WEBVTT - SVB's Collapse Ripples Through Silicon Valley 0:00:01.000 --> 0:00:03.720 I'm Caroline Hyde and Bloomberg's World head quarters in New York, 0:00:04.080 --> 0:00:06.200 and I Mede Lodlow in San Francisco. This is a 0:00:06.240 --> 0:00:10.000 special edition of Bloomberg Technology because ed Today we are 0:00:10.039 --> 0:00:13.000 focusing on the biggest bank failure since the two thousand 0:00:13.039 --> 0:00:16.240 and eight financial crisis. Silicon Valley Bank started the year 0:00:16.280 --> 0:00:18.280 with more than two hundred billion dollars in assets. Today 0:00:18.600 --> 0:00:22.040 California regulators closed the bank and sent it into receivership. Basically, 0:00:22.400 --> 0:00:27.320 it collapsed. A top lender to vc BAT startups. SVB, 0:00:27.480 --> 0:00:30.760 the parent company, had quadrupled the size of Silicon Valley 0:00:30.760 --> 0:00:33.560 Bank in the past five years. Now it's the second 0:00:33.560 --> 0:00:36.200 bank Silicon Valley Bank is to fold in a week 0:00:36.200 --> 0:00:41.160 after Silvergate's bankruptcy. This story is bleeding into the banking sector, 0:00:41.200 --> 0:00:43.600 into the tech sector, into the financial markets at large, 0:00:43.760 --> 0:00:46.640 and has the attention of not only financial regulators, the 0:00:46.680 --> 0:00:51.000 white housetop bench capitalists, tech founders of all backgrounds. Just 0:00:51.120 --> 0:00:53.400 tell us a little bit about how it's impacting individual 0:00:53.440 --> 0:00:57.600 companies at this moment. Well. First off, the BAT trading 0:00:57.720 --> 0:01:01.240 of SVB Financial Group was suspended, halting petting news and 0:01:01.280 --> 0:01:04.560 never did trade had a really profound impact in equity markets, 0:01:04.560 --> 0:01:07.960 the KBW Bank Index down four percent, But actually other names, 0:01:08.000 --> 0:01:12.080 particularly regional lenders, where contagion risk and concern was building, 0:01:12.280 --> 0:01:15.840 we saw pretty deep declines First Republic and Signature Bank. 0:01:16.040 --> 0:01:19.360 Some of those names where we did see severe reaction 0:01:19.720 --> 0:01:22.720 was of course in SVB Group's bonds. It's debts. So 0:01:22.760 --> 0:01:25.560 I'm looking at the twenty thirty three note in particular. 0:01:25.600 --> 0:01:30.080 We are deep into distressed territory, in this case trading 0:01:30.120 --> 0:01:32.399 forty five cents on the dollar caroline. But what we 0:01:32.440 --> 0:01:35.200 have is a situation where the FDIC has come in 0:01:35.560 --> 0:01:38.200 and has taken control of this bank, and the latest 0:01:38.200 --> 0:01:40.920 Bloomberg reporting is that they are trying to find a 0:01:40.959 --> 0:01:43.679 buyer to come in and take on these assets for 0:01:43.760 --> 0:01:47.520 what is left. Shanali Bassak, who has been on air 0:01:47.800 --> 0:01:51.600 all day pushing this story forward as we brace ourselves 0:01:52.000 --> 0:01:54.840 for this weekend. Nowtionally, what do we anticipate to be 0:01:54.880 --> 0:01:56.920 coming from regulators? What do we anticipate in terms of 0:01:56.960 --> 0:01:59.520 who could be some sort of salvation right now? Yeah, 0:01:59.560 --> 0:02:01.600 I think it's very important to think about the process 0:02:01.600 --> 0:02:03.800 here moving forward for Silicon Valley Bank because there's a 0:02:03.800 --> 0:02:06.240 few things. One on the regulatory perspective now that it 0:02:06.320 --> 0:02:10.600 is in receivership. Remember, the FDIC retains all these assets now, 0:02:10.960 --> 0:02:13.280 and if you think about what happens in the event 0:02:13.360 --> 0:02:16.920 of a sale, they can move through a sale process 0:02:17.040 --> 0:02:19.560 or they could sell certain assets. That's one thing to 0:02:19.600 --> 0:02:22.519 think about. Remember there's also this issue here for customers, 0:02:22.840 --> 0:02:25.400 because if you have above and beyond two hundred and 0:02:25.400 --> 0:02:27.600 fifty thousand dollars, you need to be calling the FDIC 0:02:27.760 --> 0:02:30.360 at this point because that is the amount the FDIC 0:02:30.600 --> 0:02:34.560 insures per account. Right then, separately, you also have this 0:02:34.680 --> 0:02:37.520 other issue here of what happens to the clients that 0:02:37.639 --> 0:02:41.720 Silicon Valley Bank has lent to those venture backed loans. 0:02:41.960 --> 0:02:44.880 Are they callable in any fashion? Is there any worries 0:02:44.919 --> 0:02:47.560 about the clients that do exist for Silicon Valley Bank. 0:02:47.560 --> 0:02:49.639 Of course, are many venture capitalists that are very worried 0:02:49.639 --> 0:02:53.440 about the companies being able to make payroll. The point 0:02:53.480 --> 0:02:57.360 here is that this was a technical failure by FDIC standards. 0:02:57.400 --> 0:03:00.000 You know, silvi Gate also a part of this discussion 0:03:00.040 --> 0:03:03.560 and voluntarily wound down. But you're exactly right. You and 0:03:03.600 --> 0:03:06.320 I have been tracking for twenty four hours what so 0:03:06.360 --> 0:03:09.360 many startup founders are doing as well with their own 0:03:09.480 --> 0:03:12.800 cash moving it to other banks. We've reported some of 0:03:12.840 --> 0:03:16.880 that movement. What do we know about what clients are 0:03:16.919 --> 0:03:20.920 doing to manage this situation, Shinali with their funds. Yeah, 0:03:20.960 --> 0:03:23.480 we know. For example, remember because some of these assets 0:03:23.480 --> 0:03:26.560 are not necessarily ensured, so those are the assets that 0:03:26.600 --> 0:03:29.880 were very worried about. The customer base. Four. But remember 0:03:29.919 --> 0:03:32.760 we've been talking about this ed People act like this 0:03:32.800 --> 0:03:35.160 is something that happened in twenty four hours. There's a 0:03:35.160 --> 0:03:37.240 lot that did happen in twenty four hours. But as 0:03:37.280 --> 0:03:39.560 you know very well, the reason this happened in the 0:03:39.600 --> 0:03:42.920 first place is because customers slowly started to move deposits. 0:03:43.440 --> 0:03:45.960 We want to keep an eye on which firms still 0:03:46.040 --> 0:03:49.880 had deposits with Silicon Valley Bank up to this point, 0:03:49.920 --> 0:03:52.400 but there was a slow, steady movement and they had 0:03:52.400 --> 0:03:56.160 to sell assets at a loss to meet those deposits. Lastly, 0:03:56.200 --> 0:03:58.080 I would just say, for a matter of definition, this 0:03:58.320 --> 0:04:00.800 is one of the largest bank failures in US history 0:04:00.800 --> 0:04:03.119 in the sense that it is the second largest bank 0:04:03.160 --> 0:04:07.840 holding company failure since Washington Mutual Lehman Brothers was not 0:04:07.960 --> 0:04:10.800 necessarily a bank holding company. There are sales involved at 0:04:10.800 --> 0:04:14.120 the two hundred two thousand and eight crisis era. So 0:04:14.240 --> 0:04:17.719 this failure is a very technical one, as you're saying, 0:04:17.960 --> 0:04:20.280 and it is pretty unique in nature, and it is 0:04:20.320 --> 0:04:22.479 a very different time than two thousand and eight, so 0:04:22.600 --> 0:04:25.719 quite contained right as people see into the market, and 0:04:25.880 --> 0:04:28.320 so much of this is about psychology. That's what we 0:04:28.400 --> 0:04:31.080 keep hearing in the market, psychology of what was contributing 0:04:31.120 --> 0:04:33.320 to the run bloom Nocenali Bassek. We'll have you back 0:04:33.400 --> 0:04:35.279 later on in the show. I want to bring in 0:04:35.360 --> 0:04:38.560 Argent Seti, co founder of Tribe Capital or VC with 0:04:38.680 --> 0:04:41.800 about one point seven billion dollars of assets. Sethi says 0:04:41.880 --> 0:04:45.800 venture capitalists should prioritize founders and their employees as well 0:04:45.839 --> 0:04:51.000 as payroll and banking partners. Welcome to the program. You 0:04:51.000 --> 0:04:53.279 and I have been talking on and off for twenty 0:04:53.279 --> 0:04:57.960 four hours or so. Where do you stand as a 0:04:58.080 --> 0:05:05.040 venture catalyst who's p folio companies use Silicon Valley Bank? Yeah, 0:05:05.120 --> 0:05:07.080 I think what's in Thanks for having me. I think 0:05:07.120 --> 0:05:10.440 what's important about understanding the people that are going to 0:05:10.480 --> 0:05:13.640 be the most affected here are early in mid stage 0:05:13.640 --> 0:05:16.480 companies more so than late stage companies. By the time 0:05:16.520 --> 0:05:20.560 you get to a certain stage of revenue and in 0:05:20.680 --> 0:05:24.600 balance sheet, you start thinking about diversifying your risk and 0:05:24.720 --> 0:05:26.440 the types of partners that you have around the table, 0:05:26.480 --> 0:05:30.200 so Bargain, Stanley, JP, Morgan City Bank, Exsider, the whole 0:05:30.240 --> 0:05:35.000 list of the larger banks. I think the thing that's 0:05:35.000 --> 0:05:37.880 really important that people have been forgetting is that our 0:05:38.000 --> 0:05:42.120 job in our ecosystem, so as an investor, as a 0:05:42.120 --> 0:05:45.160 fiduciary of capital, as a fiduciary sitting on the boards 0:05:45.160 --> 0:05:47.320 of these companies, is to make sure that we're giving 0:05:47.360 --> 0:05:48.960 them the best advice and we will make sure that 0:05:49.000 --> 0:05:51.640 we can help them think about what they need to do, 0:05:51.760 --> 0:05:54.039 and for a large set of us, not just me. 0:05:54.839 --> 0:05:56.560 You know, we started giving this advice a couple of 0:05:56.600 --> 0:05:58.840 weeks ago, probably more so when we got louder over 0:05:58.880 --> 0:06:00.640 the last week and then obviously over the last between 0:06:00.680 --> 0:06:03.440 of twenty four to forty eight hours. But it's really 0:06:03.520 --> 0:06:06.479 just about diversifying your risk. Where you're cash is sitting 0:06:06.520 --> 0:06:08.760 and then how you're sweeping that cash. Is it in 0:06:08.800 --> 0:06:12.159 treasuries depending on how much deposits you have in the 0:06:12.160 --> 0:06:15.039 first place. The second piece I think a lot of 0:06:15.040 --> 0:06:18.080 people forget is that a lot of these companies do 0:06:18.279 --> 0:06:21.640 rely on banks UM and you know, Silicon Valley Bank 0:06:21.839 --> 0:06:23.960 was a pillar of the community that helped support a 0:06:23.960 --> 0:06:26.400 lot of the UM you know, underwriting the risk of 0:06:26.400 --> 0:06:28.039 the assets in order to get them ventured debt. You know, 0:06:28.040 --> 0:06:30.839 they worked with a lot of venture funds, but you know, 0:06:30.880 --> 0:06:33.080 they were a lender. They were also a lender for 0:06:33.160 --> 0:06:36.440 capital call lines of credit for funds. Funds bank with them, 0:06:36.560 --> 0:06:39.240 not just our management companies, but the funds themselves. So 0:06:39.279 --> 0:06:43.360 this actually reverberates pretty you know, pretty quickly in the 0:06:43.400 --> 0:06:45.839 ecosystem around what what it's going to look like for 0:06:46.000 --> 0:06:48.520 not just the companies, but they're backers. Does ULL fund 0:06:48.640 --> 0:06:51.960 back for them? We do not bank with SBB. We 0:06:52.120 --> 0:06:55.920 bank with a larger a larger set of providers that 0:06:55.960 --> 0:06:57.800 are out there. And then our capital call lines of 0:06:57.839 --> 0:07:00.960 credit are with different service providers. A knowledge just again, 0:07:01.120 --> 0:07:04.760 let's start with the issues for the portfolio companies. If 0:07:04.760 --> 0:07:07.880 they want to make payroll, for example, you're giving them advice. 0:07:07.920 --> 0:07:10.560 At what point do you and ow the VC backs 0:07:10.920 --> 0:07:13.640 need to give lines of credit, give money without the 0:07:13.680 --> 0:07:17.120 strings attached to those founders those companies if they can't 0:07:17.120 --> 0:07:19.720 access it from their own banks at the moment. Yeah, 0:07:19.720 --> 0:07:21.400 it's a good question. I mean, I think, you know, 0:07:21.440 --> 0:07:24.800 there's some venture capitalists that might not be in the 0:07:24.440 --> 0:07:26.920 capable they might not have the capability to fund. It's 0:07:26.920 --> 0:07:28.520 not as easy as just you know, sending the check. 0:07:28.640 --> 0:07:31.440 I saw some tweets from some angel investors. In my opinion, 0:07:31.440 --> 0:07:33.680 they're sort of ill educated on the process. You can't 0:07:33.680 --> 0:07:35.360 just wire money to help the company, right, There's a 0:07:35.360 --> 0:07:36.960 process that you go through. You have to your fiducure 0:07:37.000 --> 0:07:40.440 and understanding the risk of where the company is and 0:07:40.440 --> 0:07:43.160 and if you know if the company itself is underwriteable 0:07:43.200 --> 0:07:45.480 in the first place. So again, early stage, in mid stage, 0:07:45.520 --> 0:07:48.120 this is more of an issue. Late stage it's less 0:07:48.120 --> 0:07:49.960 of an issue. But for some of these companies that 0:07:50.000 --> 0:07:52.680 don't have the ability to access payroll, you know. I 0:07:52.720 --> 0:07:53.920 think a lot of what we're trying to do is 0:07:53.920 --> 0:07:55.360 who can we set them up with that has the 0:07:55.400 --> 0:07:57.600 capability to underwrite them. What can we do in the 0:07:57.600 --> 0:08:00.800 short term, Do we do bridge loans? Do we write 0:08:00.800 --> 0:08:03.560 more investment into the company through equity. I think one 0:08:03.560 --> 0:08:05.640 of the issues is that you know, you're going to 0:08:05.680 --> 0:08:07.640 have a lot of predatory folks out there going after 0:08:07.720 --> 0:08:09.280 some of these companies if they can meet some of 0:08:09.320 --> 0:08:12.680 these liabilities, and an article again as fiduciaries, is to 0:08:12.680 --> 0:08:16.080 make sure that doesn't happen. What's interesting, of course, Ed, 0:08:16.360 --> 0:08:19.720 is you've been writing throughout the day. Who then, we 0:08:19.760 --> 0:08:21.960 haven't hate to say the silver cloud silver linings in 0:08:21.960 --> 0:08:24.520 these clouds, but who benefits? Where does the money flow 0:08:24.840 --> 0:08:28.280 ultimately from portfolio companies that are trying to diversify at 0:08:28.320 --> 0:08:31.760 this moment, and indeed the vcs too, well, there are 0:08:31.760 --> 0:08:34.520 many VNCH catalysts that believe actually staying put was the 0:08:34.640 --> 0:08:36.560 right move. But the name that I kept hearing time 0:08:36.559 --> 0:08:38.920 and time again was JP Morgan, you know, that was 0:08:38.960 --> 0:08:41.720 getting a lot of phone calls, but also some lesser 0:08:41.760 --> 0:08:45.240 known banks Mercury as an example, some vcs saying get 0:08:45.240 --> 0:08:47.080 a bit of your capital and bigger banks, but go 0:08:47.160 --> 0:08:49.280 with some of the startups too because of the benefits 0:08:49.280 --> 0:08:52.000 they're offering. What was really interesting as well is this 0:08:52.080 --> 0:08:54.720 is kind of laying bare the situation right now for 0:08:54.880 --> 0:08:57.760 being a startup, being a founder, right Argent, you've been 0:08:57.760 --> 0:09:01.280 writing about the desert that we are traveling through in 0:09:01.280 --> 0:09:04.400 the world of VC and startops. There is a deficit 0:09:04.440 --> 0:09:07.760 of available capital. And my question to you is how 0:09:07.840 --> 0:09:09.839 much worse is that now given the events of the 0:09:09.880 --> 0:09:13.480 past twenty four hours. Yeah, So there's two pieces here. 0:09:13.679 --> 0:09:16.760 Over the last five years. I think the way to 0:09:16.800 --> 0:09:18.920 think about it is the FED the first printed trillions 0:09:18.920 --> 0:09:21.920 of dollars, then they denied anything was happening, Then they 0:09:21.920 --> 0:09:24.640 said it was transitory. Then you know, we put their 0:09:24.720 --> 0:09:26.599 rates to them. And so what happens is there's a 0:09:26.640 --> 0:09:31.360 lot of trickle effects that come from this. So the 0:09:31.400 --> 0:09:33.840 first is that a lot of venture capital went into 0:09:34.360 --> 0:09:36.240 a lot of these companies, may they be good or bad. 0:09:36.320 --> 0:09:38.040 So roughly about a trillion and a half over the 0:09:38.120 --> 0:09:41.760 last four to five years those companies. In order for 0:09:41.800 --> 0:09:45.760 them to meet their demands or growth concerns, they probably 0:09:45.800 --> 0:09:48.360 need another three to four trillion of capital. Where is 0:09:48.400 --> 0:09:50.440 that going to come from? That? This was before SVB, 0:09:51.280 --> 0:09:53.160 and so that becomes an issue. Now all of a 0:09:53.200 --> 0:09:56.480 sudden you have SEB. People generally get scared. You know, 0:09:56.880 --> 0:09:59.240 it may not be logical, and there might be capital 0:09:59.280 --> 0:10:01.240 around the table, but just get scared and their deer 0:10:01.240 --> 0:10:02.959 in the headlights. So I think what you're going to 0:10:03.000 --> 0:10:06.400 see is flight to safety. What are the assets that 0:10:06.480 --> 0:10:08.800 you go after? How do you continue to bankroll them. 0:10:08.840 --> 0:10:10.480 How do you do a concentration of your time am 0:10:10.520 --> 0:10:13.679 capital into these companies in which ones are going to 0:10:13.720 --> 0:10:16.840 be resilient and so you know, I think this probably 0:10:16.880 --> 0:10:21.680 takes about three to six months to go through the system. 0:10:21.720 --> 0:10:23.800 I do think it gets worse over the next twelve 0:10:23.880 --> 0:10:26.240 to sixteen months, just because a lot more companies will 0:10:26.280 --> 0:10:28.600 need access to that capital. And I think the one 0:10:28.640 --> 0:10:32.800 thing that people really forget here is that these companies 0:10:32.920 --> 0:10:35.920 need this capital and rocro or in order to hit 0:10:36.000 --> 0:10:39.200 their certain thresholds of their unit economics because most of 0:10:39.240 --> 0:10:43.000 them still haven't been able to shed enough. People still 0:10:43.040 --> 0:10:44.760 haven't been able to get into a place that's healthy, 0:10:45.120 --> 0:10:46.840 and you know, the capital needs are going to become 0:10:46.880 --> 0:10:49.480 greater and greater over the next year. Ultimately many are 0:10:49.520 --> 0:10:53.080 loss making. Tribe Capital cofounder Argent Sethi, thank you so 0:10:53.160 --> 0:10:56.360 much for providing information across social media channels, but for 0:10:56.440 --> 0:11:00.960 coming on this show too. We appreciate it zero. Our 0:11:01.080 --> 0:11:06.280 recent developments the concern a few banks that I'm monitoring 0:11:06.520 --> 0:11:12.800 very carefully, and when banks experience financial losses, it is 0:11:12.920 --> 0:11:17.960 and should be a murder of concern US Treasury Secretary 0:11:18.040 --> 0:11:21.040 Janny Ellen. They're saying she was monitoring the situation, also 0:11:21.080 --> 0:11:23.360 said that the US banking system remains resilient to the 0:11:23.440 --> 0:11:26.600 regulators have quote effective tools to address the fallout from 0:11:26.600 --> 0:11:28.920 the collapse of Silicon Valley Bank. She's called a meeting, 0:11:28.960 --> 0:11:30.840 of course, with the leaders of the Federal Reserve, the FDIC, 0:11:30.960 --> 0:11:33.200 the officer of the Control of the currency, to discuss 0:11:33.240 --> 0:11:37.360 developments around SVB. Before we get to those overall regulatory discussions, 0:11:37.360 --> 0:11:38.760 and I want to bring you some breaking news because 0:11:38.760 --> 0:11:43.640 this has huge overarching implications for publicly traded companies. Roku 0:11:43.720 --> 0:11:47.880 currently saying that twenty six percent I reiterate a quarter 0:11:48.440 --> 0:11:52.440 of Roku's total cash and cash equivalents are held with SBB. 0:11:52.840 --> 0:11:57.120 The company's deposits are with SVB a largely unensured and 0:11:57.160 --> 0:12:00.360 they don't know what extent it can recover those cash 0:12:00.440 --> 0:12:03.840 deposit deposits. So currently Roku, of course, the makeup of 0:12:03.840 --> 0:12:05.959 the way in which you consume perhaps what you're watching 0:12:05.960 --> 0:12:08.400 at this very moment, twenty six percent of its total 0:12:08.440 --> 0:12:11.080 cash and cash equivalents are held with SVB, and ed 0:12:11.160 --> 0:12:13.880 existing cash flow is enough for the next twelve months 0:12:13.880 --> 0:12:15.840 and beyond. Of course, this is a later stage company 0:12:15.840 --> 0:12:17.840 in public company and one that we keep a close 0:12:17.840 --> 0:12:22.520 eye on currently falling six percent after ours ed. Yeah, 0:12:22.559 --> 0:12:25.920 it's it's a question we're asking, right forget not just 0:12:26.200 --> 0:12:29.720 private startups the founders. There are a number, okay they're 0:12:29.760 --> 0:12:32.959 smaller cap companies, but public companies that use Silicon Valley 0:12:32.960 --> 0:12:37.800 Bank because until earlier today it was a critical bank 0:12:37.880 --> 0:12:40.360 for the world of technology and companies founded over this 0:12:40.440 --> 0:12:42.880 nation and beyond. And this is why we then worry 0:12:42.880 --> 0:12:45.000 a lot about the startups who don't have twelve months 0:12:45.000 --> 0:12:47.839 and beyond of existing cash flow. Let's talk about the 0:12:47.920 --> 0:12:50.000 ripple effects and where next the regulators are going to 0:12:50.000 --> 0:12:52.800 be watching. Of course, most Kylee Lines has been doing 0:12:52.960 --> 0:12:55.960 incredible work, having newly moved to Washington, and now our 0:12:56.040 --> 0:12:59.840 regulatory overseer really just talk to us, Kayley, about what 0:13:00.000 --> 0:13:02.400 we loot full next. Coming from the likes of the 0:13:02.440 --> 0:13:06.800 FDIC and indeed John Allen herself well for the FDICE, 0:13:06.960 --> 0:13:09.280 this really goes back to Roku in the question of 0:13:09.360 --> 0:13:12.199 uninsured deposits, because remember, this is the first failure of 0:13:12.240 --> 0:13:14.360 an insured institution we've seen this year, one of the 0:13:14.440 --> 0:13:17.400 largest we have seen in history. But that insurance only 0:13:17.440 --> 0:13:19.679 goes so far. That cap is two hundred and fifty 0:13:19.679 --> 0:13:23.000 thousand dollars, and from our understanding, more than ninety percent 0:13:23.040 --> 0:13:26.120 of the deposits Dot Silicon Valley Bank were uninsured. So 0:13:26.200 --> 0:13:28.400 that is really going to be question number one what 0:13:28.520 --> 0:13:33.400 happens with those uninsured deposits. Are those depositors going to 0:13:33.520 --> 0:13:35.560 be made whole? That is going to be one of 0:13:35.559 --> 0:13:38.520 the priorities that we are following on, especially as you 0:13:38.520 --> 0:13:41.720 guys were just alluding to for those early sage companies 0:13:41.760 --> 0:13:44.640 that may be short on cash at this point, then 0:13:44.679 --> 0:13:47.160 it becomes a question of any kind of ripple effects. 0:13:47.200 --> 0:13:49.480 Are we going to see other episodes of this or 0:13:49.640 --> 0:13:52.560 was this an isolated incidents. Journalie and I were speaking 0:13:52.600 --> 0:13:56.960 with a former official from the FDIC's earlier who said, I, look, 0:13:57.000 --> 0:13:59.880 regulators are really hoping that this is just an isolated 0:14:00.360 --> 0:14:02.560 that they can contain. And I would note that Jenny Ellen, 0:14:02.600 --> 0:14:05.000 as well as the broader White House, including the Council 0:14:05.000 --> 0:14:09.079 of Economic Advisors Director Cecilia Rouse, did express confidence in 0:14:09.160 --> 0:14:11.680 what regulators are doing here, and Rouse was quick to 0:14:11.720 --> 0:14:13.480 point out that this is not two thousand and eight. 0:14:13.480 --> 0:14:15.439 We are post two thousand and eight. We are a 0:14:15.520 --> 0:14:19.360 postad Frank, there are now capital and liquidity requirements stressed 0:14:19.400 --> 0:14:21.600 at better in place, and really the banking system and 0:14:21.720 --> 0:14:24.640 theory is much more resilient now than it was then. 0:14:25.840 --> 0:14:28.800 Bloomer's Kayley lines out in DC, thank you. The regulatory 0:14:28.800 --> 0:14:31.120 conversation is not going to stop here, and we will 0:14:31.120 --> 0:14:34.600 continue it with our in Kleine, economic senior fellow at 0:14:34.640 --> 0:14:38.600 the Brookings Institution. You've been working on financial regulatory reform 0:14:38.640 --> 0:14:41.120 issues for a very long time. The Department of the 0:14:41.200 --> 0:14:45.080 Treasury and Economic Advisor to the Senate Banking Housy Housing 0:14:45.120 --> 0:14:48.360 an Urban Affairs Committee. No. Yellen saying she has full 0:14:48.400 --> 0:14:52.000 confidence in the banking regulators. The FDIC has come in 0:14:52.480 --> 0:14:56.000 taken control at Silicon Valley Bank and will oversee the 0:14:56.080 --> 0:14:59.520 sale process. Do you have that confidence based on your 0:14:59.520 --> 0:15:03.360 experience in this area. I do. Look, the FDIC has 0:15:03.360 --> 0:15:06.640 done a great job in handling and resolving institutions. Actually 0:15:07.360 --> 0:15:09.480 generally speaking, they're able to do so at a small 0:15:09.560 --> 0:15:12.040 cost of taxpayers and tend to recover a lot for 0:15:12.520 --> 0:15:15.800 uninsured depositors. But each bank failure is a little bit different. 0:15:16.360 --> 0:15:18.680 Keep in mind, this bank was overseen at the federal 0:15:18.760 --> 0:15:21.400 level by the Federal Reserve, the Federal Reserve Bank of 0:15:21.400 --> 0:15:27.720 San Francisco was Silicon Valley banks number one federal regulator, 0:15:27.880 --> 0:15:30.240 and so the San Francisco FED should have been on 0:15:30.280 --> 0:15:33.560 top of what was going on the bank's explosive growth. 0:15:33.760 --> 0:15:35.600 And now it's very quick failure. But there are a 0:15:35.640 --> 0:15:40.040 lot of tools the FDIC has to handle this resolution situation, 0:15:40.320 --> 0:15:42.640 and I do think there's confidence. So there's a large bank, 0:15:42.960 --> 0:15:45.520 sixteenth largest bank in the country. Yeah, but it's not 0:15:45.600 --> 0:15:48.760 your typical bank. It only has sixteen branches. It's a 0:15:48.840 --> 0:15:51.400 very different structured bank than most of its peers around 0:15:51.400 --> 0:15:55.040 that same size. Are just bringing the breaking news. It 0:15:55.080 --> 0:15:58.560 continues to unfold. We currently understand the SVB Financial Group, 0:15:58.600 --> 0:16:00.960 perhaps on surprise in newscoping room from the SMP five 0:16:01.040 --> 0:16:04.360 hundred as an index insulates the company that will replace it. 0:16:04.480 --> 0:16:07.760 But just talk us through what got us here ultimately, 0:16:07.880 --> 0:16:11.040 and whether the regulations that you have been so crucial 0:16:11.080 --> 0:16:15.720 informing in many ways and analyzing the repercussions thereof whether 0:16:15.760 --> 0:16:18.760 they're the right regulations, the right ways in which banks 0:16:18.800 --> 0:16:22.760 currently hold capital, but in some ways can lead to 0:16:22.880 --> 0:16:26.280 extraordinary circumstances that we find with SVB. Right, So let's 0:16:26.280 --> 0:16:30.480 start with the premise my premises banks should fail. We 0:16:30.560 --> 0:16:35.040 have nearly five thousand banks in America, and a healthy 0:16:35.080 --> 0:16:37.600 amount of failure is greater than zero. I was more 0:16:37.600 --> 0:16:40.560 concerned the last two years when not a single bank failed. 0:16:41.080 --> 0:16:43.080 By the way, the first time in American history we 0:16:43.120 --> 0:16:45.400 went a year without a bank failure was two thousand 0:16:45.400 --> 0:16:49.040 and five. Regulators told us the banking system was in 0:16:49.080 --> 0:16:51.080 great shape, and not a single bank failed again in 0:16:51.120 --> 0:16:54.480 oh six oops. So a little bit of failure is 0:16:54.560 --> 0:16:58.080 actually a desirable thing, not something to be afraid up. 0:16:58.280 --> 0:17:02.960 The question is when anitution fails, is that failure contained, 0:17:03.840 --> 0:17:06.560 who bears the losses of it? And how quickly can 0:17:06.600 --> 0:17:09.960 this situation be resolved? And in that situation, I think 0:17:10.000 --> 0:17:13.320 the regulatory tools the FDIC and the Federal Reserve and 0:17:13.400 --> 0:17:16.439 other regulators have now or light years ahead of what 0:17:16.480 --> 0:17:19.360 they had in two thousand and seven and eight, when 0:17:19.359 --> 0:17:24.760 the cause of the crisis was very different. Aaron, A 0:17:24.800 --> 0:17:27.000 lot of people out there have a lot of questions, 0:17:27.240 --> 0:17:32.280 principally startup founders who were banking with Silicon Valley Bank. 0:17:32.960 --> 0:17:37.240 When the FDIC comes into an institution in this situation, 0:17:37.680 --> 0:17:40.240 what is their priority? You look at the chart on 0:17:40.280 --> 0:17:42.479 the screen, you can't even see it on the right 0:17:42.520 --> 0:17:46.400 hand side, because this is the first technical FDIC failure 0:17:46.840 --> 0:17:48.960 in a very very long time, in the first of 0:17:49.040 --> 0:17:53.280 this year so well. Silvergate Bank is another bank that 0:17:53.400 --> 0:17:55.280 failed very recently, if you want to call it a 0:17:55.280 --> 0:17:58.639 technical failure, not Sometimes the FDS is able to negotiate 0:17:58.840 --> 0:18:03.000 purchase an assumption here where other banks take the assets 0:18:03.040 --> 0:18:06.000 of the other bank. The FDS is number one priority, 0:18:06.200 --> 0:18:09.720 or the retail customers and the insured depositors who are 0:18:09.720 --> 0:18:11.440 going to be able to have access to their money, 0:18:11.480 --> 0:18:14.440 almost like nothing happened. There's just a bit of a rebranding. 0:18:14.920 --> 0:18:19.480 That's their number one priority. Uninsured depositors, businesses their number 0:18:19.520 --> 0:18:22.600 two priorities to try to maximize the ongoing value of 0:18:22.640 --> 0:18:26.600 the institution, to minimize the loss felt by everybody, including 0:18:26.680 --> 0:18:29.959 uninsured depositors. But I want to point something out here, 0:18:29.960 --> 0:18:31.399 and I hope we get a chance to discuss it, 0:18:31.440 --> 0:18:34.040 which is the FDIC isn't the first person to have 0:18:34.080 --> 0:18:37.320 a claimant. So if you think about who owns to 0:18:37.440 --> 0:18:40.360 who has a claim on this bank's assets, the FDSC 0:18:40.560 --> 0:18:43.480 is number two. Number one. Is this kind of arcane 0:18:43.520 --> 0:18:46.840 part of the government called the Federal Homelan bank system 0:18:47.160 --> 0:18:49.760 and the Federal Homelan Bank of San Francisco had lent 0:18:49.840 --> 0:18:53.360 more money to Silicon Valley Bank than to any other 0:18:53.400 --> 0:18:57.920 bank they did business with at its time of its failure. Okay, 0:18:58.040 --> 0:19:01.760 so Digg in the fall, you've done analysis and what 0:19:01.880 --> 0:19:06.960 other companies, what other lenders have perhaps exposure to the 0:19:07.000 --> 0:19:10.680 homelowans element of things? Are we likely to see? What's 0:19:10.680 --> 0:19:13.720 a contagion risk here? What's ultimately going to be the 0:19:13.800 --> 0:19:16.680 likelihood of also the uninsured companies, the likes of Roku 0:19:16.760 --> 0:19:19.360 that comes out says twenty six percent whose cash balances 0:19:19.440 --> 0:19:24.640 are over in Silicon Valley Bank and ultimately aren't ensured. 0:19:24.880 --> 0:19:27.480 What are the ripple effects here? So there are a 0:19:27.480 --> 0:19:30.000 couple of things. Number one, the people that run to 0:19:30.040 --> 0:19:32.480 the homeland bank system that are heavy users of it, 0:19:32.560 --> 0:19:37.040 particularly that come very very quick. A year ago, Silicon 0:19:37.119 --> 0:19:39.920 Valley Bank didn't even appear on the top list of 0:19:40.880 --> 0:19:43.920 borrowers from the Federal Homelone Bank of San Francisco, and 0:19:44.440 --> 0:19:46.840 you know, within a year they'd vaulted to number one 0:19:46.960 --> 0:19:50.560 twenty billion dollars of outstanding advances. Silvergate, at the time 0:19:50.560 --> 0:19:53.679 of its failure had over four billion dollars of outstanding 0:19:53.680 --> 0:19:56.160 advances to you look at the list of other people 0:19:56.160 --> 0:19:59.040 that have started leaning very heavily on the homeline bank system, 0:19:59.080 --> 0:20:01.480 and you ask the question, why why are they going there, 0:20:01.800 --> 0:20:05.320 particularly a bank like Silver Bank, which isn't really making mortgages. Right, 0:20:05.359 --> 0:20:07.800 The purpose of the homelan bank system originally, when you 0:20:07.800 --> 0:20:09.639 go back one hundred years, it was supposed to be 0:20:09.680 --> 0:20:12.199 a federal reserve kind of for these things called thrifts. 0:20:12.200 --> 0:20:14.600 They used to make mortgages when America had a very 0:20:14.600 --> 0:20:17.760 different banking system and a bank and a were different things. 0:20:18.119 --> 0:20:20.480 So I kind of look there, that's a classic red flag. 0:20:20.520 --> 0:20:23.560 If you go back to two thousand and seven Countrywide 0:20:23.600 --> 0:20:26.439 Washington Mutual, all those folks were the ones that were 0:20:26.520 --> 0:20:29.840 running to the homeland bank system and oh seven long 0:20:29.960 --> 0:20:32.280 after the market had started to dry up on the 0:20:32.320 --> 0:20:36.280 asset that they were over invested in. Yeah, Brookings Institution, 0:20:36.359 --> 0:20:38.879 Aaron Kleine, We thank you so much for the intricacies 0:20:38.920 --> 0:20:40.879