Meet Jasmine. Jasmine is a college student attending State
University. Like many college students, Jasmine has a
lot things she needs to buy: books, laundry baskets, food, and so on, and she can pay
for those things with two types of money: debit or credit. Debit is money that comes from a personal
bank account. Credit is money that is lent to you by your
bank. For example, let’s say Jasmine has been
using a credit card. Each time Jasmine uses the card to buy something,
say a $100 textbook, her bank is loaning her the money. While that sounds nice, be warned, the bank
isn’t giving Jasmine this money for free. They expect her to pay a certain amount of
money each month, called interest, if she doesn’t totally pay off her balance by the
due date. As you can imagine, this can get very expensive
very quickly, especially when factoring in the high annual interest rates, or APRs, that
are charged by these companies. However, there is a solution to this rather
scary problem. As long as Jasmine always pays off her balance
in full by her monthly due date, she’ll never pay a cent of interest.
Jasmine is shocked and thrilled, but still
isn’t quite sold on credit-cards. After all, with all their flaws, are they
really worth using? The short answer: as long as you avoid running
up a balance, definitely! So why is that? Well, “free money” for starters. Most credit cards offer their users rewards,
like cash back or airline miles, each time they make a purchase. For example, let’s say Jasmine’s credit
card comes with 2% cashback. That means if Jasmine spends $500 per month,
then at the end of the month she’ll automatically get $10 back, no questions asked. Then, if that wasn’t good enough, responsibly
using a credit card also allows Jasmine to build a great credit score. This is a calculated number between 300 and
850 that summarizes your credit history, covering everything from your payment history to the
age of your accounts. While we’ll teach you more about your credit
score, including how to get and improve it, in our next video “Credit Scores and Reports
101”, just for now know that most credit cards actually require a credit score of at
least 600, plus at least $15,000 in annual income and a reasonable debt payment to income
ratio, generally below 36%.
However, thankfully for Jasmine, who lacks
both credit history and a full-time job, she shouldn’t have a problem getting a student
credit card. In fact, the online application will take
all of five minutes. She’ll just have to be a full-time student
of at least 18 years of age, with either a small amount of income, like from a part-time
job, or a creditworthy co-signer. However, at this point we have to say, be
careful. Taking on a co-signer is no small matter. The account is still in your name, so any
credit mistakes are on you and your co-signer, plus your co-signer is even liable for any
of your missed payments. If Jasmine isn’t quite ready for that level
of responsibility, she can instead be added as an authorized user to her family’s account.
Not only will this allow her to get her own
credit card, but in a few short months the credit bureaus will treat her parent’s credit
score as her own. Sounds pretty great right? Well, this strategy isn’t a cure-all. Even though Jasmine isn’t liable for payments
on the account, her parents still are, plus many lenders will want to see you successfully
handling credit on your own before giving you a major loan. Hopefully you and Jasmine now understand the
basics of credit cards. Be sure to watch our next video, which covers
everything you need to know about credit scores, and be sure to check out our website, where
you can find more educational materials, your free credit score and great credit card recommendations.
The mighty Credit Suisse. Europe's most scandalous bank
has now been swallowed up by its rival, UBS, ending their decades
long battle for Swiss banking dominance. This marks the end of an astonishing rise
and fall story that traces its roots
back to the bank's role in transforming Switzerland into the economic powerhouse
that it is today. But while Credit Suisse
had noble beginnings as a local Swiss bank set up to develop a backwardation,
it gradually expanded into the high stakes businesses
of managing the wealth of the global elite and then a Wall Street investment banking.
Ultimately, its desire to be the best
got it to expand too quickly, which then led to a slow and steady
decline marked by a series of scandals ranging from petty squabbles
between executives at luxurious cocktail parties to assisting
in hiding the money of infamous dictators
like Libya's Gaddafi and Egypt's Mubarak. So without further ado, let's explore
the dramatic story of Credit Suisse's rise
to prominence and fall from grace. It's hard to imagine now, but in 1856, the visionary businessman
and politician Alfred Escher described Switzerland as Europe's forgotten
backwater, a relatively poor country that had just emerged from a civil war
and was surrounded by great powers such as France and Prussia, born
in a wealthy but disgraced family. Mr. Escher set out to restore
his family's name by trying to modernize Switzerland, connecting it
to the rest of Europe via rail. There was just one problem
since Switzerland was so poor, it was thought at the time that railway construction was only possible
with the help of foreign money and therefore foreign influence
to prevent this.
Alfred Escher founded a Swiss
bank and Citic, then known by its German name as tried, said
he took credit and stood, which roughly translates
to Credit Suisse in French. And even though the bank
only formally changed its name to Credit Suisse in the 1970s, actually,
for the sake of keeping the story simple. From here on, I'd refer to the bank
as Credit Suisse. Anyway, what I found remarkable about Mr. Escher's motivation
is that he seems to have understood one of the deepest mysteries of economics, a mystery that even up to this day,
not many people seem to understand the power of private bank money creation.
After all, why would starting a bank
in a poor country mean that? Mr. Escher No longer needed to rely on foreign
investors to fund his railway company? Where would the money in the bank
come from if not from wealthy foreigners? Well, it's simple. By starting a bank, Mr. Escher essentially began his own money
printing business, enabling him to create money to employ
Swiss workers for his railway projects. Okay, I know that sounds complicated. So here's how he did it. Step by step at a time,
the Swiss economy largely ran on the Swiss franc coins
that were linked to gold and silver. And with the promise of future riches, Mr. Escher was able to convince
his to make connections to supply the initial coins
needed to start the bank, meaning that the bank now had coins in reserve
that were all owned by the shareholders. Now, as the first step of money
creation, Mr. Escher's railway company
would then borrow from the bank.
But instead of demanding
coins, the railway company agreed to open a deposit account
at Credit Suisse. Crucially, this now meant that
the railway company and Credit Suisse were indebted to each other
for the same amount. But what was the point of that? The railway company issuing debt to the bank and the bank
issuing that to the railway company? Well, the point is that
these types of debt are not the same. You see, the debt issued by the bank
in the form of a deposit account could be exchanged for coins
whenever the railway company wanted. Whereas the debt issued by the railway
company would only lead to a coin inflow
for the bank in a couple of years. On top of that, Mr. Escher convinced railway workers
to accept payments in Credit Suisse's deposit accounts instead of coins,
and that getting people to accept your debt
as money is the magic ingredient that explains why banks can create money
and people like you and me cannot. I think famous US economist Hyman Minsky
made a really good point when he said everyone can create money. The problem is just to get it accepted. In other words, anyone can issue debt.
But even today, only debt issued by
banks is accepted as money. Of course, there are good reasons
that you and I, as well as Mr. Escher's workers accept this deal. First, banks have made it really easy
for clients to transfer the debts between them. Second Bank Dapps can be exchanged
for cash whenever we want. And third, banks are typically actually
good for their debts. After all, if some workers wanted coins
from the Swiss, the bank could pay them
using its coin reserves. And then if its reserves were depleted,
it still had valuable loans in a railway company. It could potentially use these
then as collateral to borrow coins from other banks
if it really needed it. In other words,
from the perspective of the workers, the bank was good for their debt
because they were backed both by COIN reserves as well as the loans
to the railway company.
It is only if the railway company
would get into trouble that the workers would really have
a strong incentive to run to the bank to try to get the limited coins out
as quickly as possible. And that was the magical money
printing business of Credit Suisse. In a nutshell, Credit
Suisse would in essence, turn railway company debt into bank debt, which workers
and companies would use as money. But before you start crying foul,
let's remember that up to this point, the deal has actually mostly
been favorable to the companies, the workers and the Swiss economy,
not the bank.
After all, the more deaths from
this company's credit squeeze monetized, the more companies could build,
which is good for the economy, and the more employment opportunities there would be,
which is good for the workers. And the more the Swiss economy would grow. And on the other hand,
the Credit Suisse bankers had to work hard to make sure they didn't monetize the debt
from the wrong companies, because if they couldn't pay back,
they could face a bank run.
Now, that is a job of a banker. So how does a banker get paid for this? Well, by turning a higher interest rate
on loans to the companies that had paid out on deposits, and that is the local business of Credit
Suisse in a nutshell, built on a layer of cash
brought in by its shareholders. It helped the loans of companies building
the Swiss economy and gave them, in return, low interest rate deposit accounts
that could actually be used as money.
And this is how Mr. Escher achieved his dream. His bank, Credit Suisse, monetized
the debts of his railway companies, which allowed them to hire workers
without needing foreign money. This contributed
greatly to the Swiss railway boom and thus the modernization of Switzerland. And so Mr. Escher would go down into the Swiss
history books as one of its most influential business
tycoons ever. And as a bonus, his bank would turn out
to have a great future ahead of it. A great future that would soon
take a doctor in Switzerland started promoting and strictly
enforcing its banking secrecy laws. But before getting into Swiss banking
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And with that, let's go back to how Swiss
banking secrecy allows Credit Suisse
to become more powerful than ever before. Even though Swiss banking secrecy, which made the sharing of client information punishable
with up to five years in prison, was made official in 1934. The practice had already been encouraged
by the Swiss government for decades. The goal of this Swiss policy
was simple Convince wealthy foreigners to hold their money
in Swiss banks at this point. You might be wondering,
but I thought you said Mr. Escher had achieved his dream
of developing the country without foreign money. When he created a Swiss bank
capable of creating money locally. And yes, he did do that for the railways. But the thing is, small, open economies
like Switzerland still need a lot of foreign money to pay for stuff
that isn't in the country.
Meaning that a big foreign currency
reserve is needed. Something can be built up
if wealthy foreigners are convinced to hold their money in Swiss banks. And banking secrecy attracts
wealthy foreigners for three main reasons. The first was tax evasion. The second was hiding
illegally obtained money. And the third most noble one
was hiding money from invading governments during the first and Second World Wars. Although, let's be honest, in practice,
the biggest reasons were mainly tax evasion, tax evasion and tax evasion. Anyway, as a business, first and foremost,
the promise of more profits persuaded Credit Suisse's managers
to abandon Mr. Escher's simple banking model. This led to the emergence of this second
great pillar of what would become the Credit
Suisse banking empire Wealth Management. If you go back to the balance
sheet of Credit Suisse, we can visualize wealth
and asset management as an extra layer building
on top of the traditional Swiss bank.
Managing the wealth for shady foreigners
means taking in large deposits
and investing these in various ways. Again, making money
because these investments typically earn a higher interest rate
than the bank pays on these deposits. But where wealth management differs
from traditional banking is that it's also about just advising wealthy clients
about how to manage their wealth without taking any on your own
balance sheet. So at first glance, especially,
this advisory part seemed much safer than pure banking,
since it was just advice. However, given that the advice of these
wealthy foreigners wanted typically, let's be honest, was about how to avoid
taxes or how to hide ill gotten wealth. And this is why this new lucrative
wealth management division would actually ultimately set up Credit Suisse
to become Europe's most scandalous bank. The first major scandal involved several
Swiss banks acquired by Credit Suisse, which were later
found to have harbored stolen Nazi wealth. Upon Discovery, Credit
Suisse refused to return this wealth to Holocaust survivors for decades.
However, a far more damaging scandal
turned out to be the Gyatso scandal in 1977,
which occurred in the Swiss town of Gyatso,
which is in walking distance of Italy. What had happened is that the local office
in this tiny village had allowed Italians to smuggle millions of dollars
worth of money into the country. But instead of putting that money
in official Credit Suisse accounts, this local manager, Mr. Ernst Kuma,
had put the funds into his own operation in another notorious
Alpine tax haven, Liechtenstein, instead. This caused a severe blow
to the reputation of credit Suisse and Swiss banking in general. But strikingly, this wasn't
due to the facilitation of tax evasion. It was because the funds
were apparently not safe in Swiss banks. But rather than resolving these issues
and returning to the boring old ways of local banking. Credit
Suisse management was hungry for more, so they decided to use the scandal
as an opportunity to rebrand Credit Suisse as an international bank, expanding
beyond Swiss banking and wealth management,
and venturing into the lucrative but high risk world of Wall
Street investment banking and in the early 1980s,
while the Swiss bankers had perfected the profitable business of tax evasion,
they were still outclassed by a new breed of competitors
the American Wall Street banker.
You see, Wall Street bankers had mastered
an even more lucrative business model in investment banking. In theory, investment
banking is more like wealth management than traditional banking, in that it is,
for a large part, all about earning income from commissions for services rendered
rather than about earning interest income. But instead of helping clients
evade taxes. Investment bankers provide services
aimed at helping clients obtain the funding needed to expand
their businesses. Just to illustrate this,
say that you were a growing global corporation in the 1980s
and you wanted to expand. Sure, you could go to Credit
Suisse to get a loan, but in this decade
it became increasingly popular to instead go to a Wall Street investment bank
like Goldman Sachs. Shearson Lehman Brothers,
or the most illustrious of them all. First Boston, a bank
that would serve as the springboard for many Wall Street
titans such as former Lazard CEO Bruce Wasserstein
and even BlackRock CEO Larry Fink.
Not one of the reasons investment
banking became so popular is that a bank like First Boston could potentially
get you a lower interest rate than a traditional bank could. They did so not by giving you a loan,
but by helping you issue bonds on America's
competitive bond markets. And alternatively, if you sought less risk
and went to issue stocks. Investment bankers
could also assist you with that. And finally, if you were in the market
for buying up the competition, a bank like First Boston could help you to determine
at what price you should make an offer. And all of this for a small commission,
of course. At least this being an advisory business
is how investment banking started out. But in the 1980s, investment banks
increasingly got in the action themselves, issuing debt
to buy the risky types of securities they helped their clients
to issue or increasingly, they started providing loans that clients
needed to take over these other companies. Risky, certainly. But the interest rates that investment
banks could charge on these loans and the profits they could make on
their trading activities were in the eyes of Credit Suisse's management
absolutely worth the risk.
There was just one problem. How could a group of conservative Swiss
bankers join this elite Wall Street club? Well, as it turned out,
all they had to do was wait. When First Boston, the illustrious bank
encountered trouble due to excessive lending to clients for acquisitions,
Credit Suisse swooped in to rescue it. And this ultimately led to Credit Suisse
completely absorbing First Boston and firmly joining the ranks of elite
global banks like Jp morgan and Goldman
Sachs under its own name, Credit Suisse.
This marked the completion of Credit
Suisse as a global full service bank. A bank event like any other was built
on top of cash reserves and shareholder capital. The first safest layer was
then the traditional Swiss bank that provided loans and deposits
to the Swiss. The second layer was the wealth and asset
management business that invested deposits from wealthy
individuals into various projects. The third and final layer was not a risky
Wall Street investment bank, which issued debt on capital markets and invested
in risky securities and provided loans to risky clients
looking to take over other businesses.
And in the next decade, this risky
combination was about to get even riskier, as Credit Suisse's management
set its sights on yet another rival, LA. In the 1980s, Credit Suisse's
ambitious chairman, Mr. Rainer E. Gut. had one problem
while he ran a prestigious global full service bank. He didn't run the most prestigious global bank in town, and that was UBS. Now, in this decade,
both banks had adopted a so-called Hunter strategy, meaning that they mainly pursued
growth by hunting smaller, weaker rivals and buying them up. So when the large Swiss bank
known as Volk's bank, was struggling after the housing bubble in Switzerland
burst, both UBS and Credit Suisse saw their chance to swallow it up
to become the biggest Swiss bank. So they both courted Fox Bank
and it initially sided with UBS. However, Mr. Good worked
tirelessly in various backroom deals, eventually securing the deal for Credit
Suisse, making it the biggest Swiss bank.
However, this was not to last very long. As less than a year
later, UBS merged with Bank or becoming the biggest Swiss bank
once again. However, for both organizations,
this would cause big problems later on. You see these mergers combined. Several highly complex organizations
make it very difficult to monitor what all employees were up to. And indeed, not long
after these complexities began to catch up with Credit Suisse First, its wealth management
division came under increasing scrutiny from the press after it came to light
that they had helped dictators from Nigeria, the Philippines
and even the notorious Japanese
Yakuza gang to hide and launder money. Second, its investment
bank got into big trouble and suffered heavy losses during the dotcom bubble,
and this led to that.
In 2006, Credit Suisse became
one of the first banks to have to get rid of their subprime mortgages when trouble
arose in the US housing markets. However, this turned out
to be a blessing in disguise, and it also meant that when the global
financial crisis hit one year later, Credit Suisse had already gotten rid
of most of its toxic assets. And as a consequence, Credit
Suisse managed to do quite a bit
better than both as a wall Street rivals.
And reportedly UBS, which needed a state
bail out by the Swiss state. However, in hindsight, receiving a bailout
and facing restructuring might actually have been a blessing
in disguise for UBS as it was forced to slimmed down
its excessive operations while Credit Suisse kept expanding its scandal
ridden wealth management and risky investment banking operations. That being said, Credit Suisse did not escape
the crisis unharmed.
In 2008, the company still suffered
substantial losses due to bad investments
made by its investment banking division. Fortunately,
the bank's overall losses were limited thanks to the success
of its wealth management division. Although the reasons for this success
would soon become apparent, while the very nature of Swiss
banking secrecy encouraged tax avoidance and theft, in this period,
it became clear that Credit Suisse had taken it
to another level, being the bank of choice for money
laundering. Officials from regimes such as that
of Libya's Gaddafi and Egypt's Mubarak. However, the scandals
that were really hurting Credit Suisse were the ones that got the regulators
to actually find the bank. Already in 2009. The bank was fined millions
for helping Iran to evade sanctions, a fine that paled in comparison
to the billion dollar fine the bank had to pay for helping US
citizens evade taxes. On an industrial scale in 2014, fines it, together with further losses
from its investment bank led Credit Suisse, to seek new management
in the form of the charismatic CEO Tidjane Thiam, who pledged to deemphasize
investment banking and focus the company's energy on helping the ultra
wealthy to avoid even more taxes.
But now, with a focus on Asia and
hopefully while staying within the law. Mr. Thiam’s, leadership at Credit
Suisse started strong, but eventually led to one of the company's
most high profile scandals, which involved him clashing
with his head of wealth management, Mr. Iqbal Khan. The two men
who apparently started on a friendly note, saw their relationship turn sour
rather quickly as a result of Mr.
Khan's resentment of not sharing
more of the spotlight with Mr. G.M.. But in a move that seemed to come right
out of a reality drama show on Netflix, Khan moved in
right next door to his boss team and spent 12 years loudly
renovating the property. And then in retaliation, allegedly, Mr. Thiam planted trees that liked Mr. Khan's view of Lake Zurich, which in turn then led to a very public
falling out that took place at Mr. Thiam's luxury cocktail party. Then when mr. Khan eventually left,
he went directly from Credit Suisse to its biggest rival, UBS. And then in an almost movie
like Plot Twist, Credit Suisse had private investigators
tell Mr. Khan that into a high stakes
chase throughout Zurich. A physical altercation
and ultimately the suicide of the private investigators involved. In the end,
this tumultuous scandal cost Mr. Tim his job and overshadowed
the fact that revenues had actually begun
to recover during his tenure. Now, that being said, during his tenure,
the scandals within Credit Suisse's wealth management division
definitely persisted, with the bank facing scrutiny over its role in Asian corruption
scandals, such as Malaysia's one MTBE scandal and the bribing of Hong Kong officials
to establish a foothold in the city.
To make matters worse, the investment
banking arm then began making headlines for all the wrong reasons. First, there was a colossal collapse
of Archegos capital, which then cost Credit Suisse billions. And as if that wasn't enough, British
finance firm Greensill Capital met a disastrous end soon after striking
another blow to the bank's balance sheet. So in 2021 and 2022, both the investment
bank and wealth management divisions of Credit
Suisse experienced massive losses, losses that could not be offset by the good old Swiss banking division
that was still profitable. Therefore, it made sense
that already in 2022, the bank suffered massive deposit outflows,
especially from its wealthy clients. Outflows that got worse when banking
turmoil started in the United States. And given that we now know that
other banks and the Swiss Central Bank were unwilling to save the bank,
these depositors were right to flee the bank, in my opinion, as their various assets backing
its deposits had lost too much value. And so the bank
would have entered bankruptcy. If it was a normal business. However, as we've seen
at the start of this story, banks are not normal businesses.
They play a vital role in our economies. In the case of Switzerland turning Swiss,
that's into money. Money that is the lifeblood of the Swiss
economy. And so, of course,
the bank had to be saved. Or did it? When discussing whether or not the bank had to be saved,
there was just one problem. The Swiss people were still pretty pissed about the government
bailing out UBS in 2008.
So the government assured them
this is no bailout. They just negotiated a deal with UBS,
which was to take over Credit Suisse for a reduced price
from existing shareholders and then risky foreign bondholders
from the US and Asia would lose their investments
while deposit holders, as well as many key staff
members, would be protected. Oh, and the government
promised to protect us from further market panic via a very cheap loan
and it would provide a guarantee of bearing a large share of the losses
if Credit Suisse turned out to be worth way
less than what the US bought it for. So yeah, it's not a bailout. The government just provided cheap loans and guarantees
which are worth millions of dollars. And all of this was done
for the good of regular Swiss people. According to the Swiss finance minister,
who said without a solution, payment transactions
with Credit Suisse in Switzerland would have been significantly disrupted,
possibly even collapsed, and the wages and bills
could no longer have been paid. The problem with that statement,
though, is that the Swiss retail bank
was only a small part of Credit Suisse, and that small part
could have been saved on its own.
After all, during the great
financial crisis, this is exactly what the Belgian
and best governments did when the bloated Fortis ABN Amro
combination collapsed. They only bailed out
the local banking units that were crucial
for their national economies. The other parts were allowed to collapse
or be sold off at bargain prices to the highest bidder. And this was actually a viable option
for credit Suisse as well, because, as the Financial Times
reported, ex first Boston banker and now BlackRock
CEO Larry Fink had actually already sent some of his top ranking lieutenants
to Zurich to explore the option to buy precisely
these risky parts of the company. But this takeover was allegedly blocked by the Swiss government. Instead, they preferred
that UBS would become an even bigger, too big to fail mega conglomerate that is
twice the size of the Swiss economy, a behemoth that would dominate Swiss
retail banking, Swiss wealth management and Swiss investment banking,
a conglomerate that at the time of the takeover
was led by a foreign CEO who was then
swiftly replaced by a Swiss banker.
After the deal. So could there be something
more going on here? Was this takeover actually
in the best interest of the Swiss people or just in the best interest
of the influential Swiss banking class that faced only minor consequences
in the form of reduced bonuses thanks to this collapse? Unfortunately,
because I am not part of the Swiss banking circles,
I cannot answer that question for you. But perhaps you can help me
answer it down in the comment section, or you can join the discourse
server for money and macro if you support the channel via Patreon
or become a member. Oh, and if you're interested in more rise
and fall stories, check out this playlist over here. Or if you want to know more
about how private banks create money,
take a look at this video over here.
Tries to say Credit Suisse in German Actually says Credit Suisse in German.
Clipping coupons and scoring flights with
credit card miles can save a few bucks here and there, but achieving long-term financial
stability requires a much more holistic approach. Let's look at six big personal finance topics
budgeting, saving, debt, taxes, insurance, and retirement and discuss a helpful principle
for each. Number one: When budgeting, consider focusing
on the big-ticket items. You may have heard you'd be a millionaire
if you'd just skip your morning latte, but it's likely that you can save more by cutting
costs on the expensive stuff like housing and transportation. According to Kelley Blue Book, in 2019, the
average new car cost about $37,000. But buying the same car pre-owned could save
more than $10,000 much more than a year's worth of lattes. Number two: When setting savings goals, be
specific about your plan to get there. It's easy to say, I'm going to save $6,000
for retirement this year, but you also need to define your tactics for pursuing your goal.
Subgoals can help guide your savings strategy:
if you want to save $6,000 this year, think about how you might save $500 this month by
increasing your income or trimming your expenses by about $115 a week. These mile markers can help you assess how
realistic your goal is and help you monitor your progress. Number three: Avoid high-interest debt and
loans for items that could quickly lose value. You might have heard to avoid debt at all
costs, but not all debt is created equal. One type of debt to avoid is debt with an
interest rate higher than 5%, like credit card debt carried from month to month. Also, try to avoid going into debt for anything
that is likely to quickly loses value, like boats, RVs, jewelry, and other luxury goods. But there are times borrowing money makes
sense. For example, loans for education or starting
a business are often considered healthy debt because they may lead to more income down
the road. For some, a low-interest mortgage might be
a good use of debt, because a house has the potential to appreciate.
And even using a credit card as long as you
pay the balance in full every month can help improve your credit score by showing lenders
you can responsibly manage debt. But healthy debt only helps your credit score
if you make your payments on time, so if you're looking to increase your credit score, only
borrow money you're confident you'll be able to pay back.
Number four: Reduce your taxable income. This doesn't mean make less money this
means find ways to pay less taxes on the money you make. One way to do this is to receive income in
a tax-exempt form, meaning get compensated in a way that isn't taxable. For example, many employers offer benefits
that allow you to receive or set aside untaxed money for things like retirement, health care,
education, transportation, and child care.
A second way to potentially reduce your taxes
is to defer them meaning pay your taxes later by contributing to a traditional IRA or 401(k). With these types of retirement accounts, you
don't have to pay taxes until you withdraw your money during retirement, when your tax
rate may be lower. Number five: Avoid insurance for expenses
you can afford to pay for out of pocket. Depending on your personal situation, you
may need car insurance, home or renter's insurance, or life insurance. And everyone needs health insurance. Studies suggest that more than 60% of all
bankruptcies are related to medical issues, so strive to have at least minimum coverage. But remember that the purpose of insurance
is to protect you in unfortunate scenarios. In exchange for protection, you make regular
payments to an insurance company called premiums. Premiums are guaranteed and often ongoing
expenses. For smaller valuables, like electronic devices,
you may want to skip insurance if you can afford to replace them, because paying for
coverage you might never use can be a waste of money.
And finally, number six: Don't just save
for retirement invest for retirement. Realistically, just saving isn't likely
going to be enough to reach your retirement goals. Investing can help grow your money over time. As you can see, if you invested $1,000 in
stocks in 1975, by the end of 2018, your investment would've been worth over $130,000. How can $1,000 grow so fast? Over time, compound interest, which means
earning interest on interest, can help investors experience exponential growth, or growth that
occurs at an increasingly rapid rate. Contributing to retirement accounts like 401(k)s
and IRAs can potentially help you save on taxes and allow your investments to compound
even faster. So remember:
When budgeting, consider focusing on the big-ticket items. When setting savings goals, be specific about
your plan to help you get there. Avoid high-interest debt and loans for items
that will quickly lose value. Consider taking steps to help reduce your
taxable income. Avoid insurance for expenses you can pay for
out of pocket.
And finally, consider investing for retirement. While there's no shortage of personal finance
advice out there, cutting through the noise to focus on high-impact adjustments can potentially
have an enduring effect on your financial future..
Banks don’t fail very often, and bank runs
appear to be mostly a thing of the past. The last bank failure in the United States
happened in 2020 when a small bank in Kansas with 69 million dollars in deposits failed
at a cost to the FDIC of 18 million dollars. That two-year streak was broken this Wednesday
with the failure of the crypto focused bank Silvergate, which was a bit bigger. As of year-end 2022, Silvergate’s deposits
were over $6bn, possibly ranking it in the top 50 largest US bank failures in FDIC history. Silvergate’s importance in the recent crypto
boom is possibly best described by a now-deleted testimonial from the bank’s website, “Life
as a crypto firm can be divided up into before Silvergate and after Silvergate. It’s hard to overstate how much it revolutionized
banking for blockchain companies.” The testimonial was written by a millennial
who still lives in his parents’ basement playing video games and has had some recent
run-ins with the law – His name is Sam Bankman Fried. I’m told they took it down from their website
a few months ago because it doesn’t hold the same weight today as it used to.
So, let’s talk about Silvergate Bank, andtouch
on the general sell off in bank stocks that we saw yesterday to understand what went wrong… If we go back ten years, Silvergate was a
small San Diego based real estate lender that transformed itself into the go-to bank for
the crypto industry. So how did this transformation occur? Well, in 2013 Silverlake’s CEO tells the
story that he began reading about cryptocurrencies and decided to buy his first Bitcoin.
A year later Silvergate invited in crypto
entrepreneurs and asked them what problems they were trying to solve and how the bank
could be helpful. After this, the bank transformed itself and
grew rapidly. It went public in late 2019 at a share price
of $13, and a year later the stock price had risen by 1,580% as it became a key interchange
point between dollars and cryptocurrencies. Major Silverlake clients included Paxos, bitFlyer,
Kraken and also innovators in atonal rock music – Mars Junction, who also had some
involvement in the Crypto industry. FTX and Alameda were also big customers.
The bank’s growth mirrored the growth of
the crypto industry, and it declined alongside that industry too, announcing in a regulatory
disclosure earlier this week that it plans to wind down operations in the face of “turmoil
in digital currency markets”. This announcement was only so much of a surprise
as last week Silvergate had announced that they would be unable to file an annual report
with the SEC on time due to a weakening in their capital position. They announced that they might be forced to
close at that time, blaming growing problems in part on pending investigations into their
operations. The filing confirmed that Silvergate is being
investigated by the US Department of Justice. Customers rushed over the last few months
to pull money out of Silvergate.
In January they reported that customers had
withdrawn more than $8bn, forcing them to sell held-to-maturity assets to fund the run,
accruing losses on the sale of those securities of $718 million dollars. California’s state banking regulator said
it was “monitoring the situation closely” and working with federal regulators to make
sure Silvergate’s closure was “safe and expeditious”. Before we dig into how things went so wrong
so fast at Silvergate, let me quickly tell you about today’s video sponsor Blinkist. Blinkist is an app that helps you understand
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link in the description or scanning the QR code. OK, so why was Silvergate so important in
the world of crypto? Well, people who trade cryptocurrencies often
want to use dollars to buy crypto, or they want to sell crypto and receive dollars and
the dollar side of those transactions is where things get bogged down.
If you are transferring large sums of money
to buy crypto, you need to deal with the US banking system who might ask you a lot of
questions relating to anti money laundering regulations. Crypto people hate questions like this. Similarly, if you just sold some crypto and
want to deposit the dollars you received, most banks will have a long list of questions
about the source of your funds, and there is a really good chance that they will simply
refuse to do the transaction. It is going to be a struggle for a US regulated
financial institution to show their regulator that they have done enough due diligence to
be sure that your funds are not the proceeds of crime. And the last thing a bank needs is to be accused
of money laundering; they would rather just simply not deal with suspicious transactions.
For this reason, stablecoins like Tether and
Terra exist – or existed. If you can convert your dollars into crypto
once, you can then buy stablecoins that are supposed to always be worth a dollar, and
then instead of buying and selling crypto with actual dollars you buy and sell crypto
with dollar-denominated stablecoins, your money can stay “on chain”. The problem with that, is that you have to
trust the stablecoin issuers, and they for some reason don’t always seem trustworthy. They won’t really tell you where the money
is, they’ll sometimes announce that they are going to be audited by a top 12 auditor
(I’m not really sure what a top 12 auditor is – but when you hear that – you know
you are getting number 12 on the list), and you start to wonder if Friehling & Horowitz
made that list.
Sometimes they’ll even fire their auditor
accusing them of “excruciatingly detailed procedures”. I mean an audit is basically defined as involving
excruciatingly detailed procedures. If you find an audit fun… there is possibly something wrong with you. OK, so if you don’t like stablecoins…
maybe you could keep your dollars on a big trustworthy exchange… But that can have its problems too.
This problem of course goes deeper than crypto
investors wanting bank accounts that can interface with their crypto trading accounts, because
if you have deposited your dollars with a crypto exchange or a stablecoin provider,
they still need to deposit them somewhere. They need a bank too. Now (of course), another way of dealing with
this banking issue, might be to lie to your bank about what your account is being used
for (SBF and the team at FTX did that), but the technical term for ‘lying to your bank’
is Bank Fraud (as Sam Bankman Fried just found out) – and you can get in trouble for that. It’s part of the reason that Sam is still
living with his parents, and it’s one of the reasons that he may have a new roommate
soon. So… What this all means… Is that there was significant demand for a
“crypto friendly bank” and Silvergate was willing to fill that role, when no other
bank was willing to take that risk.
Silvergate weren’t just crypto friendly
either, they built their own payments network called the Silvergate Exchange Network to
(according to their marketing documents) enable the efficient movement of U.S. dollars between
participants 24 hours a day, 7 days a week, 365 days a year. As you might imagine, Silvergate (being the
only bank that would deal with them) attracted a lot of big crypto customers, as these customers
were able to open up accounts without lying too much. Silvergate dealt with most of the big players
in the industry and they were an actual US regulated bank with excruciatingly detailed
audited financial statements and capital regulation. This meant that your money was safe at Silvergate,
unlike at the other venues we just went over. Now the beauty of dealing with these crypto
customers, crypto exchanges, and the band members of Mars Junction, was that because
you don’t have any real competition in this space, you don’t really have to pay them
any interest on their deposits.
You could take the billions of dollars they
deposit with you, put it all in treasuries and you get to keep all of the interest. You’ll probably have to spend some of the
profits on lawyers to keep the regulators at bay, but overall you might have a profitable
business. But that’s boring right… And no one gets involved in crypto for a boring
life… So I suppose they decided they could lend
some of the money to that crazy guy with the laser eyes to buy more Bitcoin. I’m sure that’ll be fine… Right.
But it wasn’t just that guy, there were
other people too. They had a product called SEN Leverage direct
lending, where they would lend people money collateralized with bitcoin. Exchanges could also borrow dollars collateralized
with bitcoin for corporate treasury and other business purposes. In January they announced that total SEN Leverage
commitments were $1.1 billion dollars and that all of their SEN Leverage loans “continued
to perform as expected, with no losses or forced liquidations.” So, as crazy as that business might sound,
it was not really the source of their problems. So, where did things go wrong then? Well, as of September, 2022 their balance
sheet showed about $11.4 billion of “securities,” meaning bonds: Treasury securities, mortgage-backed
securities, agency bonds and so on and $1.4 billion of “loans,” meaning the Bitcoin
loans and some other real-estate lending.
They had $13.2 billion worth of deposits at
the end of September, most of them being from crypto companies – so non-interest paying
deposits, the best kind… The problem for Silvergate was that when FTX
was exposed as being insolvent, crypto investors were considerably less willing to leave their
cash on exchanges. They asked for their money back from the exchanges,
meaning that the crypto companies had to ask for their money back from Silvergate, so Silvergate
was faced with a good old fashioned bank run – driven not by a loss of faith in Silvergate,
but by a loss of faith in crypto exchanges. By the end of December, noninterest bearing
deposits at Silvergate fell from $13.2 billion dollars to just $3.9 billion dollars. There is a good chance that if you had an
account at a crypto exchange, that exchange banked with Silvergate, and if you closed
your account and cashed out, the cash came from a deposit at Silvergate. As people closed their crypto accounts and
cashed out, that led to some of the problems at Silvergate. There were other FTX related problems too. When prosecutors started looking into the
collapse of FTX, their attention was drawn to their banker – Silvergate, for hosting
accounts connected to Sam Bankman-Fried.
Now, a big problem for Silvergate, was that
– with their money all tied up in bonds or lent out, Silvergate had to come up with
around 9 billion dollars to pay out these withdrawals. Their accounts show that by the end of December
they had sold half of their bonds and had controversially borrowed $4.3 billion from
the Federal Home Loan Bank of San Francisco, a government institution that is in place
to give short-term secured loans to banks that have a short-term liquidity problem. This Federal Home Loan Bank loan drew the
attention of a group of Senators in Washington DC. Who wrote a letter to Silvergate’s CEO,
pressing him on his knowledge of FTX’s alleged misconduct and expressing that they were “disappointed
by his evasive and incomplete response” to a prior letter inquiring about the bank’s
relationship with FTX.
The senators took aim at both Silvergate and
the Federal Reserve for their inability to “identify what we now know were extraordinary
gaps in Silvergate’s due diligence process,” and said that by taking the cash injection
from FHLB, Silvergate introduced crypto market risk further into the traditional banking
system. In September Silvergate had shown 3.1 billion
dollars’ worth of bonds as being “held to maturity” and 8.3 billion dollars’
worth of bonds as being available for sale. The difference between these two classifications
(from an accounting perspective) is that the available for sale bonds have to be marked
to market – or held on the books at their fair market value, while the “held to maturity”
bonds could be marked at their cost price.
By the end of December there were no “held
to maturity” bonds left on the balance sheet, meaning that they had either been sold, or
reclassified as available for sale. One way or another, interest rates had gone
up a lot in 2022, and these bonds were worth a lot less than they were being carried on
the balance sheet at. The sale resulted in a loss of $751.4 million
during the fourth quarter of 2022 and in addition, the Company recorded a $134.5 million dollar
impairment charge related to an estimated $1.7 billion dollars of securities it “expects
to sell in the first quarter of 2023 to reduce borrowings.” This is because reclassifying some of the
bonds to “available for sale” meant that they now had to be marked to market and that
the loss had to be recognized under GAAP accounting rules.
Silvergate also had to write down a $196 million
dollar investment in “certain developed technology assets related to running a block-chain-based
payment network” that it had bought in January 2022. So, all in, there was a net loss of over a
billion dollars in the fourth quarter of 2022. OK, so banks have regulatory capital requirements. That means that they can’t just lend out
all of the money that comes in as deposits. Some of the money being lent out has to come
from shareholder capital. Thus, if some of the loans go bad, the shareholders
take the hit and not the depositors. This makes sense, as deposits at American
banks are insured by the FDIC, and the FDIC doesn’t want to have to pay out every time
a loan goes bad.
Bank capital requirements are “risk-based”
and need to be kept above 4% to be “adequately capitalized” and above 5% to be considered
“well capitalized.” Different types of assets have different risk
weights, and this is done to keep deposits safe. The safest assets – like treasury bonds
have a zero-risk weighting, so a bank that has everything in treasury bonds only has
to meet that 4% capital requirement. A bank that makes a lot of mortgage and business
loans might have a capital requirement of around 8%, and assets like bitcoin have a
100% capital requirement, meaning that a bank would need to have $100 of capital for every
$100 of bitcoin on its books. The minimum that a bank would want to get
to is 5% regardless of the risk weighting of their assets, as below that they are no
longer considered well capitalized. In September Silvergate was fine, as despite
the Bitcoin loans, most of their money was in high quality bonds that had zero risk weights. But when their deposits went out the door
and they had to sell assets and realize a billion-dollar net loss, they were left in
a situation where an additional 19-million-dollar loss would but their capital below 5% and
they would no longer be considered well capitalized.
Last week Silvergate announced that they had
sold additional debt securities in January and February to repay the company’s outstanding
advances from the Federal Home Loan Bank of San Francisco and that they ”expect to record
further losses related to the other-than-temporary impairment on the securities portfolio”. These additional losses they said would “negatively
impact the regulatory capital ratios of the Company and could result in the Bank being
less than well-capitalized. In addition, they announced that they were
evaluating the impact that these subsequent events have on their ability to continue as
a going concern for the twelve months following the issuance of financial statements.
And none of that is considered good. This announcement caused the stock price to
half that day and according to Bloomberg caused Coinbase, Galaxy, Paxos and other crypto firms
to announce that they would stop accepting or initiating payments through Silvergate. These customers leaving were the final nail
in the coffin, as they reduced deposits even further. So, there we go, a bank run, on a real bank,
caused by crypto related losses and crypto volatility. Bank runs in general seem like something from
the distant past, and that’s because they mostly are. We did see something that looked like a bank
run here in the UK during the credit crunch, at a bank called Northern Rock.
The most recent U.K. bank run before that
had been Overend Gurney in 1866, a London bank that overreached itself in the railway
and docks boom of the 1860s. The Northern Rock bank run wasn’t even an
actual bank run, as retail depositors only started lining up outside bank branches after
the Bank of England had announced that it was intervening to support the bank. Although it may have seemed dramatic on television,
the customers withdrawing their money came after the liquidity crisis, rather than being
the event that triggered the liquidity crisis. In modern US banking, there is deposit insurance
to reassure retail depositors and there are programs in place to ensure that a solvent
bank can get cash to deal with withdrawals. There are bank examiners and various regulations
in place like capital requirements to make sure that the banks stay solvent.
Last week, Silvergate’s customers started
withdrawing their money because they were worried about Silvergate’s solvency (this
is what we think of as a bank run), but late last year, when the problems started, they
were withdrawing their money because crypto had collapsed. The bitcoin loans – which may seem dumb
– were not really the problem at Silvergate, the problem was the crypto customers, whose
own customers no longer trusted them. Contagion from the crypto crash caused the
problems at Silvergate. Additionally rising interest rates caused
losses in their bond portfolio, weakening their capital position. Yesterday we saw a big sell-off in big US
bank stocks, which appeared to have been sparked by difficulties at Silicon Valley Bank, a
small, technology-focused lender. Silicon Valley Bank had revealed on Wednesday
that it had lost roughly $1.8bn following the sale of a portfolio of securities valued
at $21bn, which it had to sell in response to a decline in customer deposits. The losses prompted the bank to announce a
share sale to shore up its capital position. The losses on the sale of the Silicon Valley
Bank bond portfolio shifted investor attention to the risks that might be lurking in the
huge bond portfolios held by other US banks, many of which invested an influx of deposits
during the coronavirus pandemic into long-dated securities that will have fallen in value
as interest rates went up.
It was announced a few days ago that Silvergate
Capital plans to wind down operations and liquidate. The press release says that “In light of
recent industry and regulatory developments, Silvergate believes that an orderly wind down
of bank operations and a voluntary liquidation of the bank is the best path forward.” They go on to say that “The bank’s wind-down
and liquidation plan includes full repayment of all deposits.” Silvergate collapsed amid a criminal investigation
by the Justice Department’s fraud division along with scrutiny from politicians and regulators. Their problems deepened as they liquidated
assets at a loss and shut down their flagship payments network, which they called “the
heart” of the group of services for crypto clients. Sheila Bair, who headed up the FDIC during
the global financial crisis told Bloomberg yesterday that Silvergate’s troubles are
as much if not more about traditional banking risks — lack of diversification, maturity
mismatches — as they are about its exposure to crypto.
But it can be argued that its exposure to
crypto was its lack of diversification. It was exposed to the extremely volatile and
legally risky crypto industry, and the collapse of that industry, combined with the heat that
it drew from the department of justice led to the collapse of Silvergate Bank. Matt Levine at Bloomberg argues that one way
to think about the rise and fall of Silvergate is that the crypto boom was at its heart a
low-interest-rate phenomenon (people started speculating in crypto because interest rates
were below the rate of inflation) and so Silvergate was hugely exposed to interest-rate risk – simply
because of its exposure to its Crypto customers.
Its assets – the bonds that it bought – were
also interest rate-sensitive, and when rates went up their assets fell in value. So rising interest rates caused the deposits
to evaporate at the same time as the assets backing those deposits fell in value. Levine argues that (with hindsight), Silvergate’s
risk management – a year ago – should have been laser-focused on the risk of rising
interest rates crushing both its assets and its customers, and it should have hedged that
risk one way or another. If you found this video interesting, you should
watch this one next. Don’t forget to check out our video sponsor
Blinkist using the link in the description below. Have a great day, and talk to you again soon. Bye..
seven thousand dollars is not a
fantastic balance no 125 interest rate so the installments are paid off completely
that so Apple had a thing going on if you want to get a product they will have you pay
over 12 months with no interest on it but so I already have all of that paid off that's that
does not contribute to the debt hold on okay okay but the rest is no you know it's you are past due
a thousand 133 past due why are you not making your payment so at least minimum monthly payments
on this okay I don't have any money okay so I mean in order for the past due to get that high that
means you must have been missing payments for a very long time very long time I'd say maybe
up to like a year a year of not paying on
Meet Tom. Tom is a few years out college with a great
job and a lot credit card debt. Tom just watched our first video, “How to
Get Out of Credit Card Debt – Part 1”, so he understands that balance transfer credit
cards are a good debt management solution. Unfortunately, he just can’t qualify for
one with a big enough credit line. What should he do? Well, Tom’s not out of luck. He can instead use a personal loan pay off
his remaining credit debt. Personal loans are great. They come with fairly low credit score requirements,
generally around 640, and have interest rates lower than almost every credit card.
Not only that, most modern personal lenders
will allow you to check your rates for free, without hurting your credit score. In the end, these loans actually only have
one caveat, you just have to be sure their one-time setup costs are less than the interest
you’ll save by transferring. If this sounds confusing to you, don’t worry. We do the math for you on our website, plus
we teach you everything else you need to know in our video “Personal Loans 101” Finally, even if personal loans doesn’t
work, there are still a few more last resort options beyond asking your friends and family
for money: Option One: You could use the money from your
retirement accounts, like a 401(k) or an IRA. However, this option is problematic, as any
withdrawal before age 59 and a half with be subject to a 10% penalty, plus taxes, not
to mention raiding your retirement account is generally a bad long-term move.
Option Two: You could use a 401(k) loan, in
which you can borrow up to 50% of your current 401(k) contributions as a loan, up to a maximum
of $50,000. This definitely has advantages: there’s
no credit check, plus the interest rate will almost certainly be better than your credit
card. However, there are serious flaws to this loan
as well: not only are you prohibited from contributing to your 401(k) while the loan
is active, but if you leave your job, willingly or not, you’ll have only 60 days to repay
the loan, otherwise it’s considered an early withdrawal. Finally, we have Option Three: You could use
a HELOC, which is a revolving line of credit like a credit card, just much larger and secured
by a house. Again, this has advantages, mainly a lower
interest rate, but this is balanced by a major flaw: unlike a credit card, failure to repay
a HELOC can result in losing your home. Finally, if none of our proposed solutions
have solved your problem, we highly recommend contacting the National Foundation for Credit
Counseling, or NFCC.
They’re a nonprofit whose goal is to help
you avoid bankruptcy. To this end, they’ll create a personalized
payment plan for you and work with your lenders to both reduce your debt load and interest
rate. Hopefully you and Tom now have a better idea
of how to get out of credit card debt. If you want to see our balance transfer card
recommendations, your free credit score, or just more educational material, be sure to
check out our website!.
Alright, so, the executive assessment. So we looked at the numbers. Total number was? – Total number was $1,200. – $1,200, which means you didn't
hit the $1,500. – Right. – What do you think
of not hitting your number? – You know, there's things
I have thought of already. Like, why didn't they have a
credit car swiper at the front? 'Cause that could've been
an additional revenue versus just cash. – I mean, that's the negative,
obviously. I mean, you didn't
hit the number, but… – Right.
– Let me tell you what I saw that I started liking. For the first time, you were
really starting to take control. You were delegating to Jayson.
You had him going. I saw you get mad at him
for trying to step in. – I saw that he was helping
and that I was delegating and then he was just taking
the initiative to go above and beyond,
and I said, "Don't do my job." It felt empowering, and, like,
it wasn't anything personal.
– I know that what I was asking
was a lot. But for me and you, it was all about
the executive assessment. Can he make tough decisions?
Can he manage people? Can he manage his time?
Can he do the things that a CEO of a company can do? And the answer is yes,
you can do it. You've always been able
to do it. From this day forward,
let nobody tell you different.
– I won't.
I won't. – How do you feel? – I just have a lot on my mind
right now. This was
a very enlightening week. I feel like I can do it. And, I mean, I feel like I have to
fire you… [dramatic music] From my business management and handling any of my money. – What are you doing?
Like… this is not what I told you
to do this for. You were supposed to get–
– You didn't tell me to do this. This is what has to happen. Sorry. – If you have to make
that decision– – It's–you didn't even hear
what I had to finish saying. "But, but, but, but, why?".
