Mark Twain is reputed to have said that “history does not repeat itself, but it rhymes.” The events of the past few months have certainly conjured up many memories of the Financial Crisis, and for those following bank stocks, the emotional roller coaster of 2008-2009 feels all-too-present today. The fate of many of our nation’s banks may rest largely on how long our economic paralysis is sustained in support of the greater good of public health.
Bankers and research analysts agree that American banks are much better-capitalized than they were a dozen years ago and should be able to withstand several months of severe economic contraction. But if the economy were to remain largely shut for six months, absent a windfall of additional money-printing from the Fed, another financial crisis could ensue atop our existing humanitarian crisis.
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With all this doom and gloom, there is a glimmer of hope. Like every other financial or humanitarian catastrophe to befall our modern age – World War I, The Great Depression, World War II, Black Monday, the collapse of Long Term Capital Management, the Dot-com bust, 9/11, and the most recent Financial Crisis – the path downwards has been followed by an even more ebullient path upwards. The shape, timeline, and certainly of any future recovery is unknowable, but we can hold out hope that it will at least rhyme with the events of the past.
I’ve had the experience of living and working through several market dislocations. From each one, I’ve sought to learn how to extrapolate from relevant data and facts, and, perhaps more importantly, how to recognize and curtail emotions. While every investment brochure disclaims that “past performance is not indicative of future results,” as an investor, it’s important to learn from your own past performance and journal your mistakes. Only by dissecting your thought processes at the time – both rational and emotional – can you endeavor to make better decisions the next time you are faced with a similar set of facts and circumstances.
Online Banks: The Financial Crisis As Inspiration
I was stationed in Tokyo during the Financial Crisis, working as an investment banker for one of the largest American banks, which had recently acquired one of Japan’s largest brokerage firms. I arrived in August 2007, just after closing the last private equity-based capital raise that involved so-called “Toggle Notes,” where a borrower could elect whether to pay the interest it owed in cash or in-kind (i.e. more debt.) It was illustrative of just how favorable the capital markets had become for issuers – a sign of a raging bull market where seemingly nothing could go wrong.
As an analyst on Wall Street in the late 90s, I learned that the hallmark of the late stage of a bull market is when the market “climbs a wall of worry.” In other words, in spite of each piece of bad news that could befall the economy, stock market indices continue to march upwards. In addition to overly accommodating capital markets, several other more pedestrian warning signs were also present by the summer of 2007. The drivers who shuttled me home from the office late at night were increasingly talking about their stock market gains and the houses they were flipping for profit. In-flight magazines contained countless ads for hi-rise luxury condominium developments. Were these signs of a healthy economy where the rising tide lifts all boats, or a warning that the pace of wealth creation was unsustainable?
As 2007 progressed into 2008, the unsustainability of the bubble in asset prices became all-too-apparent, and banks began to fail. From 2008 through 2012, the FDIC closed a staggering 465 banks. To put this in context, in the five years prior to 2008, only ten banks had failed. The bank where I worked didn’t fare much better. Bearing witness, first-hand, to such a precipitous fall from grace taught me an important lesson in the fragility of banks. No matter how storied the name or how solid the marble that adorns its branch entrances, banks exist at the pleasure of investors and depositors’ willingness to extend credit in exchange for levered returns.
The Importance Of Keeping Cash Safe
In response to the Great Depression, President Roosevelt and Congress enacted the Banking Act of 1933, paving the way for the creation of the Federal Deposit Insurance Corporation (FDIC). When my bank’s share price hit $0.97 in March of 2009, it struck me that much of my cash held at that bank might be in peril. While the FDIC provides deposit insurance, that coverage is limited, and every dollar that you hold above the FDIC insurance cap makes you, in effect, an unsecured creditor of that bank. I realized that in order to keep cash safe, I needed a better solution.
I began researching options for cash. Many banks and brokerage firms offered brokered deposit solutions, where a bank takes your excess deposits and sells them to other banks. The pitch is that this helps you obtain increased FDIC coverage, and so you should feel safe keeping all of your funds at your home bank or brokerage account. But my research revealed several risks inherent in this system, as well as large conflicts of interest. If I was to ensure all my cash was safe and liquid, I needed a better solution.
The best thing I could think of was to open new bank accounts at multiple banks and diversify my holdings by spreading my cash across them. I’d hold each account in my own name, control how much was kept at each bank (to ensure all funds remained below the FDIC limit at each bank), and retain full same-day liquidity at each bank. Unlike brokered deposits, where you might not be fully insured if the broker sells your deposits to a bank where you already hold accounts, and where you could lose access to all your funds if your main bank goes under, with my strategy, I knew that I’d maintain full control, full liquidity, and full FDIC-insurance coverage.
Online Banks And Interest Rates
In 2009, online banking was still relatively nascent, but, it turned out, opening new accounts at online banks was much faster and easier than going into a bank branch. I opened accounts at several of the leading online banks, which also happened to offer higher interest rates than their brick-and-mortar peers, owing to their lower operating cost structure. Much like Amazon had figured out how to sell a textbook cheaper by eschewing physical stores, online banks applied this concept to banking, making it possible to earn a higher interest rate on FDIC-insured savings accounts.
Still, the online banks changed their rates with great frequency, and often when I logged in to check my balances, I found that interest rates had changed. It occurred to me that I could move funds from one bank to another to benefit from yet-higher interest rates. For the next three-and-a-half years, I found myself logging in each month, checking rates, and manually moving funds from bank to bank to obtain the highest yield while keeping all my funds FDIC-insured.
This strategy could be highly lucrative (effectively capturing a pure arbitrage in the market for bank deposits) but also a huge time sink. There had to be a better way. How could I automate this process, so that my money could continue to earn the highest yields possible without my having to lift a finger? And if I could find a way to automate the management of my own cash, why couldn’t I open up this same strategy to anyone else who wanted to simultaneously earn higher yields with less risk?
Online Banks: Conclusion
The result: I created my own automated cash management platform – MaxMyInterest.com. Seven years and three patents later, Max is now the highest-yielding cash management solution in the United States, used by financial advisors at thousands of wealth management firms with more than $1 trillion of assets under management. With a top yield of 1.71%, Max stands above all other cash options offered by banks and brokerage firms – yet, the core premise remains the same as it was back in 2009: deliver the best yields, fully FDIC-insured, with same-day liquidity and no conflicts of interest.
While it may be difficult to envision now, the COVID-19 crisis shall too pass. And, if history does indeed rhyme, in its wake American ingenuity and determination will likely push our economy and financial markets yet higher – although the recovery may be long and uneven. As an investor, your appetite for risk may again increase, too. But for the portion of your portfolio that remains in cash, you should remain as protected and earn as much as possible.