411: Heads I Win Tales You Lose: The U.S. Banking System

The challenge with investing is that you can do everything right and still lose. Unfortunately its supposed to be that way otherwise everyone would take the biggest bets possible all the time and always win. That’s just not reality.

In good times, it is very hard to anticipate what could happen if the unexpected occurs. Over the last 24 months, we saw interest rates rise at a slope never before seen in the US economy. This was just a few months after the Federal Reserve called inflation “transient” signaling that it would not raise rates.

In hindsight, the subsequent rise in interest rates to curb inflation is all clear now but I don’t remember hearing anyone talking about the scenario before it happened.

As a result, many including me lost money and continue to hold our breath as rates start to level out. As much as we hate it, this is the way the system is supposed to work.

The thing is, all of what we are experiencing is going to happen again in one shape or another. Over the next few years, those with ice in their veins will buy when everyone else is scared. And hopefully, they will remember what this feeling we all feel now feels like and sell when things feel too good to be true.

As Sir John Templeton put it, the most dangerous words for an investor are “this time, it’s different”.

It would be easier to accept this fact of investor life if it applied to the big boys as well. But it doesn’t. 2008 was the extreme example. The big banks lost big bets. Had those bets come to fruition, they would have made lots of money. But they didn’t win those bets. And the taxpayer paid for their losses and all of the lawmakers said it would never happen again.

But it did. In 2023, the taxpayer stepped in to bail out multiple regional banks. This time, those banks weren’t even being irresponsible. They were investing in a way that would be deemed conservative. Yet, they too were the victim of unparalleled rate hikes by the Fed.

Lucky for them, they were banks and not individuals like us. What happened with those regional banks and is it likely to happen again? My guest on Wealth Formula Podcast this week is a brilliant Professor at Stanford who was brought in to investigate the regional bank failures in Silicon Valley.

When she talks, the government and people like Jamie Dimon listen. See what she has to say about the current state of the banking system and how it affects you.

Show Notes:

08:29 What is wrong with the banking system?

11:34 What went wrong in Silicon Valley?

13:58 How do FDIC rules work? 

24:20 What should have been done in 2008 to prevent this from happening again?

28:28 Will what is happening to Silicon Valley happen to the rest of the country?

31:44 Is it still risky out there?