Disclaimer: I have accounts at Schwab, AMP (futures), Fidelity, and ThinkorSwim (TD-soon to be Schwab). Schwab and TOS are fantastic. When I managed money I had ALL of my client accounts at their institutional division. While I wouldn't trust any of their "advisors" (different discussion for a different day) I most certainly have had a great experience.

IMPORTANT: I am focused on Schwab as a self clearing BD. Normally, a BD can go belly up, the Clearing firm cannot since its actually the Clearing firm that has custody of assets. A non-self clearing BD can go out of business and there would be no affect on client assets, other than being tied up for a week or so (I have been through this professionally) until the Clearing firm finds a new BD. The BD is the front end, the Clearing firm is the backend - with all the money. But Schwab is self clearing so failure of the BD is the same as failure of the Clearing part of Schwab.

While I am not overly concerned about Schwab, with their CDS news I got to wondering where the factual basis for my confidence is.

PREFACE: Schwab CEO stated Schwab "has enough liquidity in case all BANK deposits ran off." Ok, thats good to know.

BUT

soon after Bettinger said that a Schwab spokesperson said that Bettinger was "referring to client allocation decisions within Schwab and not clients pulling money from the institution and going elsewhere."

Well thats different. I think he was talking about reallocation of money out of money markets and cash and moving them into mutual funds, stocks etc. but still at Schwab- but the point is that he was not talking about money leaving the firm.

READING Further Bettinger said that Schwab "has around $100 billion in cash flow on hand and the means to raise more than $300 billion via FHLB and the Fed's new liquidity program set up after SVB."

Ok, so their backstop is cash flow (ok, not "money in the bank"), and tapping borrowing lines. I do not expect intrabank lending to freeze up like what happened in the GFC - BUT what the CEO is talking about is NOT what we here are talking about.

As of the end of 2022 Schwab had $7.48 trillion in total client assets.

OPINION: If, and that's a big IF, clients started yanking money out of Schwab Clearing, and assuming that Schwab could still rely on $100b in cash flow and the $300b from FHLB, that would "cover" 5.34% of total client assets.

If Schwab were to experience a large withdrawal of investment accounts, they would NOT be able to "cover" if those withdrawals were greater than their ability to tap credit lines. I have not researched what amount they have access to in terms of credit beyond what's listed above.

BULL VIEW: Schwab has plenty of money in FCF to cover their HTM expected losses. It just got $17b in inflows. It is NOT Lehman due to portfolio structure. AND, Schwab Bank does not make any business loans - almost all loans are mortgages and home refi's. Schwab BD and Schwab Clearing will be fine and any share weakness should be bought. Also, a huge part of Schwab Clearing assets are controlled by Investment firms, 401k's and advisors which normally means less volatility of deposits and withdrawals - they are "stickier."

BEAR VIEW: The bull view is valid ONLY under normal operating conditions. However, if another BD/Clearing firm of size (think Hilltop) were to experience large withdrawals, Schwab could be faced with the double problem of bad industry press and tightening credit conditions - which could cause their investment clients to flee. Furthermore, if the banking sector continues to get worse, which it will, credit conditions could tighten which would start a progression of decline which even Schwab could not handle.

MY CONCLUSION: Schwab will be fine. If they had more, and I mean a lot more non government agency bonds (Schwab is conservitive holding like 70% in Treasuries - so guarnteed by the Fed) then yes, the CDS jump would be a bigger deal. They don't. Also, it would take an epic amount of clients wiring funds out of their investment accounts to worry me. BC a lot of Schwab clearing accounts have financial advisors and funds as gate keepers, I doubt that would happen. For me, Schwab is #2 on my list of financial instituions I want to buy when more moneyline banks fail. I believe I will be able to enter long at a cheaper price within the next 5-6 months.

If you want a really really good analysis of Schwab, read this from one of our WSB members: https://www.reddit.com/r/wallstreetbets/comments/11p1mhl/do_not_bet_against_schwab_2023_credit_rating_a/?utm_source=share&utm_medium=web2x&context=3

That person is exponentially smarter than me.