raise questions about the safety and solvency of other banks. And First Republic Bank started to get scrutiny as well. And it was widespread concern that this would lead to a broad national review of banking solvency, with everybody beginning to realize is any bank safe since most of the assets at most of the banks are not insured by FDIC because the account values are simply so big?

This is why it was imperative that FDIC and the Treasury Department step in to provide reassurance that our banking system is safe. It is. That the American economy is secure. It is. And to demonstrate that by saying, relax, we will provide the capital for all of Silicon Valley Bank depositors, regardless of the size of their accounts. Now, some people are wondering if the bank is, in fact, so strong and so big. What's really the problem? Why couldn't they meet depositor requests for withdrawals? What's the problem here? Well, this is another bad business decision by Silicon Valley Bank. We've already met one bad business decision - they over concentrated.

Most of their depositors were tech companies. And if something happened in the world of tech, they were too concentrated to diversify their way out of it. They didn't have business with the automotive sector or the airline sector or the retail sector or the hospitality sector or the healthcare sector. Almost all their depositors are the tech sector. First mistake they made was overly concentrating in the tech sector. The second problem that they made is that they were collecting so many deposits from so many tech companies that they had too much money and they couldn't lend it all out. They couldn't make enough mortgage loans or business loans or car loans. They were simply sitting on tens of billions of dollars of deposits and they had nowhere to lend the money.

So what do you do if you're a bank and you can't find customers to lend your assets to? You deposit your deposits with the US Treasury. You simply buy Treasury securities. Treasuries are the safest security in the world because in the entire history of the United States government, the US government has never failed in providing interest and principal payments on time. This is why this is considered the safest investment in the world.

That's what Silicon Valley Bank did. It gave the money to the US Treasury and bought Treasuries. Well then what's the problem? They could simply sell the Treasuries to create the cash to meet the demand of depositors wanting withdrawals, right? 

Well, wrong. And here's why. This is the second mistake that the executives made at Silicon Valley Bank. They didn't simply buy 30-day, 60-day, 90-day T-bills. They decided to buy 10-year Treasury notes. They did that because the 30-day, 90-day paper were paying terribly low rates of interest. Remember a year ago when interest rates were 0.1%? 10-year Treasuries were paying more. And so the bank executives, in a desperate effort to earn a higher yield, put much of the bank's assets into 10-year Treasuries.

Fast forward a year and here we are today. Those 10-year Treasuries are now paying 4% in interest, much higher rates. But the bank had bought Treasuries when the rates were much lower, meaning that if they had to sell those Treasury notes, prior to their maturity, they wouldn't get 100 cents on the dollar. And that's exactly what happened. So many depositors demanded their money back that the bank was forced to sell their Treasuries. And the Treasuries, because interest rates have risen so much in the last year, those treasuries are no longer worth 100 cents on the dollar. They're only worth $0.80 on the dollar. And the bank has discovered a 20% loss of its asset base. This is enough to collapse the bank. And that is why we had this crisis.

The first mistake was that the bank over concentrated by doing business predominantly with one industrial sector - technology companies. And second, it took the excess deposits and made an interest rate play by buying 10-year Treasuries instead of 30-day Treasuries. That is how the bank ended up collapsing. And the worst part of the whole situation? 

The federal bank examiners didn't stop them from doing this. The bank examiners should have said, you are over concentrated. You're doing too much business with one sector and you're taking a big risk by depositing your money in interest rate sensitive securities of 10-year maturities. You should be limiting yourself to 30-day, 90-day, one-year maturities. The bank blew it and the banking examiners blew it by allowing them to do it.

And so here we are, little choice but to now step in and protect the banking system much in the same way as the government was forced to do in 2008. Was this preventable? Absolutely. Was this foreseeable? Totally. And yet it happened anyway. Seems we haven't learned a lot from 2008. It's just like they say, history repeats itself.

I'm not happy that we had to bail out the bank. But now that we were forced into that situation, there really was no choice. There's going to be a lot of recrimination. There's going to be a lot of second guessing, a lot of Monday morning quarterbacking. There's going to be a lot of reaction politically over the government's reaction to dealing with this situation. All that is natural and the situation will evolve over time. One big question - if the FDIC has effectively said that they're going to insure all deposits regardless of size, this effectively spells the end of the $250,000 ceiling for all banks and all depositors everywhere all the time. Is that sound economic, fiscal and monetary policy? Well, I don't know. Even with $250,000 limit in place, FDIC has only about $0.03 for every $100 it was insuring. 

Now, with those insured deposits unlimited, you're kidding yourself if you think that the federal government can truly step in and protect you if there is a calamity in the American banking system. So what's the action step for you? Do what Silicon Valley Bank should have been doing in the first place. Buy 30-day T-bills and ladder them by 30, 60, 90-day T-bills and rotate them. Every time a 90-day T-bill comes due, replace it with a 30-day T-bill. This way every three months, one third of your money becomes liquid. And this way you'll have the safety and liquidity unavailable anywhere else for as long as the United States government is open for business. More to come on this subject in the days and weeks to follow for sure. And if you want to hear what I have to say about it timely, be sure to follow me on Twitter and LinkedIn. 

Hey, today at 1 p.m. Eastern, I want you to join me for a one-hour webinar. It's hosted by the Financial Experts Network. The topic is Financial Planning in the Age of Longevity. The audience is a group of financial advisors. You're welcome to join as well. You can register at FinancialExpertsNetwork.com. The link is in the show notes. And if you're enjoying this podcast and you'd like to engage on a particular topic, connect with me on my social media channels, Facebook, Twitter, Instagram, YouTube, all the links are in today's show notes. I look forward to joining you in the conversation.

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