The Banking Fiasco Is What Happens When Emotions Rule The Market
Last week, we witnessed a case study in how human behavior and emotions drive markets. Let’s start with a story…
Early Monday morning (March 13), I got a frantic text from my mother-in-law. She very rarely texts me. It read: “We are hearing a lot of noise about banks… will you call us.”
They were ready to march to their local banks, pitchforks in hand, and demand their money. Everybody was. This uneasiness was a ripple effect from the collapse of Silicon Valley Bank (SVB) — the 16th largest bank in the United States — on Friday, March 10.
It is the second largest bank failure on record, behind Washington Mutual Trust in 2008.
Signature Bank (Nasdaq: SBNY) also collapsed. Over the weekend, the government stepped in and assured the public- and depositors at SVB and SBNY- that their deposits were safe and would be made whole, even those above the $250,000 FDIC insurance limit.
But the reassurance fell on deaf ears.
As Monday morning came, regular folks were panicking. The bank run was on, and investors were dumping regional bank stocks.
Like First Republic Bank (NYSE: FRC), which caters to Silicon Valley elites and other high-net-worth clients. Shares fell over 65% Monday morning…
PacWest Bancorp (NYSE: PACW) fell over 60%… Comerica (NYSE: CMA) lost over 35%… the Invesco KBW Regional Banking ETF (Nasdaq: KBWR) shed over 15%.
Even the big boys took a haircut. Charles Schwab (NYSE: SCHW) lost over 30%. JPMorgan Chase (NYSE: JPM) has seen shares slide over 10%, and Wells Fargo (NYSE: WFC) was down nearly 20%.
The Latest Shoe To Drop
As if that weren’t enough, let’s fast-forward a little bit to last Sunday. That’s when the Swiss government announced UBS (NYSE: UBS) would buy Credit Suisse (NYSE: CS) for $3.2 billion.
The Swiss government had previously injected $280 billion of state funds into the bank as customers were pulling deposits out of the bank at a furious pace ($110 billion).
Credit Suisse had been in trouble for years. But the latest round of worry led to a run on deposits that could have sparked an international banking crisis.
Here’s what my colleague John Persisnos had to say about the situation:
In years past, many of Credit Suisse’s ultra-wealthy clients have been exposed as a rogue’s gallery of dictators, gangsters and corrupt politicians. However, as the bank recently struggled with staggering operating losses, Swiss regulators deemed it as too big to fail.
The UBS/Credit Suisse buyout values the latter at less than 15% of its market capitalization three months ago. As part of the buyout deal, Swiss regulators also announced that so-called additional tier-one (AT-1) bonds will be written to zero, wiping out $17 billion for those unlucky bondholders.
Shareholders got clobbered, too. Saudi National Bank, for example, lost over $1 billion on its CS shares. The upshot, though, is that the international banking system has averted the chaos that would have resulted if Credit Suisse had been allowed to go under.
When Emotions Rule The Market
Here’s the thing about all of this… it could have been avoided. Sure, a bank here or there might have failed because, believe it or not, banks fail nearly every year. Eight banks failed between 2019 and 2020. And eight banks went under in 2017 alone.
But when someone says, “don’t panic.” Everyone panics. And that’s exactly what the CEO of Silicon Valley Bank said on a call. Had there not been a run on SVB, it would likely still be around today, and the wild swings in banking stocks (and the market at large) would have been avoided.
But alas, emotions and human behavior (especially when it comes to money) ruled the day. And believe it or not, this is often the case. In fact, over at Maximum Profit, our system essentially makes trades based on other people’s irrationality and how it affects the markets. We just saw that play out in spectacular fashion.
Bottom line, if you’re thinking about dipping your toes into the banking sector because of the massive selloffs, be careful. The same emotion/momentum we take advantage of to the upside works the same for the downside. Many of these stocks can fall much lower from here.
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