368: Your Bank Probably Owes You Money

Buck: Welcome back to the show, everyone. Today, my guest on World Formula podcast is my old friend Peter Arts, who is used to be my neighbor in Chicago. Pete is a super smart guy, served as the Bank of Montreal’s Global Asset Management’s global head of liquidity for the last ten years. In addition, he was also the head of U.S. private debt, taxable fixed income and Canadian fixed income. In his role, he oversaw $50 billion in assets across Toronto. Chicago, London, managed by a global team of portfolio managers and credit analysts. He’s also served on global committees for Counterparty Investment and risk. Pete, good to see you, man.

Peter: Great seeing you, buddy.

Buck: So, you know, this is this is an interesting way to do things. I think, like, you know, sometimes, Pete just tells me interesting stuff. And then I just kind of keep it to myself or else I mention it on the show as if, you know, as if I thought about it and ripped him off like that. So.

Peter: So what do they say? Imitation is the best form of flattery or whatever.

Buck: That’s right, that’s right. So instead of doing that, I’m actually going to give him credit for a lot of the, for his own thinking. So Pete, first of all, obviously you’ve been involved with fixed income and know probably the bond markets and all that stuff better than anybody else that I know. And I’m just curious from your perspective, and you know, we talked a little bit offline about, you know, the things that you think that are happening or could happen or what’s, you know, not predicting necessarily, but where you’re seeing the conflicts within the economy. Can you tell us a little bit about that?

Peter: Well, I mean, there’s obviously, as soon as you think that you’ve got something figured out, something kind of comes around and, you know, really blasts us like SVB, I think was a pretty big shock to everybody. But more or less, it’s kind of like that has put an unbelievable stress in different ways, I think on the banking system, because we’re getting a lot of reports that people are obviously, there’s billions and trillions of dollars on the front end, right? Of the curve in cash, right? And a lot of people have moved those from the banks, you know, whether they want the higher rates because they’re going into the money market funds or the short term mutual funds, right? Or they went because they started to panic from some of the smaller type banks, right? So the recipients spend all the big banks, you know, the changes in the Bank of Americas. And, you know, now they’re all leaving those banks and going into the money market fund. So there’s been a little bit of a like buzz going around about, you know, if you have to start making whole on those deposits as people pull out, you know, what is the game that’s involved with the banking side and how they have to, you know, sell or take losses? You know, I think one of the big things with banks is that they have this, you know, this hold, you know, portfolio that they can just hold the securities and not really book a market to market. So, you know, as they get more punished and have to sell those things, they have to actually book those losses. So this is kind of what happened with SVB, you know.

Buck: Second, real quick, just, just because you’re, you know, you, you probably know a lot more than us. So you’re talking, you’re talking at a high level, but like, just explain to me, like, first of all, what you think, well, tell us what happened with SVB. And I guess the next step is, well, you know, what’s the difference between Silicon Valley Bank and the larger banks where a lot of this money is migrated?

Peter:

I mean, I think you could go into all kinds of different things about the balance sheet and how it was managed and how much of their not for sale portfolio was indeed on the SVB books that they had to start tapping. And very simplistically, they loaded up their balance sheet with some, you know, with bonds way back when rates were low. Right. So when rates came up on the backend, you know, they basically, you know, prices go down. It’s that simple. They go inverted. So they sat there for a while, but when you looked at the percentage compared to other banks, I mean, I think most banks hold like under 10%. I believe that they’re not for sale portfolio or was somewhere like in the high, like 70s or something, you know, so that’s what caused a lot of their pain. But more than their pain is no one’s ever really looked at the diversification of a client base. Right. Everyone kind of says, oh, what’s the diversification in your own portfolio? Well, I mean, they had a monopoly on that tech sector. Right. You know, and when they did their loans

or whatever they did for their business, you know, to bring those customers in part of the deal was, well, we want you to be our, you know, we want to be your number one bank also. So if you put X amount of deposits in, we could probably make more favorable loans for X, Y, Z, or we’ll, you know, participate in your company going public for whatever fees or not. So, you know, it’s interesting that they did have all of their eggs in one basket. So, you know, one, one runs, they all run, I guess.

Buck: That’s right. That’s right. And then, so, I mean, our, do we, the sense of security, I think that people get from the bigger banks, do you feel like that’s warranted?

Peter: Yeah. I mean, we obviously lived through 2008 and, you know, we all got in our vocabulary too big to fail. So, I mean, the way to look at that, I think sometimes is to think of it more from a standpoint of, you know, what will the U.S. do to back you up on that case? Right. You know, what to what extent will they go in? We’ve seen it on all degrees. You know, we saw them host the party to sell Bear Stearns at nothing. So, I mean, the way to look at that, I think sometimes is to think of it more from a standpoint of, you know, what will the US do to back you up on that case? Right. You know, what, how, to what extent will they go in? We’ve seen it on all degrees. You know, we saw them host the party to sell Bear Stearns at nothing. Right. And then we saw them walk away from Lehman, you know, or, you know, basically give an entire investment bank and a property in, you know, in central Manhattan to Barclays for pennies on the dollar, you know, so to what extent, you know, they come in like with AIG and Goldman, you know, I think that they’ve proven they’ll do everything in their power, you know, and they obviously have a bunch of these programs right now. And we could get into that at a different time, but it’s like the programs for them to take all these things off their balance sheet, put them on loan them at 100% or $1, you know, however you might look at it and pay, you know, give them the liquidity they need. You know, it does smell a little bit like a house of cards at some point, but it wouldn’t be the first time we’ve seen this in the U.S. before.

Buck: So talk a little bit about, you know, I think one of the things that we talked about offline again was most people, probably including me, don’t really understand interest rates that well. Tell us what we’re missing.

Peter: What happens is there’s three things that people understand about interest rates. One is if they have a mortgage, right? That’s the first introduction. I mean, maybe when we were kids, you know, you’ve got interest rate on your savings account, right? That was, you know, and the other interest rate that we all get hit with is sales tax. So we start to understand it from that standpoint, right? And then obviously, you know, you see it from the interest rates or the percentage that you pay for income tax, right? So, you know, that the percentage is increased as you make more money. So you put all those together. Oh, and car loans, too. I think that what we’ve seen is why we’ve gone for almost 12 years with no interest rates until the last year. Right. So there’s generations, you know, of people that have already two generations, maybe, you know, the tail end of one and this new one that they don’t know anything about savings rates. You know, they most don’t expect it. They don’t expect it, which is why would you? You’ve been getting nothing on your money forever, you know, to sit in the bank. You know, yeah, you could go and buy a nine month CD, you know, two years ago for like 40 cents. But like, you know, when you’re you’re dealing in smaller amounts or savers, you know, it’s pennies. So people just ignored it. But now, you know, at five percent, you know, what you’re seeing on these money market funds or these MMDA rates that the banks are paying, which are, you know, anywhere between four and five, that’s real money now. Yeah. So, I mean, that’s kind of where the interest rates start to become interesting. I mean, I think everybody should take an interest rate class in high school or college just so at the very least they walk away and understand that what a 20 percent interest rate on your credit card is.

Buck: Right. Yeah, for sure. So one of the things that I thought was really interesting and ultimately like I was like, wow, we got to get you on the show is this the type of consulting you’re doing right now. And it really what it relates to is exactly what you just referred to, which is this idea of really not understanding interest rates. And basically the banks are like, oh, you don’t even really know, do you? So I’m not going to give you what I’m actually supposed to give you, given the fact that interest rates are going up. So give me an example. Like, what are you talking about? Say somebody has a half million dollars in the bank right now. I mean, they’re I mean, I don’t know. I mean, I don’t even look to think about like interest in the bank giving me money, but apparently they should be.

Peter: But unfortunately, because it’s gone so long, it’s now your job to go fish that out.

Buck: Yeah. And that’s that’s like leaving money on the table. Right? Basically. So tell me what

you’ve been doing, because this is really, I think, a really useful and pragmatic thing to do.

Peter: Well, I think what it bore from is originally like in our fixed income group, we had what was called the capital asset management program that we built. And it was always expected that corporations checking accounts do not earn interest. That is always been the case. People, different story. So what we would do is we figured out ways to sweep that money in and out and get them invested, basically. And I think that’s what’s happened now. And what I’ve been consulting on is looking at corporations, you know, that have decent amounts of balances that they’re sitting on or seasonal balances. You know, they come in, they go out, they get paid by their clients. It gets shipped out for X, Y, Z. Well, if you look at the average balances and you look at time, the time horizon, you can actually once we get, you know, maybe a little at the end of the tunnel here with the Fed, you’re going to have where you can put the money out a little bit farther and get paid more than the front end. But right now it’s still kind of inverted. So you’re talking, you know, money market’s going to pay around 5%, you know, the best ones. And, you know, where do you get that on the curve? Well, six months out is 5%, right? And then it goes straight down. So the question right now is, is kind of a holding pattern, you know, and a lot of these corporations, they’re sitting there and they’re not getting paid. So if you go into the bank and you start asking and digging around, do they have a money market platform? You know, who have they buddied up with? Do they have an MMDA rate? You know, the biggest question obviously, which was forego with the SBB incident was the whole, what am I insured up to, right? 250 grand, right? By the FDIC. Well, the government kind of just threw that out the window.

Buck: Yeah. That was, to prevent probably further runs, right?

Peter: I mean, and they used to have these programs called Seeder programs where you would go and, you know, back in the day, I think the level was a hundred grand, you know, and they would go out and these programs would go and buy, you know, a series of CDs across or put them in all these different banks to make sure you were fully, you know, protected. Well, now with what we’ve seen, you know, obviously there’s a certain level of protection that goes through 250 as proven by some of the larger investors and holders of those secure, those bank accounts at SVB, you know?

Buck: Right. So this doesn’t apply just to companies though, right?

Peter: Oh no, not at all. Not at all. I mean, we’ve convinced a lot of people like get into your bank and go look at what their products are and look at if they have money market funds, you know? I think even when you get to a certain amount, you can actually make an argument to go into institutional shares too and not retail shares, which, you know, that’s going to, you know, that’s going to be…

Buck: What does that mean? Explain what that means.

Peter: So a lot of mutual funds will have both a institutional share class and a retail share class. Simply put, it usually had to do kind of with a minimum back in the day. It used to be like a hundred, but a lot of times, you know, different will require a different type of registration, whether it’s a corporation. But, you know, with a lot of the investors like you deal with and stuff like that, you’ve got, you know, you’ve got the quib side of it, you know, they’re qualified investment buyers. So they almost look and smell like an institution anyway. So you should be able to get those institutional share classes and pay less in fees. You know, you’re looking at money market funds would charge anywhere up to 60 to, you know, or 45 to 65 basis points as a fee, but the institutional will charge anywhere between the 18 to 22, you know?

Buck: Right. Okay. So let’s, let’s just kind of like, just put this in basic terms here. I’m looking at, you know, just look through just a few business accounts and, you know, like from our real estate syndications and stuff. And I can right away see just in a few properties, we’ve got like probably about 2 million bucks just sitting there just because, you know, it’s capital reserves and stuff. Right. So what you’re telling me is, I mean, and, and these are, you know, this isn’t JP Morgan private bank and all that kind of stuff.

Peter: I know JP Morgan for a fact has an MMDA.

Buck: And what is an MMDA?

Peter: It’s a money market deposit account.

Buck: So basically is that just the same thing as a savings account?

Peter: Yeah, sort of. You know, it’s obviously a front end. It’s got daily liquidity, you know, so you can, you don’t have like, you know, this two T plus two, as they say, or one you, you can sell it and get it the same day. But it is an act of buying and selling, you know, you have to go in and you got to give the instructions to do it. You know, in some cases they’ll have auto sweep, but you know, I’d have to look a little bit deeper.

Buck: And these are, and then you have to pay capital gains on that and all that. So, but still it’s,

it’s good now. So, so how, you know, for somebody who’s like, for example, in this situation where you’ve got, you know, a couple million dollars, it’s also being used and replenished and used and replenished and that kind of thing. So how practical is that for somebody who’s, you know, got a business, you know?

Peter: What we would always say back in the day when we were trying to, you know, convince corporations. And the thing is, is the reason why people used to drop the ball, forget low interest rates, right? They just, they’re, they’re working on their business, right? Like they built that business because they’re an expert in X, Y, and Z, right? They’re not, they didn’t go school for finance and everything like that. From the standpoint of looking at interest rates, they’re trying to build products or whatever they’re, you know, the services they’re offering. So the CFO or the treasurer is looking at the books and they’re trying to manage all the expenses. It’s, you know, kind of the last thing on their mind, you know, and the thing is, is that that’s why we would come in there and we would do an SMA or a separately managed account for these corporations, you know, and, and then we would manage their cash for them. But we had people that were, that money was changing hands every day. You know, they had anything from payroll to paying for, you know, accounts receivable payables are coming in. It doesn’t make a difference what it is. It’s just a matter of getting it invested. And I think what we would say, and that’s kind of back to my point was don’t pay other people for your liquidity. And that’s what it is. It’s like, if you don’t need the money, then, you know, figure out how you can get it to start working for you.

Buck: And again, just to emphasize though, if you, when you do use it, when you do need to use it, it’s not that difficult

Peter: So tapping it’s just tapping the liquidity to reserves. And I think most people see that that ability, like if It’s very easy. It’s just tapping the liquidity reserves. And I think most people see that, that ability, like if they have a Fidelity account, you know, they’ll have it sweeping into some government fund or something like that. It’s very similar. have a fidelity account, you know, they’ll have it sweeping into some government fund or something like that. It’s very similar.

Buck: So I know you’re, you’re consulting with companies and stuff like that, but like, what, what level would be practical, practical for somebody to reach out to you? I mean, if they have, you know, if they have like an average savings, just sitting there in the bank of like a half million bucks

Peter: Yeah. I mean, I think the first thing to do is obviously kind of look and see what you’re earning and see if it, I mean, the rule of thumb is how close are you trending to fed funds, right? So we can all look that up and see it on our screen. So, you know, if it’s half, so you’re getting paid with a two handle or a three handle, you probably need to roll up your sleeves and look a little bit deeper into the bank, you know, and see what they say right away. I mean, sometimes what I’ve done, you know, is I’m looking to build up, you know, kind of some investment guidelines for their staff or like, you know, a treasurer will have a bunch of people working for them, like get them in the mindset of how do I get this money to work for it? You know, how do I set up an investment, you know, agreement from the standpoint of, you know, what can I return back and what are the rules and guidelines of the funds that we want? You know, and a lot of times in these cases, you know, in the personal side, people will go and use muni funds, right. Or tax exempt money market funds, because they want to, you know, they like the taxable yield side of it versus so, or the, you know, the tax free yield. So it’s kind of looking at what you’ve got, and that’s kind of what I’ve done for the corporations is kind of come in, tell them the possibilities, get them ready for when the music stops here, because when the music does stop and the Fed, you know, the Fed does stop their whole interest rate scenario here, you’re going to get obviously everybody running to try and get that money to work out farther than overnight, right? And at that point in time, you know, are you going to be able to lock in

huge windfalls? No, but you’re going to be able to lock in maybe north of 5% for, you know,

inside a year, hopefully.

Buck: Yeah. And obviously, that’s you know, that’s not insignificant. I mean, I know there’s I know there’s people listening on this show who’ve got, you know, $1,000,000 just sitting in the bank right now. And and, you know, there hasn’t been a lot of opportunities. You know, they got money back from a from, you know, an exit and they’re just sitting on it waiting. And is that based on, it says based on an average, is that kind of how that works though? Like if you’re ever, if you do have an active account.

Peter: Yeah. What an MMDA or, you know, one of these things, what they’ll do is they’ll look at your average monthly balance. So back to your point, can you go in and out? Sure. You know, so they’re just going to run a 30 day on that and then they’re going to pay you the interest on the first of the month.

Buck: Yeah. Got it. Well, tell me, tell me what else we need to know here, Pete. Cause I, I mean, this stuff is pretty, it’s pretty foreign to me, obviously. I mean, you’re like a true finance guy. What else, what else do we need to know about, you know, our, how the banks are screwing us and what we can do about it?

Peter: I mean, I think they’re just slow to rise. Now you talk to anybody that runs a bank, they, they always would say that, that they always are slow to rise. And we know that it’s just that, you know, I think it’s been slower from what I’ve seen. Yeah. So, and you do have to take matters into your own hands to go and see what the bank has to offer.

Buck: So I know you do the consulting and again, you know, you, what I understand you’re saying is really, you know, if you’ve got several hundred thousand dollars in the bank and you know, you, at least, and you’re just sitting on it, you could be making money on it. That’s the bottom line.

Peter: Yeah. I mean, well look per hundred, if we just said it was 45 grand for a million, it’s going to be $4,000 per hundred thousand. Right. So that’s still real money. It’s still real money.

Buck: Right. For sure. So, so what I’m going to do here and just so you know, cause I, I know this is not like a, this is a consulting business, a private consulting business. And I, you know, I don’t want you to get inundated with phone calls and emails directly. So if anybody wants to, you know, learn from Pete, what he can potentially do for you, that was my main reason for you know, getting, getting Pete on, because I think actually he could probably help a lot of us make some money when, or actually, you know, like it’s money that we should have already.

It’s basically taking the money that we should have. And these are real numbers. And to Pete’s point, again, we don’t think about this because we’ve lived in such an environment of near zero interest rates for so long that we don’t expect anything. But now, I mean, hell we should expect something. So if you want to get in touch with Pete, just reply to any one of my Buck@wealthformula emails and you know, just ask, ask me to forward your contact to Pete and you know, you can just get in touch with him directly. It doesn’t really involve me. So well, Pete, thanks. Thanks so much for being on, man. Is there anything else you want to mention to anybody who reaches out?

Peter: No, I mean, obviously we were living in a real interesting world right now. So we’ve got all kinds of things going back and forth. You know, and how, how do all these interest rate affect mortgages and how do the mortgages affect, you know, the, you know, the different housing values, you know, obviously as you and I have talked a lot about commercial, you know, what’s going on with the commercial, you know, real estate and how are these cities per se going to repair themselves, you know, or are they, you know, so I think it’s an interesting time, but everybody buckle down.

Buck: Yeah. In the meantime, make some money off your bank.

Peter:

Well, I mean, just get paid for the use of your money. You know, I think if you really look at it, some of the theories are that if, if everything that’s happened with the rates and the ability or inability now for the banks to loan out that money, whether it’s because of high rates and people don’t want to pay for it, or just the demand is down, you know, that in itself is another tick of, that the Fed wants to see to stop raising rates. You know, that that’s another component that they want to see as they try to cool this thing down. You know, I think that obviously, you know, one of the main things to get into a recession, you have to have a decent amount of job loss, right. That’s, that’s kind of the key and we’re starting to see it, you know, obviously we’ve got a lot of, you know, what do we have less in Chicago here? They’re closing down half the Walmarts, you know? So, you know, obviously all the Bed Bath and beyonds are gone

Buck: You think you would need the Walmart.

Peter: Well, you would, but according to Walmart, they’ve never made any money in Chicago. And I think it’s not necessarily because of the economy, it’s because of theft. It’s really the reason. So anyways, it doesn’t make a difference where the job changes come from as long as they start to affect those statistics at the Fed. So we can either hurry up and get to a recession and get through it even quicker.

Buck: Anyway, yeah. Well, Pete, thanks so much for being on Wealth Formula Podcast. Again, if anybody wants to reach out to Pete about this whole getting, you know, getting paid by your bank thing, shoot me an email, reply to any one of my emails and I’ll forward your contact information to Pete.

Peter: Thanks, man. It was good, good talking to you on the big screen here.

Buck: Okay. We’ll be right back.