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Capital Market Update: SVB Fail

Capital Market Update: SVB Fail

March 13, 2023

As you may have seen or heard, Silicon Valley Bank (SVB) failed and was shut down Friday, the first major bank to do so since the 2008 financial crisis. 

This has raised fears that other banks will also fail, which could put bank deposits above the $250,000 FDIC insured limit at risk. As such, some clients have been asking if SVB or other banks failing have or would put their funds held with Windsor Private Wealth, held at Fidelity, at risk. 

The short answer is “No” for numerous reasons and on multiple levels.  The most important of which is the following: the only assets at risk in the case of a bank failure are deposits (checking, savings, bank deposit accounts) in excess of $250,000. All securities (stocks, bonds, mutual funds, ETFs, money market funds, etc.) held with Windsor/Fidelity are held in “street name”, which means Fidelity is merely holding them for you, and your securities are not considered assets of Fidelity the way SVB’s bank deposits were. To use a real-life example, when Lehman failed in 2008 client securities held in street name were not effected and could be simply transferred out to another custodian.  

We at Windsor keep client cash in money market funds, which are considered securities and therefore not a deposit or asset of our custodian Fidelity/NFS. 

Another more straightforward aspect of the safety of accounts held with Windsor/Fidelity is the strength and security of Fidelity itself. The ways in which Fidelity Investments/NFS is a safe a custodian of your investment accounts are too numerous to list here, but here are two of the main ones.

First, Fidelity isn’t a traditional bank (i.e relying on taking in deposits and lending them out at a higher rate to stay in business) like SVB.  Fidelity is primarily a 401k provider, in fact the largest 401K provider by a factor of 4X. Fidelity’s other primary lines of business are as an asset manager (i.e. Fidelity mutual funds) and an asset custodian for firms like Windsor. While hypothetically possible for Fidelity to lose all its 401k, asset management, and custodian business, such a decline would play out over a series of years, not months like Lehman’s failure, or days like SVB’s. [i]

The second aspect of Fidelity’s strength and safety is related to the first: Fidelity is a private company which has never been bankrupt, insolvent, and/or needed to be bailed out.  Remember in 2008 when Lehman, Morgan Stanley, AIG, Citibank, Merrill Lynch, Bear Stearns, Goldman Sachs, and Wachovia were all bankrupt, insolvent, and would have gone the way of Lehman if not either bought or bailed out?  I certainly do, and I also remember Fidelity being notable by its absence on that list for the reasons cited above.  [ii]

Speaking of bailouts, based on the latest headlines it sounds like the US government is planning to bailout SVB by guaranteeing all SVB deposits, including the 95% of SVB deposits not covered by FDIC insurance.  While I’m sure that’s a huge relief for the thousands of tech and biotech companies holding their cash at SVB, it so what reeks of “moral hazard” and “privatized profits, tax payers eat the losses” …but that’s a topic for another day. [iii]

I hope the above helps to address questions around the safety of and zero impact on assets held at Fidelity through Windsor Private Wealth, and I am happy to further discuss via email, text, or phone as useful. 

On a final related note, we are loving the recent decline in equities, down 8% since we called the latest bear market rally peak and moved another 5% from stocks to cash & T-Bills.  Hopefully we will get an additional big drop this coming week or soon so we can redeploy some of that cash back in at attractive entry points. [iv]


Very Truly Yours,

Jonathan Lonske

Managing Partner, Financial Advisor

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