Monday, March 13, 2023

I'm back from a week in Ukraine; Bank runs; Wells Fargo and First Republic look interesting; Big takeaways from my trip; Zoom call on Wednesday

By Whitney Tilson

1) I just got back from a week traveling 1,600 miles all over Ukraine (more on this below and in future e-mails). Did I miss anything?

I'm kidding, of course...

Unlike when, for example, I was in Antarctica or hiking in the Sierra Nevada mountains in California, I had excellent Internet coverage – both on my phone and Wi-Fi at hotels – so I was able to keep abreast of the news... especially the banking crisis triggered by the collapse of SVB Financial's (SIVB) Silicon Valley Bank.

The most important thing that the average investor needs to understand is that this is nothing like 2008, when the combination of a massive housing bubble, on- and off-balance sheet leverage, and widespread fraud created the biggest financial bubble in history. When it burst, it brought the world to its knees and required every existing – and many new – tools of the U.S. government to stabilize the situation.

Today, our banking system and economy are healthy, and there is no reason why the idiosyncratic problems of a few stupid banks – most notably, tech startup banker SVB and crypto bank Silvergate Capital (SI) – should create a systemic problem.

To understand what happened at these banks, Bloomberg's Matt Levine has an insightful explanation of Silvergate here: Crypto Bank Had a Boring Collapse. Excerpt:

Still the story of the end of Silvergate is just sort of boring and normal? It had an incredibly simple, boring, old-school and reasonably safe banking business model, borrowing short and lending long, taking demand deposits at low interest rates and investing the money in a fairly conservative portfolio of longer-maturity mortgages and bonds. What brought down Silvergate is:

  • When interest rates go up rapidly, if your assets are all long-dated bonds, they will go down in value.
  • Traditionally, banks deal with this risk by holding their assets to maturity and not marking them to market: If you have a 10-year loan and interest rates go up, the loan's market value goes down, but if you just wait 10 years you'll be repaid in full and it's no problem.
  • Silvergate, however, also lost most of its deposits because its depositors were mostly crypto firms and crypto collapsed. It couldn't hold its assets to maturity, because it had a sudden huge need for cash to pay out those depositors. So it had to sell the assets, so it lost money, which left it thinly capitalized, which led to more depositors leaving, which led to more asset sales, which ended Silvergate.

And SVB here: Startup Bank Had a Startup Bank Run. Excerpt:

As [Robert] Armstrong puts it, SVB had "a double sensitivity to higher interest rates. On the asset side of the balance sheet, higher rates decrease the value of those long-term debt securities. On the liability side, higher rates mean less money shoved at tech, and as such, a lower supply of cheap deposit funding."

Also, I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. If some depositors get spooked and take their money out, and other depositors evaluate your balance sheet and decide things are fine and keep their money in, and lots more depositors keep their money in because they simply don't pay attention to banking news, then you have a shot at muddling through your problems.

But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say "hey, did you hear, everyone's taking money out of Silicon Valley Bank, you should too," then all of your depositors will take their money out at the same time.

So these two banks were extremely dumb... But, to be clear, every bank is vulnerable in a panic since nearly all depositors have the right to withdraw all of their money at a moment's notice – yet banks lend and invest those deposits, which means they're not completely liquid.

Hence, the critical role of governments is to carefully regulate banks and step in early and forcefully when problems emerge.

The good news is that this appears to be happening. Here is a short Twitter thread on what the government is doing:

And here's Bill Ackman's spot-on tweet about it:

So depositors should rest easy. As for investors in SI and SIVB, they'll likely be wiped out, as they should be. But the entire banking sector is taking a hit... so I think it's time to start looking for babies thrown out with the bathwater.

One stock on my list is Wells Fargo (WFC), which was down about 6% this morning and is very close to a two-year low. It remains an open recommendation in our flagship Empire Stock Investor newsletter, where we're up 65% on our position (versus 11% for the S&P 500) since we recommended the stock back in September 2020. (To subscribe to Empire Stock Investor and gain access to all of our back issues and get our 12 best new large-cap ideas over the next year, it's only $49 – just click here to learn more.)

A higher-risk, higher-reward idea I'm exploring is First Republic Bank (FRC), which I've been banking with both personally and professionally for more than a decade. It's a first-rate institution with an excellent franchise, yet its stock was down more than 75% this morning.

2) Now that I'm home, I can reveal without jeopardizing my safety (long story) that I just spent six days in Ukraine – traveling more than 1,600 miles all over the country (Europe's largest).

As you may know, I have been deeply involved with supporting Ukraine over the past year – raising more than $15 million for things like ambulances and other vehicles, generators, tourniquets, hand warmers, hospital sheets and gowns, Level IV body armor, jackets and sleeping bags, night vision scopes, first-aid kits, and ballistic helmets.

I spent most of this trip (my second in three weeks) in eastern Ukraine, between six and 100 miles from the front lines. I spent most of my time with various humanitarian organizations – four hospitals, two ambulance centers, a refugee center, a children's art program, etc.

What I saw was so illuminating and inspiring! Here are my big takeaways:

  • Pretty much everything you hear in the media is wrong. 
  • Morale is extremely high among both soldiers and civilians.
  • Ukrainian forces are currently decimating Russian ones with increasingly sophisticated tactics, weaponry, and surveillance equipment. 
  • With each passing day, Ukraine is getting stronger and Russia is getting weaker.
  • When Ukraine's counteroffensive begins (likely in May), I predict that it will result in a total collapse of Russian forces across a vast front.
  • I believe it is certain that Ukraine will win this war, likely much sooner than anyone expects.
  • In other words, the Ukrainian tiger is about to devour the Russian bear.

To share the details of my latest mission, I'm hosting a Zoom call at 7 p.m. Eastern time this Wednesday evening, March 15. Here's the link to join.

Over the next week or two, I'll share pictures, videos, and stories from my trip. Here's the first one: On Thursday, I visited Bohorodychne, a (sadly) representative village in eastern Ukraine that was the scene of heavy fighting last summer. There isn't one unscathed building in a town of 7,000 people, of whom only seven are left. Below are two pictures, and here's a video I recorded there:

Best regards,


P.S. I welcome your feedback at [email protected].