Speaker 1: I'm Caroline Hyde and Bloomberg's World head quarters in New York,
Speaker 1: and I Mede Lodlow in San Francisco. This is a
Speaker 1: special edition of Bloomberg Technology because ed Today we are
Speaker 1: focusing on the biggest bank failure since the two thousand
Speaker 1: and eight financial crisis. Silicon Valley Bank started the year
Speaker 1: with more than two hundred billion dollars in assets. Today
Speaker 1: California regulators closed the bank and sent it into receivership. Basically,
Speaker 1: it collapsed. A top lender to vc BAT startups. SVB,
Speaker 1: the parent company, had quadrupled the size of Silicon Valley
Speaker 1: Bank in the past five years. Now it's the second
Speaker 1: bank Silicon Valley Bank is to fold in a week
Speaker 1: after Silvergate's bankruptcy. This story is bleeding into the banking sector,
Speaker 1: into the tech sector, into the financial markets at large,
Speaker 1: and has the attention of not only financial regulators, the
Speaker 1: white housetop bench capitalists, tech founders of all backgrounds. Just
Speaker 1: tell us a little bit about how it's impacting individual
Speaker 1: companies at this moment. Well. First off, the BAT trading
Speaker 1: of SVB Financial Group was suspended, halting petting news and
Speaker 1: never did trade had a really profound impact in equity markets,
Speaker 1: the KBW Bank Index down four percent, But actually other names,
Speaker 1: particularly regional lenders, where contagion risk and concern was building,
Speaker 1: we saw pretty deep declines First Republic and Signature Bank.
Speaker 1: Some of those names where we did see severe reaction
Speaker 1: was of course in SVB Group's bonds. It's debts. So
Speaker 1: I'm looking at the twenty thirty three note in particular.
Speaker 1: We are deep into distressed territory, in this case trading
Speaker 1: forty five cents on the dollar caroline. But what we
Speaker 1: have is a situation where the FDIC has come in
Speaker 1: and has taken control of this bank, and the latest
Speaker 1: Bloomberg reporting is that they are trying to find a
Speaker 1: buyer to come in and take on these assets for
Speaker 1: what is left. Shanali Bassak, who has been on air
Speaker 1: all day pushing this story forward as we brace ourselves
Speaker 1: for this weekend. Nowtionally, what do we anticipate to be
Speaker 1: coming from regulators? What do we anticipate in terms of
Speaker 1: who could be some sort of salvation right now? Yeah,
Speaker 1: I think it's very important to think about the process
Speaker 1: here moving forward for Silicon Valley Bank because there's a
Speaker 1: few things. One on the regulatory perspective now that it
Speaker 1: is in receivership. Remember, the FDIC retains all these assets now,
Speaker 1: and if you think about what happens in the event
Speaker 1: of a sale, they can move through a sale process
Speaker 1: or they could sell certain assets. That's one thing to
Speaker 1: think about. Remember there's also this issue here for customers,
Speaker 1: because if you have above and beyond two hundred and
Speaker 1: fifty thousand dollars, you need to be calling the FDIC
Speaker 1: at this point because that is the amount the FDIC
Speaker 1: insures per account. Right then, separately, you also have this
Speaker 1: other issue here of what happens to the clients that
Speaker 1: Silicon Valley Bank has lent to those venture backed loans.
Speaker 1: Are they callable in any fashion? Is there any worries
Speaker 1: about the clients that do exist for Silicon Valley Bank.
Speaker 1: Of course, are many venture capitalists that are very worried
Speaker 1: about the companies being able to make payroll. The point
Speaker 1: here is that this was a technical failure by FDIC standards.
Speaker 1: You know, silvi Gate also a part of this discussion
Speaker 1: and voluntarily wound down. But you're exactly right. You and
Speaker 1: I have been tracking for twenty four hours what so
Speaker 1: many startup founders are doing as well with their own
Speaker 1: cash moving it to other banks. We've reported some of
Speaker 1: that movement. What do we know about what clients are
Speaker 1: doing to manage this situation, Shinali with their funds. Yeah,
Speaker 1: we know. For example, remember because some of these assets
Speaker 1: are not necessarily ensured, so those are the assets that
Speaker 1: were very worried about. The customer base. Four. But remember
Speaker 1: we've been talking about this ed People act like this
Speaker 1: is something that happened in twenty four hours. There's a
Speaker 1: lot that did happen in twenty four hours. But as
Speaker 1: you know very well, the reason this happened in the
Speaker 1: first place is because customers slowly started to move deposits.
Speaker 1: We want to keep an eye on which firms still
Speaker 1: had deposits with Silicon Valley Bank up to this point,
Speaker 1: but there was a slow, steady movement and they had
Speaker 1: to sell assets at a loss to meet those deposits. Lastly,
Speaker 1: I would just say, for a matter of definition, this
Speaker 1: is one of the largest bank failures in US history
Speaker 1: in the sense that it is the second largest bank
Speaker 1: holding company failure since Washington Mutual Lehman Brothers was not
Speaker 1: necessarily a bank holding company. There are sales involved at
Speaker 1: the two hundred two thousand and eight crisis era. So
Speaker 1: this failure is a very technical one, as you're saying,
Speaker 1: and it is pretty unique in nature, and it is
Speaker 1: a very different time than two thousand and eight, so
Speaker 1: quite contained right as people see into the market, and
Speaker 1: so much of this is about psychology. That's what we
Speaker 1: keep hearing in the market, psychology of what was contributing
Speaker 1: to the run bloom Nocenali Bassek. We'll have you back
Speaker 1: later on in the show. I want to bring in
Speaker 1: Argent Seti, co founder of Tribe Capital or VC with
Speaker 1: about one point seven billion dollars of assets. Sethi says
Speaker 1: venture capitalists should prioritize founders and their employees as well
Speaker 1: as payroll and banking partners. Welcome to the program. You
Speaker 1: and I have been talking on and off for twenty
Speaker 1: four hours or so. Where do you stand as a
Speaker 1: venture catalyst who's p folio companies use Silicon Valley Bank? Yeah,
Speaker 1: I think what's in Thanks for having me. I think
Speaker 1: what's important about understanding the people that are going to
Speaker 1: be the most affected here are early in mid stage
Speaker 1: companies more so than late stage companies. By the time
Speaker 1: you get to a certain stage of revenue and in
Speaker 1: balance sheet, you start thinking about diversifying your risk and
Speaker 1: the types of partners that you have around the table,
Speaker 1: so Bargain, Stanley, JP, Morgan City Bank, Exsider, the whole
Speaker 1: list of the larger banks. I think the thing that's
Speaker 1: really important that people have been forgetting is that our
Speaker 1: job in our ecosystem, so as an investor, as a
Speaker 1: fiduciary of capital, as a fiduciary sitting on the boards
Speaker 1: of these companies, is to make sure that we're giving
Speaker 1: them the best advice and we will make sure that
Speaker 1: we can help them think about what they need to do,
Speaker 1: and for a large set of us, not just me.
Speaker 1: You know, we started giving this advice a couple of
Speaker 1: weeks ago, probably more so when we got louder over
Speaker 1: the last week and then obviously over the last between
Speaker 1: of twenty four to forty eight hours. But it's really
Speaker 1: just about diversifying your risk. Where you're cash is sitting
Speaker 1: and then how you're sweeping that cash. Is it in
Speaker 1: treasuries depending on how much deposits you have in the
Speaker 1: first place. The second piece I think a lot of
Speaker 1: people forget is that a lot of these companies do
Speaker 1: rely on banks UM and you know, Silicon Valley Bank
Speaker 1: was a pillar of the community that helped support a
Speaker 1: lot of the UM you know, underwriting the risk of
Speaker 1: the assets in order to get them ventured debt. You know,
Speaker 1: they worked with a lot of venture funds, but you know,
Speaker 1: they were a lender. They were also a lender for
Speaker 1: capital call lines of credit for funds. Funds bank with them,
Speaker 1: not just our management companies, but the funds themselves. So
Speaker 1: this actually reverberates pretty you know, pretty quickly in the
Speaker 1: ecosystem around what what it's going to look like for
Speaker 1: not just the companies, but they're backers. Does ULL fund
Speaker 1: back for them? We do not bank with SBB. We
Speaker 1: bank with a larger a larger set of providers that
Speaker 1: are out there. And then our capital call lines of
Speaker 1: credit are with different service providers. A knowledge just again,
Speaker 1: let's start with the issues for the portfolio companies. If
Speaker 1: they want to make payroll, for example, you're giving them advice.
Speaker 1: At what point do you and ow the VC backs
Speaker 1: need to give lines of credit, give money without the
Speaker 1: strings attached to those founders those companies if they can't
Speaker 1: access it from their own banks at the moment. Yeah,
Speaker 1: it's a good question. I mean, I think, you know,
Speaker 1: there's some venture capitalists that might not be in the
Speaker 1: capable they might not have the capability to fund. It's
Speaker 1: not as easy as just you know, sending the check.
Speaker 1: I saw some tweets from some angel investors. In my opinion,
Speaker 1: they're sort of ill educated on the process. You can't
Speaker 1: just wire money to help the company, right, There's a
Speaker 1: process that you go through. You have to your fiducure
Speaker 1: and understanding the risk of where the company is and
Speaker 1: and if you know if the company itself is underwriteable
Speaker 1: in the first place. So again, early stage, in mid stage,
Speaker 1: this is more of an issue. Late stage it's less
Speaker 1: of an issue. But for some of these companies that
Speaker 1: don't have the ability to access payroll, you know. I
Speaker 1: think a lot of what we're trying to do is
Speaker 1: who can we set them up with that has the
Speaker 1: capability to underwrite them. What can we do in the
Speaker 1: short term, Do we do bridge loans? Do we write
Speaker 1: more investment into the company through equity. I think one
Speaker 1: of the issues is that you know, you're going to
Speaker 1: have a lot of predatory folks out there going after
Speaker 1: some of these companies if they can meet some of
Speaker 1: these liabilities, and an article again as fiduciaries, is to
Speaker 1: make sure that doesn't happen. What's interesting, of course, Ed,
Speaker 1: is you've been writing throughout the day. Who then, we
Speaker 1: haven't hate to say the silver cloud silver linings in
Speaker 1: these clouds, but who benefits? Where does the money flow
Speaker 1: ultimately from portfolio companies that are trying to diversify at
Speaker 1: this moment, and indeed the vcs too, well, there are
Speaker 1: many VNCH catalysts that believe actually staying put was the
Speaker 1: right move. But the name that I kept hearing time
Speaker 1: and time again was JP Morgan, you know, that was
Speaker 1: getting a lot of phone calls, but also some lesser
Speaker 1: known banks Mercury as an example, some vcs saying get
Speaker 1: a bit of your capital and bigger banks, but go
Speaker 1: with some of the startups too because of the benefits
Speaker 1: they're offering. What was really interesting as well is this
Speaker 1: is kind of laying bare the situation right now for
Speaker 1: being a startup, being a founder, right Argent, you've been
Speaker 1: writing about the desert that we are traveling through in
Speaker 1: the world of VC and startops. There is a deficit
Speaker 1: of available capital. And my question to you is how
Speaker 1: much worse is that now given the events of the
Speaker 1: past twenty four hours. Yeah, So there's two pieces here.
Speaker 1: Over the last five years. I think the way to
Speaker 1: think about it is the FED the first printed trillions
Speaker 1: of dollars, then they denied anything was happening, Then they
Speaker 1: said it was transitory. Then you know, we put their
Speaker 1: rates to them. And so what happens is there's a
Speaker 1: lot of trickle effects that come from this. So the
Speaker 1: first is that a lot of venture capital went into
Speaker 1: a lot of these companies, may they be good or bad.
Speaker 1: So roughly about a trillion and a half over the
Speaker 1: last four to five years those companies. In order for
Speaker 1: them to meet their demands or growth concerns, they probably
Speaker 1: need another three to four trillion of capital. Where is
Speaker 1: that going to come from? That? This was before SVB,
Speaker 1: and so that becomes an issue. Now all of a
Speaker 1: sudden you have SEB. People generally get scared. You know,
Speaker 1: it may not be logical, and there might be capital
Speaker 1: around the table, but just get scared and their deer
Speaker 1: in the headlights. So I think what you're going to
Speaker 1: see is flight to safety. What are the assets that
Speaker 1: you go after? How do you continue to bankroll them.
Speaker 1: How do you do a concentration of your time am
Speaker 1: capital into these companies in which ones are going to
Speaker 1: be resilient and so you know, I think this probably
Speaker 1: takes about three to six months to go through the system.
Speaker 1: I do think it gets worse over the next twelve
Speaker 1: to sixteen months, just because a lot more companies will
Speaker 1: need access to that capital. And I think the one
Speaker 1: thing that people really forget here is that these companies
Speaker 1: need this capital and rocro or in order to hit
Speaker 1: their certain thresholds of their unit economics because most of
Speaker 1: them still haven't been able to shed enough. People still
Speaker 1: haven't been able to get into a place that's healthy,
Speaker 1: and you know, the capital needs are going to become
Speaker 1: greater and greater over the next year. Ultimately many are
Speaker 1: loss making. Tribe Capital cofounder Argent Sethi, thank you so
Speaker 1: much for providing information across social media channels, but for
Speaker 1: coming on this show too. We appreciate it zero. Our
Speaker 1: recent developments the concern a few banks that I'm monitoring
Speaker 1: very carefully, and when banks experience financial losses, it is
Speaker 1: and should be a murder of concern US Treasury Secretary
Speaker 1: Janny Ellen. They're saying she was monitoring the situation, also
Speaker 1: said that the US banking system remains resilient to the
Speaker 1: regulators have quote effective tools to address the fallout from
Speaker 1: the collapse of Silicon Valley Bank. She's called a meeting,
Speaker 1: of course, with the leaders of the Federal Reserve, the FDIC,
Speaker 1: the officer of the Control of the currency, to discuss
Speaker 1: developments around SVB. Before we get to those overall regulatory discussions,
Speaker 1: and I want to bring you some breaking news because
Speaker 1: this has huge overarching implications for publicly traded companies. Roku
Speaker 1: currently saying that twenty six percent I reiterate a quarter
Speaker 1: of Roku's total cash and cash equivalents are held with SBB.
Speaker 1: The company's deposits are with SVB a largely unensured and
Speaker 1: they don't know what extent it can recover those cash
Speaker 1: deposit deposits. So currently Roku, of course, the makeup of
Speaker 1: the way in which you consume perhaps what you're watching
Speaker 1: at this very moment, twenty six percent of its total
Speaker 1: cash and cash equivalents are held with SVB, and ed
Speaker 1: existing cash flow is enough for the next twelve months
Speaker 1: and beyond. Of course, this is a later stage company
Speaker 1: in public company and one that we keep a close
Speaker 1: eye on currently falling six percent after ours ed. Yeah,
Speaker 1: it's it's a question we're asking, right forget not just
Speaker 1: private startups the founders. There are a number, okay they're
Speaker 1: smaller cap companies, but public companies that use Silicon Valley
Speaker 1: Bank because until earlier today it was a critical bank
Speaker 1: for the world of technology and companies founded over this
Speaker 1: nation and beyond. And this is why we then worry
Speaker 1: a lot about the startups who don't have twelve months
Speaker 1: and beyond of existing cash flow. Let's talk about the
Speaker 1: ripple effects and where next the regulators are going to
Speaker 1: be watching. Of course, most Kylee Lines has been doing
Speaker 1: incredible work, having newly moved to Washington, and now our
Speaker 1: regulatory overseer really just talk to us, Kayley, about what
Speaker 1: we loot full next. Coming from the likes of the
Speaker 1: FDIC and indeed John Allen herself well for the FDICE,
Speaker 1: this really goes back to Roku in the question of
Speaker 1: uninsured deposits, because remember, this is the first failure of
Speaker 1: an insured institution we've seen this year, one of the
Speaker 1: largest we have seen in history. But that insurance only
Speaker 1: goes so far. That cap is two hundred and fifty
Speaker 1: thousand dollars, and from our understanding, more than ninety percent
Speaker 1: of the deposits Dot Silicon Valley Bank were uninsured. So
Speaker 1: that is really going to be question number one what
Speaker 1: happens with those uninsured deposits. Are those depositors going to
Speaker 1: be made whole? That is going to be one of
Speaker 1: the priorities that we are following on, especially as you
Speaker 1: guys were just alluding to for those early sage companies
Speaker 1: that may be short on cash at this point, then
Speaker 1: it becomes a question of any kind of ripple effects.
Speaker 1: Are we going to see other episodes of this or
Speaker 1: was this an isolated incidents. Journalie and I were speaking
Speaker 1: with a former official from the FDIC's earlier who said, I, look,
Speaker 1: regulators are really hoping that this is just an isolated
Speaker 1: that they can contain. And I would note that Jenny Ellen,
Speaker 1: as well as the broader White House, including the Council
Speaker 1: of Economic Advisors Director Cecilia Rouse, did express confidence in
Speaker 1: what regulators are doing here, and Rouse was quick to
Speaker 1: point out that this is not two thousand and eight.
Speaker 1: We are post two thousand and eight. We are a
Speaker 1: postad Frank, there are now capital and liquidity requirements stressed
Speaker 1: at better in place, and really the banking system and
Speaker 1: theory is much more resilient now than it was then.
Speaker 1: Bloomer's Kayley lines out in DC, thank you. The regulatory
Speaker 1: conversation is not going to stop here, and we will
Speaker 1: continue it with our in Kleine, economic senior fellow at
Speaker 1: the Brookings Institution. You've been working on financial regulatory reform
Speaker 1: issues for a very long time. The Department of the
Speaker 1: Treasury and Economic Advisor to the Senate Banking Housy Housing
Speaker 1: an Urban Affairs Committee. No. Yellen saying she has full
Speaker 1: confidence in the banking regulators. The FDIC has come in
Speaker 1: taken control at Silicon Valley Bank and will oversee the
Speaker 1: sale process. Do you have that confidence based on your
Speaker 1: experience in this area. I do. Look, the FDIC has
Speaker 1: done a great job in handling and resolving institutions. Actually
Speaker 1: generally speaking, they're able to do so at a small
Speaker 1: cost of taxpayers and tend to recover a lot for
Speaker 1: uninsured depositors. But each bank failure is a little bit different.
Speaker 1: Keep in mind, this bank was overseen at the federal
Speaker 1: level by the Federal Reserve, the Federal Reserve Bank of
Speaker 1: San Francisco was Silicon Valley banks number one federal regulator,
Speaker 1: and so the San Francisco FED should have been on
Speaker 1: top of what was going on the bank's explosive growth.
Speaker 1: And now it's very quick failure. But there are a
Speaker 1: lot of tools the FDIC has to handle this resolution situation,
Speaker 1: and I do think there's confidence. So there's a large bank,
Speaker 1: sixteenth largest bank in the country. Yeah, but it's not
Speaker 1: your typical bank. It only has sixteen branches. It's a
Speaker 1: very different structured bank than most of its peers around
Speaker 1: that same size. Are just bringing the breaking news. It
Speaker 1: continues to unfold. We currently understand the SVB Financial Group,
Speaker 1: perhaps on surprise in newscoping room from the SMP five
Speaker 1: hundred as an index insulates the company that will replace it.
Speaker 1: But just talk us through what got us here ultimately,
Speaker 1: and whether the regulations that you have been so crucial
Speaker 1: informing in many ways and analyzing the repercussions thereof whether
Speaker 1: they're the right regulations, the right ways in which banks
Speaker 1: currently hold capital, but in some ways can lead to
Speaker 1: extraordinary circumstances that we find with SVB. Right, So let's
Speaker 1: start with the premise my premises banks should fail. We
Speaker 1: have nearly five thousand banks in America, and a healthy
Speaker 1: amount of failure is greater than zero. I was more
Speaker 1: concerned the last two years when not a single bank failed.
Speaker 1: By the way, the first time in American history we
Speaker 1: went a year without a bank failure was two thousand
Speaker 1: and five. Regulators told us the banking system was in
Speaker 1: great shape, and not a single bank failed again in
Speaker 1: oh six oops. So a little bit of failure is
Speaker 1: actually a desirable thing, not something to be afraid up.
Speaker 1: The question is when anitution fails, is that failure contained,
Speaker 1: who bears the losses of it? And how quickly can
Speaker 1: this situation be resolved? And in that situation, I think
Speaker 1: the regulatory tools the FDIC and the Federal Reserve and
Speaker 1: other regulators have now or light years ahead of what
Speaker 1: they had in two thousand and seven and eight, when
Speaker 1: the cause of the crisis was very different. Aaron, A
Speaker 1: lot of people out there have a lot of questions,
Speaker 1: principally startup founders who were banking with Silicon Valley Bank.
Speaker 1: When the FDIC comes into an institution in this situation,
Speaker 1: what is their priority? You look at the chart on
Speaker 1: the screen, you can't even see it on the right
Speaker 1: hand side, because this is the first technical FDIC failure
Speaker 1: in a very very long time, in the first of
Speaker 1: this year so well. Silvergate Bank is another bank that
Speaker 1: failed very recently, if you want to call it a
Speaker 1: technical failure, not Sometimes the FDS is able to negotiate
Speaker 1: purchase an assumption here where other banks take the assets
Speaker 1: of the other bank. The FDS is number one priority,
Speaker 1: or the retail customers and the insured depositors who are
Speaker 1: going to be able to have access to their money,
Speaker 1: almost like nothing happened. There's just a bit of a rebranding.
Speaker 1: That's their number one priority. Uninsured depositors, businesses their number
Speaker 1: two priorities to try to maximize the ongoing value of
Speaker 1: the institution, to minimize the loss felt by everybody, including
Speaker 1: uninsured depositors. But I want to point something out here,
Speaker 1: and I hope we get a chance to discuss it,
Speaker 1: which is the FDIC isn't the first person to have
Speaker 1: a claimant. So if you think about who owns to
Speaker 1: who has a claim on this bank's assets, the FDSC
Speaker 1: is number two. Number one. Is this kind of arcane
Speaker 1: part of the government called the Federal Homelan bank system
Speaker 1: and the Federal Homelan Bank of San Francisco had lent
Speaker 1: more money to Silicon Valley Bank than to any other
Speaker 1: bank they did business with at its time of its failure. Okay,
Speaker 1: so Digg in the fall, you've done analysis and what
Speaker 1: other companies, what other lenders have perhaps exposure to the
Speaker 1: homelowans element of things? Are we likely to see? What's
Speaker 1: a contagion risk here? What's ultimately going to be the
Speaker 1: likelihood of also the uninsured companies, the likes of Roku
Speaker 1: that comes out says twenty six percent whose cash balances
Speaker 1: are over in Silicon Valley Bank and ultimately aren't ensured.
Speaker 1: What are the ripple effects here? So there are a
Speaker 1: couple of things. Number one, the people that run to
Speaker 1: the homeland bank system that are heavy users of it,
Speaker 1: particularly that come very very quick. A year ago, Silicon
Speaker 1: Valley Bank didn't even appear on the top list of
Speaker 1: borrowers from the Federal Homelone Bank of San Francisco, and
Speaker 1: you know, within a year they'd vaulted to number one
Speaker 1: twenty billion dollars of outstanding advances. Silvergate, at the time
Speaker 1: of its failure had over four billion dollars of outstanding
Speaker 1: advances to you look at the list of other people
Speaker 1: that have started leaning very heavily on the homeline bank system,
Speaker 1: and you ask the question, why why are they going there,
Speaker 1: particularly a bank like Silver Bank, which isn't really making mortgages. Right,
Speaker 1: The purpose of the homelan bank system originally, when you
Speaker 1: go back one hundred years, it was supposed to be
Speaker 1: a federal reserve kind of for these things called thrifts.
Speaker 1: They used to make mortgages when America had a very
Speaker 1: different banking system and a bank and a were different things.
Speaker 1: So I kind of look there, that's a classic red flag.
Speaker 1: If you go back to two thousand and seven Countrywide
Speaker 1: Washington Mutual, all those folks were the ones that were
Speaker 1: running to the homeland bank system and oh seven long
Speaker 1: after the market had started to dry up on the
Speaker 1: asset that they were over invested in. Yeah, Brookings Institution,
Speaker 1: Aaron Kleine, We thank you so much for the intricacies
Speaker 1: around regulation there, and we want to go back to
Speaker 1: the companies that currently exposed to Silicon Valley Bank that
Speaker 1: are going to be worrying about well whether the deposits,
Speaker 1: whether their money at the lender is going to be ensured.
Speaker 1: Roadblocks coming out saying the SVB situation won't affect his operations,
Speaker 1: but roadblocks of course. The gaming company says five percent
Speaker 1: of its balance is held at SVP. Roku has already
Speaker 1: come out and said twenty six percent overall of its
Speaker 1: cash has been held over at SVB. Existing cash flow, though,
Speaker 1: is enough for the next twelve months and beyond, they say,
Speaker 1: and they don't know what extent it can recover those
Speaker 1: SVB cash deposits. One last headline for you. Rocket Lab
Speaker 1: has deposit accounts with SBB, totaling of ballets of thirty
Speaker 1: eight million. It's about seven point nine percent of cash
Speaker 1: and equivalents with SVB. We have so much more going
Speaker 1: on after the break. This is bloom Bag. I'm Creana
Speaker 1: of the startups and venture capital team. I'm outside Silicon
Speaker 1: Valley Banks office in San Francisco. They're in the NASTAP building.
Speaker 1: All morning, there's been a slow trickle of customers coming in,
Speaker 1: only one every fifteen twenty minutes or so, and they're
Speaker 1: being redirected to the banks Powell Alto office on Sandhill Road.
Speaker 1: Are being told that if they want any information, that's
Speaker 1: where they have to go. It's unclear whether anyone is
Speaker 1: even in this office right now in San Francisco. Welcome
Speaker 1: back to a special edition of Bloomberg Technology. I'm Ed
Speaker 1: Ludlow in San Francisco and Caroline Hyde in New York
Speaker 1: on the ground reporting there. Let's get back to what
Speaker 1: happened in the days markets trade, in the week the
Speaker 1: markets trade because remember this did seem to evolve all
Speaker 1: at once over the last twenty four hours, but it
Speaker 1: has had a damaging effect on the NASDAC on risk
Speaker 1: sentiment in general. The overall collapse of Silicon Valley Bank,
Speaker 1: which swiftly followed a called Silva Gate earlier in the week,
Speaker 1: the nazacs off by four point seven percent. This is
Speaker 1: also largely to do with the Federal Reserve, with the
Speaker 1: increase and interest rates at many braceful that's ultimately behind
Speaker 1: the collapse of these lenders. We're seeing crypto on the
Speaker 1: downside more than nine percent, having its worst weeks. It's
Speaker 1: in mid November. We're looking at the flight to safety
Speaker 1: yields crescendoing lower, the US tenure yield off by a
Speaker 1: quarter of a percentage point. Move it on. Look at
Speaker 1: what's happened across the assets. Ed. We're looking at the
Speaker 1: bond market that really exemplified some of the risks inside
Speaker 1: what happened with Silicon Valley Bank. How swiftly the overall
Speaker 1: bond prices fell Silicon Valley Bank SVB, the parent company,
Speaker 1: forty three percent as where they're training out, so just
Speaker 1: forty three cents on the dollar fory or bonds. We're
Speaker 1: seeing also though, some marked discounts where other key lenders,
Speaker 1: like in the space in purple, of course, you can
Speaker 1: see the likes of some other of those smaller lenders,
Speaker 1: Western Alliance as their first republic is there in the
Speaker 1: teal color ed. The next question is what happened to
Speaker 1: the future of those assets held by the bank, What
Speaker 1: happens to the bank, and what happens to the companies
Speaker 1: that were banking with and not just the private ones.
Speaker 1: We're getting loads of headlines about the public companies. They're
Speaker 1: exposures to svbing, what they've done to mitigate it. Joining
Speaker 1: us now, Bloombergs Max rays Max give us the latest
Speaker 1: headlines and news out of Silicon Valley Bank. Sure, well,
Speaker 1: exactly like you're saying, we are seeing public companies come
Speaker 1: out in regulatory filings this afternoon, telling us essentially how
Speaker 1: much exposure they have, how much money is lacked up
Speaker 1: at the bank, and just to kind of make sure
Speaker 1: we're on the same page. When you see a bank
Speaker 1: run like this, the concern is that if you have
Speaker 1: deposits that are not ensured, if the bank fails, you
Speaker 1: won't have access to those funds and it becomes a
Speaker 1: question of whether or not you're ever reimbursed. Right, and
Speaker 1: particularly with a commercial bank that is so focused on
Speaker 1: one sector, if everyone panics at once and you see
Speaker 1: this draw down that's kind of motivated by talk on Twitter,
Speaker 1: by talk from vcs telling their portfolio companies to get out,
Speaker 1: you see the sort of situation, right. It's almost, you know,
Speaker 1: a classic prisoner's dilemma where if everyone works together, we
Speaker 1: won't see this happen, but if even one person breaks,
Speaker 1: you have the situation where folks are really in dire
Speaker 1: straits with money locked up in this bank and no
Speaker 1: clear way of getting at it. Ultimately, Max talk to
Speaker 1: us about the contagion effect. We're just seeing the bond
Speaker 1: prices of some other lenders there. How much all people
Speaker 1: now focusing in on other regional lenders are the key
Speaker 1: constituents that maybe some them all focused on the tech
Speaker 1: sector too. Yeah, I want to be very careful with
Speaker 1: how I talk about this, just because SIVB is a
Speaker 1: very unique animal when it comes to banking. There's not
Speaker 1: really a bank with such a singular focus. Silvergate was
Speaker 1: the same way but for crypto, where it had this
Speaker 1: very very myopic focus on this one industry which made
Speaker 1: it very susceptible to a moment like this. But yeah,
Speaker 1: there is definitely concerns around contagion. People are afraid that
Speaker 1: this could happen elsewhere. And the key thing driving it,
Speaker 1: like you guys have been saying all day, his interest
Speaker 1: rates the fact that the banks, their asset side of
Speaker 1: the balance sheet has been underwater for a while at
Speaker 1: this point, just because they bought these bonds for you know,
Speaker 1: less than their worth currently, which means that if they
Speaker 1: do have to sell them, they are going to realize losses.
Speaker 1: And that's what we've been seeing here and that's been
Speaker 1: driving this. I think it's fair to call it a
Speaker 1: crisis at this point, you know, at least among a
Speaker 1: few banking institutions in California, and I think everyone is
Speaker 1: trying to sort out what comes next, But I don't
Speaker 1: want to prognosticate Max. I have a feeling you have
Speaker 1: a busy weekend. Well, thank you so much. Max. Ways,
Speaker 1: he's been just so thorough on this story, and there
Speaker 1: have been ripple effects far and wide. Let's dig in too,
Speaker 1: of course, the impact on startups on the venture community,
Speaker 1: in particular Jenny Fielding. She's well known in seed investing.
Speaker 1: She's managing partner and co founder at the Fund. It's
Speaker 1: a VC firm focusing in early stage tech startups. You
Speaker 1: have not only are an abject professor at Columbia and
Speaker 1: teaching at Cornell Tech, but you're also very prolific when
Speaker 1: it was work with tech stars. Jenny, what have you
Speaker 1: been advising your portfolio companies in this day alone? I mean,
Speaker 1: it's been incredible chaos, So my phone has been blowing up.
Speaker 1: We have two hundred and fifty portfolio companies and I'd
Speaker 1: say about thirty percent are involved with SVB. So the
Speaker 1: first thing we said to them yesterday is we need
Speaker 1: to stay calm and we need to all get collectively
Speaker 1: on the same page of what's happening. So in our case,
Speaker 1: we have two hundred and fifty portfolio companies. We have
Speaker 1: another five hundred LPs that are also founders. So all
Speaker 1: of these people we have in our community and they're
Speaker 1: really suffering. So in terms of advice, we tend to
Speaker 1: take an approach of let's share information and founders need
Speaker 1: to make their own decisions. Ultimately, do you have a
Speaker 1: relationship Basilicon Valley Bank as well at the fund and
Speaker 1: what have you decided to do in terms of your
Speaker 1: own working capital and money that you have with them?
Speaker 1: We do, So I've had a long standing relationship with SPOB.
Speaker 1: They've been incredible supporters of the startup ecosystem and you know,
Speaker 1: quite frankly of the emerging managers like us as well.
Speaker 1: So they've been absolutely critical. We do have banking relationship
Speaker 1: with them, and we do keep assets with them, and
Speaker 1: so it's been a very hard moment. You know, we're
Speaker 1: trying to help our startups, we're also trying to help ourselves,
Speaker 1: so just that contrast has been quite hard, Jenny. What
Speaker 1: I keep hearing from conversations event capitalists and founders is, honestly,
Speaker 1: there's a real concern here not just about the operational
Speaker 1: cash needs of startups, but their mental health as well.
Speaker 1: And I just wondered if you'd reflect on some of
Speaker 1: the conversations you've had with portfolio founders today and how
Speaker 1: difficult it's been for them as leaders, as business operators.
Speaker 1: I canceled pretty much all of my meetings today just
Speaker 1: to field calls from founders. This is a very unsettling time.
Speaker 1: I mean, this is a very hard time in tech,
Speaker 1: you know, just in general, right, you know, the markets
Speaker 1: have created a lot of pressure on these companies. Raising
Speaker 1: capital is not how it was, you know, last year,
Speaker 1: and so compounding what's happening today, a lot of our
Speaker 1: companies are really suffering. So we try to be a
Speaker 1: sounding board. We try to listen, we try to provide resources,
Speaker 1: but ultimately it's it's just a traumatic time. There was
Speaker 1: a proposed idea from Sam Altman that actually what founders
Speaker 1: in startups need right now is cash. Just give cash
Speaker 1: if you can. Does that make sense to you? Is
Speaker 1: it sort of stop gap for what's happening out there
Speaker 1: in terms of making payroll and working capital? It really does.
Speaker 1: I mean venture capitalists like to run around saying they
Speaker 1: provide value. Well, this is the time to provide value
Speaker 1: to your portfolio companies. You need to listen to them,
Speaker 1: and you need to be able to support them, and
Speaker 1: many vcs are able to do that or provide resources. Right,
Speaker 1: there are other opportunities for people to kind of come in.
Speaker 1: But yeah, if you have payroll and you've been tied
Speaker 1: up in Silicon Valley Bank and that money, you know,
Speaker 1: maybe two hundred and fifty thousand is available on Monday.
Speaker 1: If you have fifty employees right making one hundred and
Speaker 1: fifty thousand, you're you're in a you know, a deficit
Speaker 1: of about one hundred thousand dollars just this Monday. So
Speaker 1: everyone is quite nervous, and I think it is a
Speaker 1: time to chip in and support our founders to that point.
Speaker 1: Parker Conrad of Rippling, which is in many ways a
Speaker 1: company that helps a payroll and they themselves discovered yesterday,
Speaker 1: of course the Silicon Valley issued and the fact that
Speaker 1: they have their own exposure and they notified some customers
Speaker 1: that look, some payroll processing is going to be stalled
Speaker 1: because of SBB, even though they did actually switch their
Speaker 1: banking to JP. Morgan in large part talk to us
Speaker 1: about does this have a cascade effect, Like what do
Speaker 1: people do about not being able to make payroll? Do
Speaker 1: they have to let people go. I mean, it's a
Speaker 1: really interesting question. I think that the most important thing
Speaker 1: is there's open communication. Right, we saw in the waves
Speaker 1: of layoffs when they're isn't good communication with your employees,
Speaker 1: That's when things really go awry. So have communication. Our
Speaker 1: founders are speaking to their employees all the time, you
Speaker 1: know today, of what's going on and really warning them.
Speaker 1: And I think that's a great sign of leadership, just
Speaker 1: being proactive. But yes, there is a real worried that
Speaker 1: payroll will not be made on Monday. Jenny Argin from
Speaker 1: Tribe Capital was on the show earlier. He makes the
Speaker 1: point that there was already a funding deficit prior to
Speaker 1: the events of the last twenty four hours. He expects
Speaker 1: a number of startups to fail, but not as many
Speaker 1: as you might think. What is your outlook to the
Speaker 1: health particularly at the early stage. So interestingly, like the
Speaker 1: early stage has been somewhat shielded from some of the
Speaker 1: stuff that's going on. So if you were a startup
Speaker 1: in the series B, Series C, it's been you know,
Speaker 1: quite dire, but early stage has been okay. So our trajectory,
Speaker 1: we're long term investors. We invest at the first round
Speaker 1: of capital. You know, we want to hold our positions
Speaker 1: for ten years, so you know we have a better
Speaker 1: outlook long term. I think short term we need to
Speaker 1: support our founders, and we are worried about the short term.
Speaker 1: Jenny Fielding, managing partner and co founder at the fund,
Speaker 1: helping us cover this story in the short term, that
Speaker 1: we will continue the conversation in the long term. I
Speaker 1: think the right thing, the prudent thing we've learned is
Speaker 1: counterparty risk. Once these things start. This is a classic
Speaker 1: bank run, and when the blank run starts, you don't
Speaker 1: want to be the last guy there and wondering what happened.
Speaker 1: A Labs John wu reaction to the SVB news in
Speaker 1: real time on last night's show, and let's just discuss
Speaker 1: the implications on the crypto space but also well startup space,
Speaker 1: writ large. Dave Weisberger is with us. He's CEO and
Speaker 1: co founder of coin Roots. It's a crypto spot and
Speaker 1: derivatives trading platform. But also, Dave, you're an expert in
Speaker 1: troud fires. Many will call it traditional finance market structure.
Speaker 1: You built electronics trading systems and platforms across names like
Speaker 1: Morgan Stanley, Solomon brothers, and they're like, just tell us
Speaker 1: at the moment whether this is systemic issue across banking
Speaker 1: and also what it means for crypto companies such as yourself. Well,
Speaker 1: it's fascinating actually, because if you think about the core
Speaker 1: of crypto and what bitcoin is about, it's really about
Speaker 1: the opposite of fractional reserve banking. It really is about
Speaker 1: distributed not having to take counterparty risk. I won't take
Speaker 1: credit for it. Mark Yusco from Morten Creek basically does
Speaker 1: a great job. His point is crypto is truth technology
Speaker 1: to replace the need for centralized trust, and so long
Speaker 1: term events like this are massively bullish for the crypto complex.
Speaker 1: Now many of the assets in crypto will actually be
Speaker 1: hurt by this, Bitcoin I think will be helped, and
Speaker 1: we'll see how it goes. As far as is this
Speaker 1: systemic or not, that's a different question. Well, you were
Speaker 1: tweeting earlier, Dave. I'm going to bring one of your
Speaker 1: tweets up on the screen. But your basic argument is
Speaker 1: that the contagion risk, the risk from the banking system
Speaker 1: is actually much more potentially damaging to crypto and tech
Speaker 1: than it is to banks. From crypto, explain your logic here,
Speaker 1: What do you mean in this tweet? What are you
Speaker 1: trying to say? Well, I mean, at the end of
Speaker 1: the day, every time there's been an incident in crypto,
Speaker 1: it hasn't spilled back over to the mainstream until FTX.
Speaker 1: Now FTX is separate from all the other failures. Right,
Speaker 1: So we had three systemic We had three huge failures
Speaker 1: in twenty twenty two in the world of crypto. All
Speaker 1: were preventable with principles based regulation that we should have,
Speaker 1: should have had and should actually build but don't have. Right.
Speaker 1: The first was lots of money in a stable coin
Speaker 1: that wasn't stable. I had zero dollars in Luna, zero
Speaker 1: dollars in ust thought that basically the whole notion of
Speaker 1: an algorithmic stable coin to me, sounds like a Ponzi scheme.
Speaker 1: It's recursive, to use a quantitative term, And ever since
Speaker 1: Basis came out with their first white paper, despite the
Speaker 1: pedigree academic pedigree of the authors, I thought it was
Speaker 1: a terrible idea. I still think it's a terrible idea
Speaker 1: and I probably will whatever. So that was that one,
Speaker 1: and regulations that say stable coins have to be fully
Speaker 1: backed makes that not be a problem. The second, which
Speaker 1: was far worse, was from bad disclosures. And there's probably
Speaker 1: the only point that I know of that Gary Genser
Speaker 1: and I agree on completely, which is firms should have
Speaker 1: to disclose their risks. Right. The third one, which was FTX,
Speaker 1: was far more like made off than like anything else.
Speaker 1: They simply gambled away somewhere between eight and ten billion
Speaker 1: dollars and stole it from their customers. That an nothing
Speaker 1: with crypto. They could just easily been doing sports betting,
Speaker 1: doesn't matter. They lost a lot of money and stole it.
Speaker 1: That's not a systemic risk from crypto. That's a massive theft.
Speaker 1: So if you actually look at everything else, all the
Speaker 1: other major volatile events in the history of bitcoin and
Speaker 1: crypto has never really spilled over to the traditional financial
Speaker 1: system because there really isn't a impact there. But so Dave,
Speaker 1: twenty four hours ago, Okay, Caroline and I were having
Speaker 1: this discussion that actually this is all the net result
Speaker 1: of higher rates, and what higher rates have done, Caroline, right,
Speaker 1: is cut froth out of the market. Where is the
Speaker 1: most froth. Well, according to Bloomberg reporting, it was in
Speaker 1: the cryptisector. Yeah, and ultimately that was what the demise
Speaker 1: behind still the gate because people had to pull their deposits. Then,
Speaker 1: of course the tech community needing to pull their deposits
Speaker 1: to basically get through the cash burn and Dave, now
Speaker 1: you were just mentioning stable coins. I'm interested as to
Speaker 1: what happens if some of the key stable coin proponents,
Speaker 1: some of the companies behind it have relationships for the
Speaker 1: Silicon Valley Bank. That is a great question, and I
Speaker 1: wish I knew the answer. I basically I don't know
Speaker 1: Jeremy Lair from Circle. We perfectly blond about it. We've
Speaker 1: never met. But if I were running Circle, I would
Speaker 1: have had ninety eight percent of my deposits in T
Speaker 1: bills and T notes. There's no reason to take to
Speaker 1: have bank investments. You need banking for liquidity on the margin,
Speaker 1: so it should be a very small amount. Now why
Speaker 1: do I say that, It's because I'll tell you. At
Speaker 1: coin routes, for example, we were offered bank savings accounts
Speaker 1: and we compared that to three months and even thirty
Speaker 1: day tea bills for our cash needs. And the reality
Speaker 1: is you get multiple percent higher by investing in government debt,
Speaker 1: which is obviously far safer than you do in banks.
Speaker 1: So the real issue is if you look at bank
Speaker 1: rate dot com, they'll tell you the average savings account
Speaker 1: rate is point two five or point two three percent.
Speaker 1: So one has to ask oneself the question, why are
Speaker 1: people leaving money in bank deposits. That's a really, really
Speaker 1: interesting question. I don't know the answer to that. I
Speaker 1: can tell you at coin Routes, our treasury for our
Speaker 1: three years plus of runway is setting either very large
Speaker 1: banks or in treasuries just on the issue of such
Speaker 1: or we will go to them and get comment and
Speaker 1: best side of this story. I don't see yet any
Speaker 1: commentary from them on the Bloomberg terminal today either way.
Speaker 1: Corn Route CEO and co founder diet Dave Weisberger, thank
Speaker 1: you very much. Now up next the implications on Silicon
Speaker 1: Valley itself, the place, but also the tech sector as
Speaker 1: a whole. Let's talk about all of that, not just
Speaker 1: that view on your screen, but also the miles and
Speaker 1: miles of companies, founders, bench capitalists behind it in the distance.
Speaker 1: We'll bring all of you that. Next. This is Bloomberg.
Speaker 1: Let's talk about how the Silicon Valley bank melt down
Speaker 1: as impacted Silicon Valley believe it or not. You know,
Speaker 1: we've not really talked about out West and all of
Speaker 1: the companies here that are suffering as a consequence of
Speaker 1: what's happened. I'm going to bring in Bloomberg Shnai Bassett,
Speaker 1: who's been across the finance banking side of this all
Speaker 1: day long, and also Bloomberg is exative editor Tom Giles,
Speaker 1: who's been leading our coverage from the tech perspective. Tom,
Speaker 1: I'll start with you. I mean, what we're learning increasingly
Speaker 1: and rapidly is it's not just private companies, start ups
Speaker 1: and founders with exposure here. They are publicly traded technology
Speaker 1: companies with exposure to this company. This bank had its
Speaker 1: tentacles across so many different industries, across so many different
Speaker 1: types of businesses. It wasn't just startups as you said,
Speaker 1: These are publicly traded companies that kept a lot of
Speaker 1: their cash with SBB. And clearly, when you have twenty
Speaker 1: six percent of your cash that's the case with Roku,
Speaker 1: that goes well above what's ensured. And so this is
Speaker 1: a company that's falling and late trading. They disposed in
Speaker 1: a regulatory filing their shared are down six percent, twenty
Speaker 1: six percent of their total cash was held with Silicon
Speaker 1: Valley Bank. Rocket Laps is another one. Now we're also
Speaker 1: seeing a lot of companies coming out and saying we
Speaker 1: have no exposure or we have very minimal exposure. I
Speaker 1: think that's something that these companies need to share with
Speaker 1: their share holders who are concerned about exposure to a
Speaker 1: bank that's just gone into receivers five hundred million thereabouts.
Speaker 1: SVB has with roku of it's almost two billion dollars
Speaker 1: in cash and cash equivalent. Shinali, what next push us
Speaker 1: forward for what we hear from. Not only we wait
Speaker 1: for the publicly traded companies and private ones to disclose
Speaker 1: their exposure, but the FDIC in this process and indeed
Speaker 1: the regulators. We've got a weekend to work this out.
Speaker 1: We have a weekend in essence. Remember there's a question
Speaker 1: here of whether they'll look to seek a buyer and
Speaker 1: fuller a buyer for some of the assets. Remember Silicon
Speaker 1: Valley Bank, there's been a lot of complications for any
Speaker 1: potential buyer that's coming in. They would have wanted to buy,
Speaker 1: the relationships they would have wanted to buy in all
Speaker 1: of the think about how big some of these businesses
Speaker 1: have gone investment banking, they had a large wealth client
Speaker 1: base as well. These are attractive to a lot of
Speaker 1: Wall Street. But with all of that said, you know,
Speaker 1: what are the troubles that's still exists for the client base.
Speaker 1: I think that is the first and most immediate concern.
Speaker 1: No matter what, and especially if they do find buyers,
Speaker 1: what happens to those asset bases in that event, especially
Speaker 1: if not all of it is sold to some parts
Speaker 1: get left behind. Tom on the technology side of this story,
Speaker 1: where does this rank in all of the crises and
Speaker 1: mega tech stories that we've covered in this newsroom over
Speaker 1: the years. I mean, this really is up there. This
Speaker 1: is stuff that that speaks to a very visceral, fundamental
Speaker 1: fear that you have as a person, as a company,
Speaker 1: as a business, and that is essentially where I'm putting
Speaker 1: my assets you think that they're safe. This hints at
Speaker 1: the fundamental fear for any business, which is my savings
Speaker 1: are not safe. They're not They're not well be expected.
Speaker 1: These You know, putting your money in a bank is
Speaker 1: not supposed to be the speculative game. This isn't investing
Speaker 1: in crypto, This isn't investing in securities. It's not even
Speaker 1: investing in bonds. This is just keeping it in liquid
Speaker 1: cash money market securities. So this really cuts at the
Speaker 1: heart of the trust relationship that exists between a business. Yes,
Speaker 1: and ultimately Tom and Shinali, this is why the White
Speaker 1: House wigs in, why the Treasury Secretary weighs in, why
Speaker 1: we all await what indeed the rest of the regulators
Speaker 1: is going to say it over the course of the weekend,
Speaker 1: Shinali Bassak, You're going to be busy. I think Tom
Speaker 1: Giles too. We thank you both so much for your time,
Speaker 1: and that doesn't for this addition of bloom Bow technology.
Speaker 1: But ed, we've got some big moves to make. On Monday,
Speaker 1: we're back, but we are relaunching. We're new newn easton
Speaker 1: nine am Pacific with the new showtime Carrot where we
Speaker 1: are going big and this as we go to break
Speaker 1: with one of the biggest stories, at least in my career,
Speaker 1: in your career. This is Bloomberg