What You Should Know About the Recent Bank Failures 

The recent failures of Silicon Valley Bank (SVB) and Signature Bank have triggered “shock and awe” headlines designed to generate clicks and even incite fear, but many offer little in terms of understanding the cause and effect of these events. Commercial banks face many different types of risk, with loan defaults, also known as “credit risk,” being the most common. These defaults were the main drivers of the massive bank failures experienced during the early days of the Great Recession. Back then, the declining housing market was the primary trigger as investment banks such as Lehman Brothers and Bear Sterns were heavily invested in these faltering, unexpectedly risky assets. As fearful consumers withdraw cash feverishly in what’s called a “bank run,” they create a liquidity crunch (which is yet another risk), forcing banks to lock in massive losses on those risky assets to meet reserve requirements.  

The events we are seeing today are not necessarily being driven by banks’ investments in risky assets, but ironically their exposure to relatively “safe” assets such as government Treasury bills and bonds. Unfortunately, quality investments don’t prevent failures … another risk that banks take on is interest rate risk, especially when rates rise abnormally fast, as they are doing today. And when rates go up, bond prices go down. In the case of SVB, 55% of its assets were in fixed income securities, which have seen their prices battered over the last two years as interest rates soar. Another key factor for SVB is that its client base tends to be high-net-worth individuals or corporations with balances that far exceed the FDIC insurance limit of $250,000. As word spread that SVB was having issues, these uninsured and savvy depositors quickly pulled cash, forcing the bank to lock in losses in high-quality fixed income assets, creating a fast-moving snowball effect that drained cash and reserves. The federal government then intervened, shutting down the bank in order to “prevent” a deepening crisis. 

Three Things                                              

Retail Sales Decline  

After a 3.2% jump in January, retail sales cooled in February, increasing just 0.4% (seasonally adjusted). The Commerce Department data showed a shift to essentials like groceries and health stores, while consumers shied away from restaurants, auto dealerships and department stores. It’s been hard to find a trend in retail data, as readings have been erratic, but retail sales have advanced 5.4% over the past year, slightly less than the current 6% consumer inflation reading. Some economists believe that the unexpected jump in January’s reading could be due to the largest cost-of-living adjustment made to Social Security checks. 

Meta Puts NFTs Aside, Announces More Layoffs 

CEO Mark Zuckerberg announced yet another round of firings at Meta, with plans to cut an additional 10,000 employees or 12% of its workforce. The news was announced as part of a blog post by Zuckerberg titled “Update on Meta’s Year of Efficiency.” Separately, Meta fintech lead Stephane Kasriel announced via Twitter that the company will end its Instagram minting and selling of non-fungible tokens (NFTs), as well as the ability to share NFTs on Facebook and Instagram. This doesn’t necessarily mean that Meta is out of the NFT market but is further proof that the company is committed to focusing on its most profitable ventures with laser focus.  

Are You Ready to Snack on Some Kellanova?! 

Legacy cereal maker Kellogg Co. will be splitting its business into two. Its North American cereal division, which includes brands such as Frosted Flakes and Fruit Loops, will become WK Kellogg Co., while its fast-growing snack and frozen foods business will be named Kellanova. Kellanova will own the Pringles, Eggo and Cheez-It brands, along with many others, and will begin trading on the New York Stock Exchange under the symbol “K.” The new ticker for its cereals business has yet to be released. Kellogg joins a group of several other companies that have incorporated a Latin-inspired name to reintroduce their products to a younger, more global customer base.  

In the Know                                              

The First Robot Lawyer Gets Sued 

Artificial intelligence (AI), in many forms, has quickly swept the world’s stage. From simple chatbots to those that can complete homework, AI is gaining a ton of attention. As humans figure out how AI will integrate into our world, there will be social and legal tests. Speaking of legal, the world’s first robot lawyer has been accused of practicing law without a license. 

DoNotPay, an AI-powered legal app that allows users to “fight corporations, beat bureaucracy and sue anyone at the press of a button,” faces allegations that it is “masqueraded as a licensed practitioner” in a class action lawsuit filed by Chicago-based firm Edelson. According to Edelson, the services offered by the bot are “unlawful” and argues that “DoNotPay does not have a law degree, is not barred in any jurisdiction, and is not supervised by any lawyer.” We suspect the CEO of DoNotPay may need more savvy representation in what could become an interesting case.