In this podcast, Motley Fool senior analyst Jason Moser discusses:
- UBS buying Credit Suisse for $3.2 billion.
- The ripple effects of everyone checking on their bank.
- Why Amazon's latest layoff announcement has him looking at the revenue-per-employee metric.
In addition, Motley Fool producer Ricky Mulvey catches up with Jacob Goldstein, host of the podcast What's Your Problem?, to talk about bank runs, why they happen, and how businesses could potentially prepare for them.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on March 20, 2023.
Chris Hill: We've got another round of tech layoffs and of course, the latest drama in the banking industry. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool senior analyst Jason Moser. How are you?
Jason Moser: It's Monday. I'm doing well. How are you?
Chris Hill: I'm fine. I'm just smiling audibly because we are back where we were a week ago today, which is the situation is fluid and banking continues to dominate the investing headlines. And this time it is overseas where the big story is. Credit Suisse is being acquired by UBS in a deal worth $3.2 billion. The deal reportedly orchestrated by the Swiss central banks with regulators. This is for a lot of reasons. These are two banks that we don't pay a ton of attention to. But because of the size of the deal, because of the influence, because a lot of investors just woke up to this news Monday morning. Naturally, one of the questions is, what ripple effects, if any, come from this? As you watch this playing out across the see what goes through your mind?
Jason Moser: Definitely, we've spent the last couple of weeks assessing the situation here domestically, watching the ripple effects of what happened with Silicon Valley Bank and Signature to a lesser extent. Wondering to ourselves, is this something that is contained just to our banking system here? Is this something that's just contained to a couple of banks that perhaps were overexposed to a certain asset class, weren't prepared to deal with certain macro economic conditions and now we're seeing this becoming a global -- I don't want to say contagion, but I mean, we do see this obviously spreading more on a global scale. It's not to say that this is the beginning of the end. But it is -- we're watching a train wreck in slow motion and that stinks as investors because you don't really know when this is going to conclude. You don't really know what the ultimate solution is.
There a lot of external forces at play that really go into this at the end of the day. Every move the banking regulators make and have made over the past couple of weeks is to shore up balance sheets and ultimately instill confidence. Yet the more they try to help, the less confident investors will become, right, because it's a tacit admission that, damn it, there's something wrong. We did something wrong, and now we're dealing with some unintended consequences. Again, it goes to show we talked about the psychology before when it comes to investing. I mean I feel like just over the past few weeks we're really seeing that psychology playing out here because the fundamentals of business are one thing.
We look at metrics that matter, and just general fundamentals of the business. But when you're talking about markets, there's a psychology at play. There are times when you, you've opened up Pandora's box and it's impossible to get things back in. I'm not certain that there are any moves the regulators can make at this point that will fully reinstall confidence in the sector. I do appreciate the fact that they continue to be seemingly on this. I like the fact that they're trying to work within the industry so that this is an industry solution as opposed to a government solution. Although I think it's fair to say that government is really pushing for that, as optics really matter. But it feels like listen, it's Monday and we should expect another fresh headline tomorrow telling us something new.
Chris Hill: You just touched on something that, look, over the years as we've been doing this podcast, you and I have talked a number of times about company X and something going on with company X, it whatever the industry is. Part of our conversation is, this is a headline risk. This isn't whatever's going on, whatever this challenge is, it's more headlines than affecting the fundamental underlying business. That's of some relief. But we also talked about the fact that it's like ah, but it's something that the CEO and their management team need to spend time on that. As an investor, you don't want to see that. You want to see the management team focused on the business, growing the business, etc. You just touched on something Jason that I think is a cousin to that, which is that every company in America has spent time over the last two weeks talking about their banking.
Even if they are very confident in what they've been doing up to that point, every company in America has had the conversation. Wait a minute, let's take a few minutes here. Are we good? Is our cash -- like, let's have an emergency board meeting or if it's a smaller company and they don't have a board an emergency management meeting. Can we just spend time talking about this thing? I think that's part of the challenge here. As you said, there's not going to be a bell that gets rung at the end of this to say, it's all over now. It's just going to be at some point in the future, we're going to look back as investors and say, over the last few months, we didn't really talk about banking. We didn't really talk about banks and liquidity and balance sheets. It seems like competence has been restored to its previous level. We're only going to know that when it's in the rearview mirror.
Jason Moser: I think you're right. When you look at something like a Credit Suisse versus USB situation, you had two different cultures. Clearly, USB seemed to be the more conservative of the two. Whereas Credit Suisse has a bit of a track record for mismanagement and crises, so to speak. Maybe the merging of these two will ultimately create a better entity going forward. But I do think that's right. I would hope that every financial institution out there, as it has, convened a meeting at some point here to do what you just said. Are we good? Is our balance sheet OK? Let's look at our investment portfolio.
Because I'd imagine the past few years, it's been cruise control for a lot of organizations, not just in banking, but generally speaking, investing was pretty easy over these last few years. You could throw a dart and pretty much make money. That's just not going to be the case anymore. I mean, clearly we're going to need to focus a little bit more on the fundamentals. And I think to your point on a finish line. No, there isn't going to be a finish line. Even look for signs that maybe things are better or better than than even we think. You look to that lending facility that was recently created by regulators for the banking situation here for banks to be able to tap that lending facility to shore up balance sheets in case depositors were feeling anxious in case there were some questions in regard to their exposure versus their depositors, to help protect them against a run. There are signs at least that that facility while it's being used. I was reading last night, a lot of the money that is being pulled from that facility is very tied to the West Coast situation. Banks like Silicon Valley Bank that have been overexposed to this start-up and VC demographic. So maybe that's a sign that things aren't necessarily as widespread as they could be. But again, it's not a finish line, it ultimately just looking for the signs that things are either recovering or perhaps not as bad as they are being reported today. But it feels like we still got a ways to go before we ultimately learn that.
Chris Hill: Before we move onto the next topic, I just want to correct one thing you said because I think you misspoke when you said that the acquiring bank is UBS.
Jason Moser: Did I say USB?
Chris Hill: You said USB. At least a couple of the dozens of listeners who are US Bancorp shareholders panicked I just want to put their minds at ease.
Jason Moser: Misspoke and thank you for the correction, it happens.
Chris Hill: Before I let you go, Amazon announced another round of layoffs, 9,000 employees. This is on top of the 18,000. We talked back in January when Amazon, Microsoft, and other major tech companies, were announcing layoffs. I believe Amazon was the one that we said, I'm pretty sure more rounds are coming. That was based in large part on just how many employees they have because on a percentage basis, I think at the time it was something like 1% or maybe even less than that. But as expected, another round which is obviously hard for the people who are losing their jobs, in terms of the underlying business and where Andy Jassy goes from here, and l say this is a longtime Amazon shareholder, I think it is fair to ask how many more of these are you going to do before you feel like you've got it right? Because this seems like the opposite of ripping off the Band-Aid.
Jason Moser: I certainly understand from the perspective of a leader wanting to be slower and more methodical than doing this. You have to believe that from any perspective, job cuts just stink. You don't want to do it as a leader, you hate it if you're the employee getting cut. The only people who can really perhaps appreciate it would be investors. That just is if it really this something that the business needs. I think what we're seeing more and more is in a lot of cases, a lot of businesses really need this. There was just a level of bloat that we're seeing a lot of these businesses starting to trim away. From the investing perspective that obviously makes sense. I would think that most leaders would want to try to let go of as few people as possible.
Maybe that's why we see this just coming in stages. Also when you look at the business like Amazon with so many different parts of the business. It's not just Amazon, this online retailer. You've got all of these different dynamics and these job cuts seem to be tilted more toward the AWS, the advertising, the Twitch side of Amazon's business. Whether we see more coming down the pike or not is still up for debate. My bet is we probably do. But if you look at where Amazon stands today versus where it was back in 2019, in regard to employees and revenue, one of the metrics we'd like to just look at just to get an idea is revenue per employee. That can just tell you a few things. Are they doing more with less or less with more? If you look at Amazon from back in 2019 from their 10-K, they say they employed approximately 798,000 full-time and part-time employees.
That was as of the end of 2019. Revenue that year, $281 billion. They were $352,000 revenue per employee. You fast-forward to today at the end of this year, at the end of 2022, they employed 1.5 million people, actually 1,541,000 full-time and part-time employees. Now, revenue took off as well, $514 billion for the year. But ultimately, what that translates to is $334,000 in revenue per employee so it's less. That's just a metric that companies want to keep an eye on. Ideally, you want to see revenue per employee growing. That tells you that you're doing more with less in some cases. Maybe that's one thing they'll continue to keep an eye on. But I just think it stood out. When you look at Amazon's employee base now versus then, 1,541,000 full and part-time employees versus 798,000 just essentially three years ago. We can see how quickly that employee base grew. The business is growing as well, just not quite as quickly, and we want to reverse that.
Chris Hill: Jason Moser, always great talking to you. Thanks for being here.
Jason Moser: Thank you.
Chris Hill: Have the events in the banking industry over the past two weeks done anything to change the definition of money? If so, does that even matter? Jacob Goldstein is the author of the book, Money: The True Story of a Made-Up Thing. Ricky Mulvey caught up with Goldstein to talk about bank runs, why they happen, and how businesses could prepare for them.
Ricky Mulvey: Right now, the Fed can just digitally send billions of dollars to banks wherever it wants -- or not, in the gold standard days. Why do we have bank runs?
Jacob Goldstein: Well, we have bank runs because not all of the deposits in American banks are insured or guaranteed. Namely this month that's important because say Silicon Valley Bank, the vast majority of the deposits were not insured. The Fed has the ability to save depositors at any bank it wants, has infinite dollars. The question is, when is it appropriate or desirable for the Fed to do that? The people last week, it seems like a long time ago, but it was just last week at Silicon Valley Bank who had their uninsured deposits, knew that their deposits were uninsured, knew that under the law, if Silicon Valley Bank didn't have their money, the government was not on the hook to make them the depositors whole, so it was rational for them to run on the bank.
Ricky Mulvey: You've studied the history of bank runs. I think there's some criticism that those deposits shouldn't be backstopped or which bank's deposits do get backstopped and which don't buy by the FDIC. What does it look like when there's a bank run and the deposits are not backstopped?
Jacob Goldstein: It looks like your classic timeless bank run. Deposit insurance is pretty new. We've had banks for many hundreds of years. In this country, we didn't have widespread deposit insurance until the 1930s. Before that time, it was routine for people who got nervous about their bank to go take their money out for good reason. The guys who won the Nobel Prize in economics last year built this formal mathematical model showing why it's rational for you to run on the bank if you're worried about the bank, because the bank doesn't have enough money to give all the depositors their money back. So if you're worried that there's going to be a run, you should run first, you should beat all the chumps so you can get your money before the bank runs out. That's exactly what we saw at Silicon Valley Bank last week.
Ricky Mulvey: But I'm thinking back to what you've written in Money about the wildcat banking era. Or if you don't backstop deposits, essentially your two options are doing what the 14th-century government of Venice, Italy, did which was behead bankers who aren't able to backstop deposits. Or you essentially just create a system where there's so many banks creating so much money that you have chaos all the time.
Jacob Goldstein: Yes-ish. There are trade-offs all the way down here. Technically, a bank deposit is a loan to the bank. The case against deposit insurance is, you want depositors, people lending money to the bank to care how safe the bank is. You want them to look at the bank and say, oh, this bank is super sketchy. I'm not going to put my deposits there because that creates a market force to cause banks to take fewer risks. It's regulation by market forces. Now we've decided that normal people should get to have checking accounts without worrying about that, some guy who has a $1,000 in the checking account or $5,000 in their checking account to pay their mortgage and buy food isn't on the hook to regulate their bank.
But we've decided that if you have more than $250,000 in the bank, you should be sophisticated enough to care about your bank's risk to be aware that Silicon Valley Bank is insolvent because of this debt on long bonds that they made. Now, I think the big problem right now is the government is de facto giving insurance to all depositors. I don't think that's a problem on its own. But the problem is the government is pretending that it's not providing that insurance. Officially, it's still the case that you'll only get FDIC government insurance on $250,000 worth of deposits. But in the 2008 crisis, and then again, just now the government's like, actually everybody's deposits are guaranteed.
It's like if, people's houses kept burning down and they didn't have fire insurance and everybody felt bad for them and the government's like, you didn't have insurance, but we're going to pay for you to rebuild your house because we feel bad for you. That's a dumb way to run an insurance market. It seems like the rational thing is, the government can no longer credibly claim that deposits bigger than $250,000 don't have tacit insurance because it clearly do. The government should own that, and say, some amount of bigger deposits or business deposits up to whatever a million dollars or something are insured and the FDIC has an insurance fund, we will charge for that. Because right now the government is providing free insurance. That doesn't make sense.
Ricky Mulvey: The other thing that I've noticed, too, is there's a criticism that banking regulators, government officials are just changing the rules on the fly. That seems to be the one consistency throughout pretty much all banking crises. With 2008, hey, we're going to go behind the wall to orchestrate these deals with Bear Stearns. In the Great Depression with FDR essentially saying we have enough gold to back up deposits, don't ask me any more questions.
Jacob Goldstein: Then it turned out that he changed the dollar value of gold. I agree. I mean, there's one particularly grating thing about the recent set of circumstances and that is if you go back to 2018, there was a change in the regulations put in place after the financial crisis where the threshold for being a systemically important bank was lowered. It had been, if you have 50 billion in assets or more, you're automatically considered systemically important. Meaning if you fail, it could have knock-on effects in the broader economy, which is what regulators care about. One bank blowing up doesn't matter, but a bank blowing up and taking down a bunch of the economy that's bad. They raised that threshold from 50 billion to 250 billion. Silicon Valley Bank is in the middle there.
Silicon Valley Bank was bigger than 50 billion, smaller than 250 so not systemically important under the new rules. Then over the weekend, the rationale the federal government gave for making depositors whole was actually it is systemically important. We need to do this because if we don't, there might be a broader banking crisis. To your point of this ad hoc regulation, that one is particularly frustrating because it is the exact opposite of how the law changed just a few years ago. I mean, the flip side is a banking crisis is very bad. Silicon Valley Bank, the stock is going to go to zero, the bondholders are going to lose most of their money, the people running the bank are losing their jobs. It's not like there is no accountability there. It would be better not to have a banking crisis than to have a banking crisis. It's hard. Banks are inherently fragile. Even good banks can blow up. You don't want the failure of a bad bank to take down perfectly sound banks. It's a hard problem.
Ricky Mulvey: The thing that I find frustrating is, I would think back, let's say three or five years ago. I don't think I would have predicted the Silicon Valley Bank collapse and I actually don't think that most reasonable people would. I think it's hindsight quarterbacking to say, I saw this particular bank failure coming. Now, what is entirely predictable though, is that there will be bank runs, there always have been bank runs and there always will be bank runs. But there is a dynamic between not putting everything in one basket and also to your earlier point, if you're a business with let's say $10 million in cash, you would need to use 40 different banks to have all of that insured. I think that's unreasonable for most businesses to do.
Jacob Goldstein: Yeah. I mean, I'll tell you the truth. I was surprised at the fact that I guess it was more than 90% of the deposits in Silicon Valley Bank were uninsured, were in very large accounts. I mean, there are other things you can do with cash. If you're a business, you can buy T-bills, you can buy Treasury money market mutual funds. Now if you need millions of dollars to make payroll every two weeks, that gets more complicated. But I was surprised by that fact. Clearly, lots of businesses have lots of money in uninsured bank accounts. At this point, I think it's reasonable to feel like those accounts have this tacit backing of the government, even if the government doesn't come out and say so.
That it's that tacit backing that seems suboptimal to me. It's weird to me that more people aren't talking about that. The only person I've heard talking about it strangely is Barney Frank, who wrote Dodd-Frank, the banking reform that came out of the 2008 crisis, and then was on the board of Signature Bank, the other lesser-discussed bank that got shut down last week and they were a big banker to the crypto industry and they also got shut down and their depositors were made whole. Barney Frank was like, hey, businesses need deposit insurance on higher amounts. To me, that seems like an obvious conclusion from this. Maybe the reason people aren't talking about it is because there's not an obvious villain there. I feel like what people want when a bank fails is a villain. Talking about insurance is boring. Maybe that's why nobody is talking about it.
Ricky Mulvey: It's hard to get the people off their seats for insurance regulation.
Jacob Goldstein: Yes.
Ricky Mulvey: Brandon Greeley wrote an op-ed in the Financial Times. It's titled, "SVP failure raises a question: who gets to create dollars?" One of the points that he raises is that there's a decision to backstop all of the deposits. That expands the definition of a dollar. You've written about how the definition of the dollar has pretty much consistently expanded and changed throughout all of human history. Does it matter that the definition of a dollar is expanding or is that just a natural course of economic life?
Jacob Goldstein: Oh, it does matter. Just to pause and talk through what that means for a sec. If you go back 100 years ago, the U.S. was on the gold standard. The definition of a dollar then was basically a certain amount of gold. It was that I think it was $22 and change or maybe $20 and change got you an ounce of gold. People thought of that as the meaning of the dollar. The fundamental thing at that point, that was a dollar was basically that much gold then the next step was a banknote, a piece of paper. Now, 100 years ago we had the Fed. It was a piece of paper, but people still thought of the paper as basically a claim check for the gold.
Then the next thing that was like a dollar, but a little less was a dollar in the bank. Because 100 years ago you knew that your dollar in the bank was a loan to the bank and if the bank went bust, you wouldn't get it back. As of a week ago, a dollar in an insured bank account was more sound, was more real dollar than a dollar in an uninsured bank account. A dollar in an uninsured bank account is a loan to the bank that you might not get back. What we've seen, I think over the past week is the government saying, OK, those dollars in your million-dollar checking account, those are actually more solid dollars than we said before.
Those are real dollars, wink. What it means is basically the government is backing, supporting banks more now than the government was a week ago. That has been the direction of things. More government backing for banks. That's OK. I'm not necessarily opposed to that, but during this public-private partnership with the government, banks are in the business of creating money and they're able to do that because of the set of government guarantees that they get. In exchange for that, they are subject to strict regulation and they have to pay for a deposit insurance. We just need to make sure that those things seem like they're in balance. The more the government is guaranteeing the banks, the more the banks should be subject to regulation and deposit insurance.
Ricky Mulvey: Jacob Goldstein, he's the host of What's Your Problem?. He has an interview out with Glenn Kelman, the CEO of Redfin. He's also the author of Money: The True Story of a Made-Up Thing. Appreciate it, as always.
Jacob Goldstein: Yeah, thanks. It was a delight to talk to you.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
