1 00:00:10,680 --> 00:00:14,360 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:14,440 --> 00:00:18,040 Speaker 1: I'm Tracy Alloway and I'm Joe wisn't thal Joe. A 3 00:00:18,200 --> 00:00:22,200 Speaker 1: lot has happened in the past few days. I don't 4 00:00:22,239 --> 00:00:25,360 Speaker 1: even know where to start, really, yeah, I mean I 5 00:00:25,360 --> 00:00:29,319 Speaker 1: don't either, but I would say, look, the developments I 6 00:00:29,360 --> 00:00:33,080 Speaker 1: think related to Silicon Valley Bank, the speed of the 7 00:00:33,159 --> 00:00:37,360 Speaker 1: run and the speed of the response are extraordinary, and 8 00:00:38,280 --> 00:00:41,360 Speaker 1: it feels to me like this episode could change like 9 00:00:41,520 --> 00:00:43,880 Speaker 1: how banks work in this country. I mean, it's incredible. 10 00:00:43,880 --> 00:00:47,600 Speaker 1: It's like all deposits seeming like they're de facto guaranteed, 11 00:00:48,080 --> 00:00:51,440 Speaker 1: changing the collateral schedule so that banks don't have to 12 00:00:51,479 --> 00:00:54,320 Speaker 1: take a mark to market hit on some of their assets. 13 00:00:54,320 --> 00:00:57,480 Speaker 1: This is extraordinary stuff here, absolutely, And I am going 14 00:00:57,560 --> 00:01:01,480 Speaker 1: to start this particular Lots with the caveat which is 15 00:01:01,520 --> 00:01:04,760 Speaker 1: that obviously things are very fast moving and we're trying 16 00:01:04,800 --> 00:01:09,240 Speaker 1: to get some emergency episodes out as quickly as possible. 17 00:01:09,640 --> 00:01:12,679 Speaker 1: So this is our first entry into what I'm sure 18 00:01:12,800 --> 00:01:15,840 Speaker 1: will be very you know, a lot more on this topic. 19 00:01:16,240 --> 00:01:18,640 Speaker 1: But we are going to be speaking with Dan Davies. 20 00:01:18,800 --> 00:01:22,280 Speaker 1: He is a managing director at Frontline Analysts. He's also 21 00:01:22,319 --> 00:01:26,120 Speaker 1: a former regulatory economist at the Bank of England. He 22 00:01:26,319 --> 00:01:29,080 Speaker 1: was a banking analyst for a very long time and 23 00:01:29,120 --> 00:01:31,840 Speaker 1: the author of Lying for Money, which is a book 24 00:01:31,959 --> 00:01:35,520 Speaker 1: all about financial fraud, A very good book. I might add, Dan, 25 00:01:35,840 --> 00:01:38,000 Speaker 1: thank you so much for coming on. All thoughts. Oh, 26 00:01:38,080 --> 00:01:40,360 Speaker 1: thanks very much for having me. It's always news whether 27 00:01:40,360 --> 00:01:44,960 Speaker 1: people want to. I was going to say at short 28 00:01:45,000 --> 00:01:47,680 Speaker 1: notice as well, but we appreciate you coming on. So 29 00:01:47,720 --> 00:01:50,960 Speaker 1: why don't we just start with a very big picture question. 30 00:01:51,080 --> 00:01:54,480 Speaker 1: But how would you characterize the events of the past 31 00:01:54,480 --> 00:01:58,200 Speaker 1: week or so. I think what's happened is that we're 32 00:01:58,240 --> 00:02:01,720 Speaker 1: seeing why certain kinds of deposits are considered to be 33 00:02:01,760 --> 00:02:07,160 Speaker 1: hot money. At the end of the day, you've got 34 00:02:07,400 --> 00:02:12,280 Speaker 1: corporate deposits, which people like to think are sticky, and 35 00:02:12,480 --> 00:02:15,560 Speaker 1: wealth management deposits in signature in New York, which is 36 00:02:15,560 --> 00:02:18,880 Speaker 1: the other bank that's been shut down and taken over 37 00:02:18,880 --> 00:02:22,119 Speaker 1: by the FDIC this weekend, which people like to think 38 00:02:22,160 --> 00:02:26,880 Speaker 1: are sticky. But their big amounts of money. It's not 39 00:02:27,000 --> 00:02:29,720 Speaker 1: like a few thousand in the bank that people have 40 00:02:29,800 --> 00:02:32,520 Speaker 1: for their transactions. It's a sum of money that people 41 00:02:32,560 --> 00:02:34,640 Speaker 1: get worried about if they they're going to lose it, 42 00:02:35,200 --> 00:02:37,640 Speaker 1: and that means it can be sticky for a while, 43 00:02:37,800 --> 00:02:41,200 Speaker 1: but when it moves, it really moves. And that's why 44 00:02:41,320 --> 00:02:46,679 Speaker 1: most regulators don't let you fund long dated assets out 45 00:02:46,720 --> 00:02:49,640 Speaker 1: of that kind of deposits or put limits on your 46 00:02:49,639 --> 00:02:53,280 Speaker 1: ability to do it. So I didn't. So what was 47 00:02:53,360 --> 00:02:59,440 Speaker 1: this case with Silicon Valley Bank specifically, in which it 48 00:02:59,600 --> 00:03:03,120 Speaker 1: would I mean, not only did it accumulate an extraordinary 49 00:03:03,120 --> 00:03:07,920 Speaker 1: amount of a corporate deposit, but also highly all more 50 00:03:08,000 --> 00:03:10,359 Speaker 1: or less in sort of one industry. Yeah, I mean, well, 51 00:03:10,440 --> 00:03:14,040 Speaker 1: Silicon Valley Bank, according to everyone I've spoken to about it, 52 00:03:14,760 --> 00:03:19,160 Speaker 1: we're just very good at customer service with tech companies 53 00:03:19,280 --> 00:03:22,840 Speaker 1: in Silicon Valley. And there was no particular magic to 54 00:03:22,880 --> 00:03:25,880 Speaker 1: the business model. It's just they built themselves around that. 55 00:03:26,360 --> 00:03:28,000 Speaker 1: They did a lot of business on the golf course, 56 00:03:28,040 --> 00:03:32,280 Speaker 1: I'm told. And when you had a venture capital funded 57 00:03:32,520 --> 00:03:36,400 Speaker 1: startup which might easily have ten million dollars in the bank, 58 00:03:37,160 --> 00:03:40,480 Speaker 1: they would be the guys who would onboard you, easily, 59 00:03:40,960 --> 00:03:43,320 Speaker 1: give you a bunch of corporate credit cards for your 60 00:03:43,400 --> 00:03:45,960 Speaker 1: kind of teenage coders who've never had a credit card before, 61 00:03:46,480 --> 00:03:50,200 Speaker 1: and just generally look after you in a way. The 62 00:03:50,200 --> 00:03:54,640 Speaker 1: other banks weren't as sharp on the consumer customer service. 63 00:03:55,000 --> 00:03:57,560 Speaker 1: My wife used to be involved in a tech startup 64 00:03:57,680 --> 00:04:00,440 Speaker 1: in New York City, and she said, like every elevator 65 00:04:00,520 --> 00:04:03,680 Speaker 1: event where startups would like get money or like raised 66 00:04:03,680 --> 00:04:07,160 Speaker 1: from vcs, there are always just reps from Silicon Value Bank. 67 00:04:07,480 --> 00:04:10,440 Speaker 1: They're ready to like show people how to open up 68 00:04:10,440 --> 00:04:12,920 Speaker 1: an account like instantly, And that was just like part 69 00:04:12,920 --> 00:04:16,440 Speaker 1: of the process of raising VC money was basically part 70 00:04:16,480 --> 00:04:19,520 Speaker 1: and parcel with getting your Silicon Value Bank account, you know, 71 00:04:19,560 --> 00:04:22,039 Speaker 1: and being good at gathering those deposits. It means that 72 00:04:22,120 --> 00:04:25,280 Speaker 1: you gather a huge amount of those deposits. And then 73 00:04:25,480 --> 00:04:27,320 Speaker 1: through the last couple of years, when you had a 74 00:04:27,480 --> 00:04:32,919 Speaker 1: massive boom in terms of vcs putting money into their portfolio, companies, 75 00:04:33,240 --> 00:04:37,480 Speaker 1: they just got these huge inflows of deposits. So, I mean, 76 00:04:37,520 --> 00:04:39,480 Speaker 1: one of the most difficult things to manage your banking 77 00:04:40,000 --> 00:04:44,679 Speaker 1: is rapid growth. And in particular, you had rapid growth 78 00:04:44,680 --> 00:04:47,159 Speaker 1: in deposits at a time when interest rates were very low, 79 00:04:47,480 --> 00:04:51,240 Speaker 1: so you know, the actual equilibrium covering their cost of 80 00:04:51,320 --> 00:04:54,800 Speaker 1: business spread on these deposits. You know, they might have 81 00:04:54,800 --> 00:04:57,599 Speaker 1: had to pay negative fifty basis points of interest rates 82 00:04:57,760 --> 00:05:00,200 Speaker 1: and the company doesn't want to do that because it's 83 00:05:00,200 --> 00:05:02,800 Speaker 1: going to damage the franchise in the water. The company 84 00:05:02,880 --> 00:05:06,640 Speaker 1: certainly doesn't want to turn business away. So what they 85 00:05:06,800 --> 00:05:09,320 Speaker 1: end up doing is putting the money in how you 86 00:05:09,480 --> 00:05:12,279 Speaker 1: yield of securities, and to do that, you've got to 87 00:05:12,320 --> 00:05:15,479 Speaker 1: move out from the maturity curve. And this is the 88 00:05:15,520 --> 00:05:18,719 Speaker 1: sort of thing that are switched on Bank Supervisor ought 89 00:05:18,800 --> 00:05:22,000 Speaker 1: to be stopping you from doing right. So I do 90 00:05:22,080 --> 00:05:24,760 Speaker 1: want to get into the regulation aspect of it, but 91 00:05:24,880 --> 00:05:29,520 Speaker 1: before we do, just on SVB specifically, I mean, it 92 00:05:29,560 --> 00:05:33,159 Speaker 1: seems to me like you had these inflows of hot money. 93 00:05:33,400 --> 00:05:38,240 Speaker 1: You had a concentration of depositors in the tech industry 94 00:05:38,320 --> 00:05:42,919 Speaker 1: where money tends to be very volatile and momentum driven, 95 00:05:42,960 --> 00:05:45,160 Speaker 1: and certainly over the past year you can imagine a 96 00:05:45,160 --> 00:05:48,400 Speaker 1: lot of people were pulling stuff out, and so you 97 00:05:48,440 --> 00:05:53,920 Speaker 1: had the sort of classic asset liability duration mismatch. But 98 00:05:54,080 --> 00:05:59,560 Speaker 1: why didn't they hedge more? Because it would seem like 99 00:05:59,600 --> 00:06:04,840 Speaker 1: this was an obvious vulnerability just based on the dynamic 100 00:06:04,920 --> 00:06:07,520 Speaker 1: that I just described. Yeah, I think that's you know, 101 00:06:07,560 --> 00:06:10,039 Speaker 1: that's a really really good question that presumably they're going 102 00:06:10,080 --> 00:06:12,640 Speaker 1: to be asking themselves right now. And I think to 103 00:06:12,760 --> 00:06:17,400 Speaker 1: some extent, they haven't realized the extent to which their 104 00:06:17,400 --> 00:06:21,640 Speaker 1: customers were not separate entities in terms of their financial 105 00:06:21,680 --> 00:06:24,479 Speaker 1: decision making. So you know, you might have thought you 106 00:06:24,520 --> 00:06:29,000 Speaker 1: had some diversification there, but in fact, if all these 107 00:06:29,040 --> 00:06:32,560 Speaker 1: people are funded by the same few vcs, and all 108 00:06:32,600 --> 00:06:35,560 Speaker 1: those vcs are on the same WhatsApp group, they're actually 109 00:06:35,600 --> 00:06:40,839 Speaker 1: behaviorally this isn't a thousand guys with ten million each. 110 00:06:41,440 --> 00:06:45,279 Speaker 1: It's one big conglomerate of guys with ten billion. And 111 00:06:45,960 --> 00:06:48,920 Speaker 1: the real trouble was though, that their commercial incentives were 112 00:06:48,920 --> 00:06:53,240 Speaker 1: completely the other way. You've got these deposits. You're providing 113 00:06:53,240 --> 00:06:57,440 Speaker 1: this excellent customer service, which was the backbone of their franchise, 114 00:06:57,800 --> 00:07:01,000 Speaker 1: that costs a lot of money. So you've actually got 115 00:07:01,040 --> 00:07:03,560 Speaker 1: to do something that earns you a bit on the 116 00:07:03,560 --> 00:07:07,919 Speaker 1: asset side, or give up the business. And if you 117 00:07:08,000 --> 00:07:10,560 Speaker 1: start hedging out the risk, then you're hedging out the 118 00:07:10,600 --> 00:07:13,800 Speaker 1: return as well. And so you know, they could have 119 00:07:13,840 --> 00:07:17,640 Speaker 1: managed it more smarter. And I think you pointed to 120 00:07:17,680 --> 00:07:21,320 Speaker 1: a story showing that they had discussed internally whether they 121 00:07:21,320 --> 00:07:24,800 Speaker 1: should be reducing that risk position, but all of the 122 00:07:24,840 --> 00:07:27,920 Speaker 1: incentives were to push them in the direction of taking 123 00:07:27,960 --> 00:07:32,040 Speaker 1: that interest rate risk, and then obviously interest rates themselves 124 00:07:32,280 --> 00:07:35,080 Speaker 1: moved quite a bit faster than anyone was expecting, so 125 00:07:35,200 --> 00:07:37,679 Speaker 1: they were just caught on the wrong side of the trade. Yeah, 126 00:07:37,720 --> 00:07:40,240 Speaker 1: this was a story that I wrote with some of 127 00:07:40,240 --> 00:07:44,160 Speaker 1: our Bloomberg colleagues, but it sites internal documents from SVB 128 00:07:44,360 --> 00:07:48,240 Speaker 1: where they discussed this exact issue, and they were actually 129 00:07:48,320 --> 00:07:52,200 Speaker 1: talking about the need to reduce duration exposure, so exposure 130 00:07:52,240 --> 00:07:55,200 Speaker 1: to interest rates, and they had an estimated cost for 131 00:07:55,320 --> 00:07:58,240 Speaker 1: how much it would affect their net interest margin or 132 00:07:58,280 --> 00:08:00,440 Speaker 1: their earnings, and I think they say it was in 133 00:08:00,480 --> 00:08:02,920 Speaker 1: the millions of dollars, you know, eighteen million the first 134 00:08:02,960 --> 00:08:05,200 Speaker 1: year and then going up to thirty six million over 135 00:08:05,200 --> 00:08:08,440 Speaker 1: the next few years. And so it seems there was 136 00:08:08,440 --> 00:08:28,320 Speaker 1: a conscious decision not to actually do it. Absolutely. Yeah, Dan, 137 00:08:28,720 --> 00:08:32,360 Speaker 1: you know, one of the you mentioned that perhaps one 138 00:08:32,400 --> 00:08:35,760 Speaker 1: of the sort of analytical errors that either the bank 139 00:08:35,840 --> 00:08:39,280 Speaker 1: made or regulators made was not appreciating that they did 140 00:08:39,320 --> 00:08:43,120 Speaker 1: not actually have really thousands and thousands of depositors, but 141 00:08:43,240 --> 00:08:45,640 Speaker 1: actually just a handful of depositors who may have all 142 00:08:45,679 --> 00:08:48,640 Speaker 1: taken their cues from a small group of vcs and 143 00:08:48,679 --> 00:08:53,720 Speaker 1: a few WhatsApp rooms. The scale of the withdrawals that 144 00:08:53,760 --> 00:08:59,120 Speaker 1: have been reported on, particularly that happened on Thursday or Friday. 145 00:08:59,280 --> 00:09:03,839 Speaker 1: Is there any amount of sort of like um liquidity 146 00:09:04,000 --> 00:09:07,200 Speaker 1: requirements that could have satisfied them, because there's talking to like, oh, 147 00:09:07,200 --> 00:09:09,280 Speaker 1: they should have had more on hand, they should have 148 00:09:09,320 --> 00:09:13,080 Speaker 1: been treated, you know, some of the DoD frank requirements 149 00:09:13,200 --> 00:09:16,000 Speaker 1: should have been extended to a bank of that size, 150 00:09:16,480 --> 00:09:19,080 Speaker 1: But like, is there a level of run that can 151 00:09:19,160 --> 00:09:23,040 Speaker 1: happen in which no amount of like preparation can really 152 00:09:23,080 --> 00:09:25,560 Speaker 1: prepare for. Well, it's kind of difficult to know what 153 00:09:25,600 --> 00:09:28,840 Speaker 1: the counter factual was. Sure, just in share amounts of 154 00:09:28,960 --> 00:09:32,280 Speaker 1: numbers of the amount of money that left, there was 155 00:09:32,320 --> 00:09:34,400 Speaker 1: nothing that could have stood in the way of us. Yeah, okay, 156 00:09:34,520 --> 00:09:39,000 Speaker 1: that's correct. On the other hand, there's no quantum of 157 00:09:39,200 --> 00:09:41,920 Speaker 1: funds they could have had hanging around that would have 158 00:09:41,920 --> 00:09:44,480 Speaker 1: stood up to that kind of a deposit run. But 159 00:09:45,000 --> 00:09:47,719 Speaker 1: you have to ask whether the room would have been 160 00:09:47,760 --> 00:09:49,920 Speaker 1: so big or whether it would have happened at all 161 00:09:50,320 --> 00:09:56,040 Speaker 1: if they've managed financing more conservatively. Is the other part 162 00:09:56,120 --> 00:09:58,640 Speaker 1: of this is that it's not just the kind of 163 00:09:58,800 --> 00:10:02,920 Speaker 1: hot money on the deposit side. There were big unrealized 164 00:10:02,960 --> 00:10:06,520 Speaker 1: losses on the securities portfolio because they'd kept that interest 165 00:10:06,600 --> 00:10:10,240 Speaker 1: rate risk there. And if you're hanging around with an 166 00:10:10,280 --> 00:10:14,280 Speaker 1: unrealized loss on securities that's bigger than your shareholders funds. 167 00:10:14,880 --> 00:10:17,440 Speaker 1: You know, the former bank regulator in me says, if 168 00:10:17,480 --> 00:10:19,440 Speaker 1: you're doing that, then something bad is going to happen 169 00:10:19,520 --> 00:10:21,679 Speaker 1: soon or later. You know, it's not a good idea 170 00:10:21,760 --> 00:10:25,640 Speaker 1: to ever let yourself get into that position, right, So, 171 00:10:26,160 --> 00:10:29,280 Speaker 1: something I wanted to ask is just on the bond 172 00:10:29,440 --> 00:10:33,880 Speaker 1: portfolio losses, which have obviously garnered a lot of attention, 173 00:10:34,800 --> 00:10:37,280 Speaker 1: A lot of these were unrealized losses. They were on 174 00:10:37,360 --> 00:10:42,079 Speaker 1: bonds that were classified as held to maturity, which means 175 00:10:42,520 --> 00:10:45,000 Speaker 1: we're going to hold them into maturity, and so we 176 00:10:45,080 --> 00:10:47,440 Speaker 1: don't have to take mark to market losses on them 177 00:10:47,640 --> 00:10:51,000 Speaker 1: unless you know they're impaired in some way, because we 178 00:10:51,120 --> 00:10:55,320 Speaker 1: fully expect to get the money back, versus securities that 179 00:10:55,360 --> 00:10:58,840 Speaker 1: are usually held as available for sale, where because you 180 00:10:58,920 --> 00:11:02,320 Speaker 1: might sell them at any point in time, you would 181 00:11:02,400 --> 00:11:04,960 Speaker 1: mark them to market and those losses would show up 182 00:11:04,960 --> 00:11:08,160 Speaker 1: on your balance sheet. So, because of the proportion of 183 00:11:08,200 --> 00:11:12,200 Speaker 1: bonds held by SVB in HTM, and because of the 184 00:11:12,240 --> 00:11:16,880 Speaker 1: extent of the losses, there is now this concern about 185 00:11:17,040 --> 00:11:21,520 Speaker 1: broader debt and interest rate exposure in the banking system, 186 00:11:21,600 --> 00:11:25,040 Speaker 1: and especially at some of the smaller banks where they 187 00:11:25,120 --> 00:11:30,199 Speaker 1: might have been more pressured to generate net income margin 188 00:11:30,400 --> 00:11:34,400 Speaker 1: by taking additional duration exposure. Can you talk to us 189 00:11:34,440 --> 00:11:38,600 Speaker 1: about those concerns. How worried should we be about other 190 00:11:38,720 --> 00:11:42,280 Speaker 1: banks versus how much of that this is maybe an 191 00:11:42,480 --> 00:11:46,760 Speaker 1: SVB specific story where it's a mix of FLDY depositors 192 00:11:46,880 --> 00:11:51,200 Speaker 1: plus a lot of duration exposure. Yeah. Well, it's clear 193 00:11:51,240 --> 00:11:55,239 Speaker 1: that the Federal Reserve is concerned that it's not necessarily 194 00:11:55,280 --> 00:11:59,160 Speaker 1: confined to those two backs because this new facility they've 195 00:11:59,200 --> 00:12:03,439 Speaker 1: put up there, the bank term Finance program just looks 196 00:12:03,480 --> 00:12:06,200 Speaker 1: to me like a term finance program that's there for 197 00:12:06,280 --> 00:12:08,800 Speaker 1: the FED to say, if you've got any of these 198 00:12:08,880 --> 00:12:11,240 Speaker 1: kind of things, if you've got any of these problems 199 00:12:11,280 --> 00:12:14,280 Speaker 1: hanging around on your balance sheets, the Fed is put 200 00:12:14,320 --> 00:12:21,080 Speaker 1: together this term funding facility in order to allow banks 201 00:12:21,080 --> 00:12:23,240 Speaker 1: that have got some kind of problem or something on 202 00:12:23,240 --> 00:12:25,040 Speaker 1: their balk sheet that they need to get rid of 203 00:12:25,200 --> 00:12:28,400 Speaker 1: and trade out of those positions in a reasonably graceful 204 00:12:28,400 --> 00:12:31,960 Speaker 1: and orderly fashion. And you can tell that there this 205 00:12:32,160 --> 00:12:35,000 Speaker 1: is the concern because they've said that they will provide 206 00:12:35,000 --> 00:12:38,040 Speaker 1: funding against the face value or the power value of 207 00:12:38,280 --> 00:12:40,960 Speaker 1: any of these bonds, rather than the market value, which 208 00:12:41,000 --> 00:12:44,800 Speaker 1: could be thirty percent. Other How extraordinary is this, because 209 00:12:44,840 --> 00:12:48,880 Speaker 1: this to me seems like a huge, a pretty extraordinary 210 00:12:48,960 --> 00:12:53,319 Speaker 1: like intervention to say, okay, these you can pledge these 211 00:12:53,360 --> 00:12:55,959 Speaker 1: assets as clatter or potentially, as you said, thirty percent 212 00:12:56,080 --> 00:12:59,480 Speaker 1: higher than they're currently trading. And isn't this like a 213 00:12:59,600 --> 00:13:04,319 Speaker 1: deft actel capital injection? Basically it's it's not quite that. 214 00:13:04,920 --> 00:13:08,240 Speaker 1: But obviously, if you're sort of got bonders valued at 215 00:13:08,240 --> 00:13:12,440 Speaker 1: seventy and you're lending a hundred against it, then slightly 216 00:13:12,480 --> 00:13:14,840 Speaker 1: more than half of your loan, a third of your 217 00:13:14,920 --> 00:13:19,600 Speaker 1: loan is unsecured. It's not unknown for central banks to 218 00:13:19,720 --> 00:13:24,320 Speaker 1: lend unsecured in emergency situations. It would be a complete 219 00:13:24,320 --> 00:13:27,319 Speaker 1: departure if they started doing that in the normal course 220 00:13:27,320 --> 00:13:32,000 Speaker 1: of business. But this does look like it's a specific, 221 00:13:32,240 --> 00:13:37,080 Speaker 1: time limited hostility that's going to go on for a year, 222 00:13:37,600 --> 00:13:39,800 Speaker 1: and where I would expect that most of all the 223 00:13:39,840 --> 00:13:41,800 Speaker 1: borrowing that's ever going to be done moderate is going 224 00:13:41,840 --> 00:13:43,679 Speaker 1: to be taken out in the next couple of weeks. 225 00:13:45,200 --> 00:13:47,640 Speaker 1: You know, you touched on this earlier, but you can 226 00:13:47,679 --> 00:13:51,200 Speaker 1: you talk a little bit more about where regulators were 227 00:13:51,720 --> 00:13:55,840 Speaker 1: specifically for SVB. But I guess on the wider bond 228 00:13:56,040 --> 00:13:59,800 Speaker 1: exposure question, because it does seem like one of the 229 00:13:59,800 --> 00:14:04,600 Speaker 1: things that's emerging now is maybe the smaller banks, the 230 00:14:04,679 --> 00:14:09,800 Speaker 1: regional lenders, escaped some of the extra regulatory scrutiny that 231 00:14:09,920 --> 00:14:14,800 Speaker 1: was heaped on the larger systemically significant banks in recent years, 232 00:14:14,800 --> 00:14:18,120 Speaker 1: and so now they are more vulnerable to the threat 233 00:14:18,160 --> 00:14:21,520 Speaker 1: of both deposit flight and higher interest rates. Well, yeah, 234 00:14:21,560 --> 00:14:24,640 Speaker 1: they did. I mean, what basically happened is that in 235 00:14:24,680 --> 00:14:29,479 Speaker 1: the USA there were a couple of buzzle international standards 236 00:14:29,800 --> 00:14:32,600 Speaker 1: that were meant to address pretty much this exact risk, 237 00:14:33,480 --> 00:14:37,320 Speaker 1: which were only implemented for a very small number of 238 00:14:37,360 --> 00:14:41,600 Speaker 1: the largest internationally active banks. And a lot of that 239 00:14:41,800 --> 00:14:45,320 Speaker 1: appears to be because medium sized and community banks in 240 00:14:45,360 --> 00:14:50,200 Speaker 1: the USA have got a strong political lobby. Not running 241 00:14:50,240 --> 00:14:54,840 Speaker 1: this risk was, as we discussed, a threat to the earnings, 242 00:14:54,880 --> 00:14:58,000 Speaker 1: and so people decided that they were going to be 243 00:14:58,040 --> 00:15:00,880 Speaker 1: hard to get these things restricted to the very biggest banks, 244 00:15:01,360 --> 00:15:06,000 Speaker 1: and as a result, Silicon Valley Bank wasn't required to 245 00:15:06,040 --> 00:15:10,280 Speaker 1: calculate or report some of what I'd regard as the 246 00:15:10,360 --> 00:15:15,640 Speaker 1: key regulatory ratios with regard to its use of hot 247 00:15:15,680 --> 00:15:19,720 Speaker 1: money to financial liquid assets, and it's kind of high 248 00:15:19,800 --> 00:15:23,720 Speaker 1: quality liquid assets on HAPD. Those policies were just really 249 00:15:24,200 --> 00:15:27,160 Speaker 1: meant to be managed by the company itself and by 250 00:15:27,160 --> 00:15:30,680 Speaker 1: the company in discussion with its supervisor. But because there's 251 00:15:30,760 --> 00:15:35,000 Speaker 1: no hard and fast regulatory number being calculated there, it's 252 00:15:35,040 --> 00:15:37,080 Speaker 1: easy to lose track. And it seems that that's what's 253 00:15:37,080 --> 00:15:41,200 Speaker 1: happened Dan, just you know, sort of zooming out for 254 00:15:41,240 --> 00:15:44,880 Speaker 1: a second. And as someone who analyzes banks around the world, 255 00:15:45,160 --> 00:15:50,440 Speaker 1: how unusual is the sheer number of banks regional community 256 00:15:50,480 --> 00:15:53,280 Speaker 1: banks that exist in the United States relative to other 257 00:15:53,400 --> 00:15:57,960 Speaker 1: rich countries. It's not all known. It's not as extreme 258 00:15:58,040 --> 00:16:00,560 Speaker 1: as in Germany, where you have lots of with whats 259 00:16:00,560 --> 00:16:04,240 Speaker 1: and lots of really really small savings banks, but it 260 00:16:04,440 --> 00:16:07,760 Speaker 1: is quite unusual to have that much of the banking 261 00:16:07,800 --> 00:16:12,600 Speaker 1: system in small kind of local savings banks, you know. 262 00:16:12,680 --> 00:16:15,240 Speaker 1: And then you have these things like Silicon Valley Bank, 263 00:16:15,360 --> 00:16:21,040 Speaker 1: which grew so quickly that although it was a local 264 00:16:21,400 --> 00:16:25,320 Speaker 1: Silicon Valley and a local tech industry entity as recently 265 00:16:25,320 --> 00:16:28,080 Speaker 1: as four or five years ago, by the time both 266 00:16:28,480 --> 00:16:30,600 Speaker 1: last week it was the sixteenth biggest bank in the 267 00:16:30,640 --> 00:16:35,040 Speaker 1: United States of America by asset sis. So one of 268 00:16:35,040 --> 00:16:37,600 Speaker 1: the things that seems kind of inevitable now is the 269 00:16:37,680 --> 00:16:41,320 Speaker 1: idea that you are probably going to see some consolidation 270 00:16:41,480 --> 00:16:43,960 Speaker 1: of smaller banks and you are going to see more 271 00:16:44,000 --> 00:16:46,920 Speaker 1: money flowing into some of the big guys if there is, 272 00:16:47,080 --> 00:16:49,680 Speaker 1: you know, concern about the health of the banking system. 273 00:16:49,720 --> 00:16:54,080 Speaker 1: And I was just talking to one tech person just 274 00:16:54,160 --> 00:16:57,160 Speaker 1: this morning. He just got his oh, I should say, 275 00:16:57,200 --> 00:17:00,400 Speaker 1: we are recording this on Monday, March thirteenth, but he 276 00:17:00,640 --> 00:17:04,800 Speaker 1: just got some of his first wire transfer from SVB 277 00:17:05,000 --> 00:17:08,439 Speaker 1: out and he's moving it into JP Morgan. So that 278 00:17:08,560 --> 00:17:12,400 Speaker 1: seems kind of inevitable money going into the bigger gesibs. 279 00:17:12,520 --> 00:17:16,280 Speaker 1: And also maybe the smaller banks have to start raising 280 00:17:16,400 --> 00:17:19,520 Speaker 1: their deposit rates as they try to hold on or 281 00:17:19,600 --> 00:17:24,400 Speaker 1: compete for more customers. And yeah, I think so when 282 00:17:24,400 --> 00:17:27,080 Speaker 1: you have something like this, you're always going to see 283 00:17:27,119 --> 00:17:29,320 Speaker 1: what they call a flight to safety or a flight 284 00:17:29,400 --> 00:17:35,320 Speaker 1: to quality. And in the case of deposit runs like this, 285 00:17:36,000 --> 00:17:38,879 Speaker 1: because people look at the too big to fail banks 286 00:17:39,560 --> 00:17:44,760 Speaker 1: prosing that they've got a defacto guarantee despite the fact 287 00:17:44,760 --> 00:17:47,280 Speaker 1: that actually what we've seen in the case of the 288 00:17:47,480 --> 00:17:50,960 Speaker 1: Signature and Silt and Valley is that the fd I 289 00:17:51,080 --> 00:17:55,040 Speaker 1: see seems to be quite happy to extend coverage to 290 00:17:55,240 --> 00:17:58,920 Speaker 1: one insured deposits, even in this kind of second tier 291 00:17:59,080 --> 00:18:03,080 Speaker 1: and Signatures actually quite small bank, as long as they 292 00:18:03,080 --> 00:18:06,439 Speaker 1: are reasonably happy about the quality of the assets, and 293 00:18:06,560 --> 00:18:10,960 Speaker 1: as long as there is a decent cushion of unsecured bondholders. 294 00:18:11,080 --> 00:18:14,359 Speaker 1: Because obviously the bondholders in these banks are going to 295 00:18:14,400 --> 00:18:16,480 Speaker 1: be taking loss, it's they're covered in the way that 296 00:18:16,520 --> 00:18:20,439 Speaker 1: the latch depositors are. Well, this is a question I 297 00:18:20,480 --> 00:18:22,359 Speaker 1: was going to ask you, which is that, like, are 298 00:18:22,440 --> 00:18:27,040 Speaker 1: all deposits de facto now ensured at any size? Like 299 00:18:27,119 --> 00:18:31,920 Speaker 1: can you envision a scenario of future bank failure in 300 00:18:31,960 --> 00:18:35,240 Speaker 1: which depositors aren't made all? Or is this over if 301 00:18:35,400 --> 00:18:39,080 Speaker 1: if you're a depositor, you'll be insured. It's actually quite 302 00:18:39,200 --> 00:18:43,119 Speaker 1: unusual for depositors of any sort of fools money in 303 00:18:43,160 --> 00:18:47,200 Speaker 1: a bank resolution. Usually you have a cushion of bondholders 304 00:18:47,200 --> 00:18:50,719 Speaker 1: today and de facto deposits are considered to be senior 305 00:18:50,840 --> 00:18:54,760 Speaker 1: to bondholders. Can only think it's happened a couple of 306 00:18:54,760 --> 00:18:57,840 Speaker 1: times in the USA, and there are actually regulations on 307 00:18:57,880 --> 00:19:01,320 Speaker 1: the way to just generally say that you've got to 308 00:19:01,359 --> 00:19:04,520 Speaker 1: have a layer of bondholders in there, which are you know, 309 00:19:04,640 --> 00:19:08,119 Speaker 1: they're not going concerned capital, but they're an extra cushion 310 00:19:08,160 --> 00:19:11,159 Speaker 1: for the deposits. So I don't think anyone's ever really 311 00:19:11,640 --> 00:19:14,800 Speaker 1: thought of deposits of any sort as being money at risk, 312 00:19:15,080 --> 00:19:17,160 Speaker 1: you know, I mean, the depositors of Silicon Valley Bank 313 00:19:17,240 --> 00:19:19,320 Speaker 1: didn't think of their deposits as being money at risk 314 00:19:19,920 --> 00:19:23,160 Speaker 1: before Wednesday Thursday of last week. And it's turned out 315 00:19:23,160 --> 00:19:25,119 Speaker 1: that they were correct. It's turned out that they're getting 316 00:19:25,760 --> 00:19:29,160 Speaker 1: all of their money back. So one thing that I'm 317 00:19:29,200 --> 00:19:32,159 Speaker 1: still trying to get a handle on is this notion 318 00:19:32,240 --> 00:19:35,840 Speaker 1: that it's it's not as if banks do not have 319 00:19:36,040 --> 00:19:40,520 Speaker 1: access to emergency lending facilities, you know, before the events 320 00:19:40,600 --> 00:19:43,160 Speaker 1: of the weekend and the announcement of the new FED facility. 321 00:19:43,440 --> 00:19:45,800 Speaker 1: And this is something that Joe and I talked about, 322 00:19:45,880 --> 00:19:50,520 Speaker 1: I think just last month, the episode on banks tapping 323 00:19:50,560 --> 00:19:54,000 Speaker 1: the discount window. And you also have the possibility of 324 00:19:54,119 --> 00:19:59,040 Speaker 1: banks borrowing from the FHLBS, the federal homelan banks, and 325 00:19:59,160 --> 00:20:03,040 Speaker 1: yet it's teams like there was an issue at least 326 00:20:03,040 --> 00:20:06,880 Speaker 1: when it comes to SVB, But what could have happened there? 327 00:20:06,960 --> 00:20:11,200 Speaker 1: Why couldn't it tap more short term cash from either 328 00:20:11,240 --> 00:20:14,199 Speaker 1: the FHLBS or the discount window or was it the 329 00:20:14,280 --> 00:20:17,639 Speaker 1: case that you know, at some point no amount of 330 00:20:17,720 --> 00:20:20,479 Speaker 1: short term liquidity is actually going to cover the amount 331 00:20:20,480 --> 00:20:23,400 Speaker 1: of deposit outflows that the bank was seeing. I think 332 00:20:23,400 --> 00:20:26,080 Speaker 1: it's the second of those. Really, there did seem to 333 00:20:26,119 --> 00:20:30,959 Speaker 1: be something going along with the FHLB where just simply 334 00:20:31,080 --> 00:20:34,320 Speaker 1: Silicon Valley Bank was very large when you compared it 335 00:20:34,400 --> 00:20:38,600 Speaker 1: to the San Francisco Federal Homeland Bank for the Federal 336 00:20:38,640 --> 00:20:42,800 Speaker 1: Reserve and the other discount window operations. You have access, 337 00:20:42,840 --> 00:20:47,160 Speaker 1: but it's access against collateral. Previously to this week, it 338 00:20:47,200 --> 00:20:51,160 Speaker 1: was against collateral market value. So if you've got a 339 00:20:51,520 --> 00:20:54,200 Speaker 1: mark to market loss on that portfolio, you can only 340 00:20:54,280 --> 00:20:57,719 Speaker 1: raise money against a haircut on the market value. And 341 00:20:57,800 --> 00:21:00,480 Speaker 1: it's going to be the right collateral broad together in 342 00:21:00,480 --> 00:21:04,119 Speaker 1: the right place at the right time. So as you can, 343 00:21:04,320 --> 00:21:07,879 Speaker 1: you know, in ordinary situations, you can always deal with 344 00:21:07,920 --> 00:21:11,480 Speaker 1: the ordinary problems of banking. What you can't deal with 345 00:21:11,680 --> 00:21:15,800 Speaker 1: is something absolutely kind of off the chance, crazy like 346 00:21:15,840 --> 00:21:34,880 Speaker 1: we saw on Thursday and Friday last week. What does 347 00:21:34,920 --> 00:21:40,480 Speaker 1: it tell you if anything that no private buyer stepped up, 348 00:21:40,520 --> 00:21:43,520 Speaker 1: because as you said, you know, they had great customer service, 349 00:21:43,560 --> 00:21:46,320 Speaker 1: there's great product fit that seemed to really fit with 350 00:21:46,359 --> 00:21:48,840 Speaker 1: the valley. It seems like, you know, some banks probably 351 00:21:48,920 --> 00:21:54,000 Speaker 1: kind of offer commodity banking services and Silicon Valley Bank didn't, 352 00:21:54,040 --> 00:21:56,639 Speaker 1: and they seem to have some sort of unique franchise value. 353 00:21:56,680 --> 00:21:59,639 Speaker 1: A lot of people like the bank. What should we 354 00:21:59,680 --> 00:22:02,080 Speaker 1: read into the fact that there was no buyer and 355 00:22:02,160 --> 00:22:05,439 Speaker 1: also what is your take on whether it should have 356 00:22:05,440 --> 00:22:09,840 Speaker 1: been sold to a g SIB like a Chase, an 357 00:22:09,960 --> 00:22:12,880 Speaker 1: entity that could have easily absorbed it. I'm genuinely surprised 358 00:22:12,880 --> 00:22:17,760 Speaker 1: that didn't happen. The London operations, the UK subsidiary was 359 00:22:17,840 --> 00:22:22,280 Speaker 1: brought by HSBC over the weekend and it looks like 360 00:22:22,600 --> 00:22:27,760 Speaker 1: HSBC have brought themselves a small because it's obviously small 361 00:22:27,800 --> 00:22:31,680 Speaker 1: compared to the overall bank, but nice little local tech 362 00:22:31,760 --> 00:22:38,399 Speaker 1: banking business. The thing about banks is that when banks 363 00:22:38,440 --> 00:22:42,120 Speaker 1: go into resolution, all sorts of strange things start kind 364 00:22:42,119 --> 00:22:44,680 Speaker 1: of bubbling up, and things that you never knew were 365 00:22:44,720 --> 00:22:47,840 Speaker 1: going on tend to be uncovered. So people tend to 366 00:22:47,880 --> 00:22:51,280 Speaker 1: be a little bit risk averse. But yes, I'm surprised 367 00:22:51,400 --> 00:22:55,800 Speaker 1: that none of the big players felt that they could 368 00:22:55,800 --> 00:22:59,359 Speaker 1: buy this one, although you know that's still a possibility 369 00:22:59,440 --> 00:23:03,080 Speaker 1: over the coming which the FDIC is still, as I understand, 370 00:23:03,119 --> 00:23:05,840 Speaker 1: it's looking to sell this thing as a going concern, 371 00:23:06,200 --> 00:23:09,359 Speaker 1: as an operating business. So it might be that they'll 372 00:23:09,400 --> 00:23:13,000 Speaker 1: just keep on doing their due diligence by their time 373 00:23:13,000 --> 00:23:15,000 Speaker 1: and bid for it in the auction. So what are 374 00:23:15,040 --> 00:23:19,359 Speaker 1: you looking out for going forward? And in terms of 375 00:23:19,480 --> 00:23:23,199 Speaker 1: wider contagion, because you know, as I mentioned, it's Monday, 376 00:23:23,359 --> 00:23:26,560 Speaker 1: March thirteenth, there's a lot happening. There will, no doubt 377 00:23:26,680 --> 00:23:29,000 Speaker 1: be a lot of developments that have happened by the 378 00:23:29,000 --> 00:23:32,439 Speaker 1: time we release this episode, but for now, there are 379 00:23:32,560 --> 00:23:35,879 Speaker 1: quite a few bank stocks that are down, which you know, 380 00:23:35,960 --> 00:23:39,399 Speaker 1: maybe that makes sense because the Federal Reserve Facility, the 381 00:23:39,440 --> 00:23:42,240 Speaker 1: new one, is going to help in terms of some 382 00:23:42,320 --> 00:23:45,240 Speaker 1: of those bomb losses, but it's not necessarily going to 383 00:23:45,280 --> 00:23:49,040 Speaker 1: do anything for equity holders, and so there's an expectation 384 00:23:49,080 --> 00:23:51,840 Speaker 1: that banks will have to raise additional capital. But what 385 00:23:51,920 --> 00:23:54,560 Speaker 1: are you on the lookout for. I think I want 386 00:23:54,600 --> 00:23:59,200 Speaker 1: to look out for a real signs that the authorities 387 00:23:59,200 --> 00:24:02,480 Speaker 1: are taking this because the one thing we learned over 388 00:24:02,520 --> 00:24:06,200 Speaker 1: the kind of great financial crisis, and then again those 389 00:24:06,240 --> 00:24:07,840 Speaker 1: of us who are active in Europe learned it in 390 00:24:07,840 --> 00:24:10,520 Speaker 1: the euro crisis is that if you're dealing with the 391 00:24:10,560 --> 00:24:14,560 Speaker 1: crisis of market confidence, you need to bring the absolute 392 00:24:14,880 --> 00:24:17,600 Speaker 1: entire power of the state and the central bank to bear. 393 00:24:18,160 --> 00:24:21,399 Speaker 1: One thing I was quite disappointed seeing with the announcement 394 00:24:21,440 --> 00:24:25,040 Speaker 1: of these facilities was all of these announcements saying this 395 00:24:25,119 --> 00:24:28,440 Speaker 1: is not a bailout, send go, taxpayers money is at risk. 396 00:24:29,040 --> 00:24:31,320 Speaker 1: And I think that the market sees those things and 397 00:24:31,440 --> 00:24:34,879 Speaker 1: it doesn't go, you know how fiscally responsible, It sees 398 00:24:34,920 --> 00:24:38,520 Speaker 1: those things and thinks nobody's taking this seriously. What you 399 00:24:38,640 --> 00:24:40,840 Speaker 1: need is someone to do what Marry or Druga did 400 00:24:41,320 --> 00:24:44,440 Speaker 1: and come out to bang the table and say, this 401 00:24:44,560 --> 00:24:47,960 Speaker 1: is a bailout. Taxpayers money is at risk. We have 402 00:24:48,160 --> 00:24:52,760 Speaker 1: unlimited firepower. We will stop this thing in its tracks. 403 00:24:52,840 --> 00:24:56,360 Speaker 1: We will underpindle the good is of the US financial system. 404 00:24:56,760 --> 00:24:59,120 Speaker 1: And you know, it's always my view that with these 405 00:24:59,119 --> 00:25:02,280 Speaker 1: things always going to end up doing that. So you 406 00:25:02,359 --> 00:25:04,200 Speaker 1: might as well save yourself a couple of days heart 407 00:25:04,200 --> 00:25:06,760 Speaker 1: sake and do it right out of the gate. Right 408 00:25:06,840 --> 00:25:10,000 Speaker 1: Europe spent about you know, Angelo Merkel spent about three 409 00:25:10,119 --> 00:25:13,159 Speaker 1: years trying to avoid that and then it ended up 410 00:25:13,200 --> 00:25:17,480 Speaker 1: being massively costly in the end, is your view that 411 00:25:17,680 --> 00:25:21,560 Speaker 1: what has happened is it a bailout? And be like, 412 00:25:21,640 --> 00:25:23,879 Speaker 1: how do you even define that? Is it useful to 413 00:25:23,960 --> 00:25:26,280 Speaker 1: define that? Or if someone asked you, Dan, what's a bailout? 414 00:25:26,320 --> 00:25:29,479 Speaker 1: What is that? Well, I think people people have stopped 415 00:25:29,520 --> 00:25:32,840 Speaker 1: asking me what's a bailout? Keep giving them, you know, 416 00:25:32,840 --> 00:25:35,880 Speaker 1: I'll keep giving them the wrong answer, and yeah, it's 417 00:25:35,880 --> 00:25:39,800 Speaker 1: a bailout, and bailance are good. Bailance are almost always 418 00:25:39,840 --> 00:25:43,680 Speaker 1: the right thing to do. And there's a bailout just 419 00:25:43,800 --> 00:25:47,640 Speaker 1: means that the state steps in and provides insurance so 420 00:25:47,680 --> 00:25:52,040 Speaker 1: that something economically destructive doesn't happen. And lots of people 421 00:25:52,040 --> 00:25:56,639 Speaker 1: who did economics degrees start talking about moral hazard. But 422 00:25:57,880 --> 00:26:00,520 Speaker 1: I noticed that there's very few people who work in 423 00:26:00,560 --> 00:26:03,639 Speaker 1: the insurance business whose first concern right now is about 424 00:26:03,680 --> 00:26:07,679 Speaker 1: moral hazard. Also, very much doubt that anyone involved with 425 00:26:07,760 --> 00:26:10,760 Speaker 1: Silicon Valley Bank, even those that are getting paid back 426 00:26:10,760 --> 00:26:13,399 Speaker 1: at one hundred cents in the dollar, will look back 427 00:26:13,640 --> 00:26:16,080 Speaker 1: at this last week and regard it as a case 428 00:26:16,080 --> 00:26:18,320 Speaker 1: a moral hazard where they got looked after really well, 429 00:26:19,800 --> 00:26:23,400 Speaker 1: in a crisis, you just need someone to stand in 430 00:26:23,720 --> 00:26:28,320 Speaker 1: and show that they are managing it. And there's a 431 00:26:28,359 --> 00:26:33,280 Speaker 1: lot of my mind, really quite silly rhetoric about bailouts 432 00:26:33,320 --> 00:26:36,320 Speaker 1: because when it happens, it's kind of easy to do 433 00:26:36,359 --> 00:26:39,560 Speaker 1: a political speech about how you're against bailouts and how 434 00:26:39,600 --> 00:26:42,800 Speaker 1: you're in favor of saving money for the taxpayer, but 435 00:26:43,840 --> 00:26:46,080 Speaker 1: it doesn't actually solve anything. And the next time a 436 00:26:46,080 --> 00:26:49,359 Speaker 1: crisis comes around, it's still a crisis and it still 437 00:26:49,400 --> 00:26:52,879 Speaker 1: needs something to be done about it. And all that 438 00:26:52,920 --> 00:26:58,240 Speaker 1: happens is that that necessary corrective action takes longer to 439 00:26:58,400 --> 00:27:01,919 Speaker 1: execute because there's still people who think that they can 440 00:27:01,920 --> 00:27:04,879 Speaker 1: gain short termple of skill advantage by shouting about bailants. 441 00:27:05,400 --> 00:27:07,439 Speaker 1: And that's the story of the euro crisis, and I'm 442 00:27:07,560 --> 00:27:10,560 Speaker 1: very much hope that it doesn't happen in the USA 443 00:27:10,680 --> 00:27:14,000 Speaker 1: right now. Yeah, it just feels like at the height 444 00:27:14,040 --> 00:27:17,000 Speaker 1: of a crisis isn't necessarily the time to start addressing 445 00:27:17,359 --> 00:27:21,800 Speaker 1: systemic injustices and weaknesses. Dan, We're going to have to 446 00:27:21,880 --> 00:27:24,560 Speaker 1: leave it there. We very much appreciate you coming on 447 00:27:24,600 --> 00:27:29,840 Speaker 1: add Lots our Emergency add Blots episode for an emergency 448 00:27:29,880 --> 00:27:32,520 Speaker 1: banking crisis. So thank you so much. Thanks very much, 449 00:27:32,680 --> 00:27:48,320 Speaker 1: have a great rest of the day. So Joe, I 450 00:27:48,359 --> 00:27:51,480 Speaker 1: thought that was a really good summary of what's been 451 00:27:51,520 --> 00:27:53,919 Speaker 1: going on. There are a lot of moving parts, and 452 00:27:54,119 --> 00:27:56,280 Speaker 1: as I mentioned a couple of times, I'm sure we 453 00:27:56,320 --> 00:27:57,840 Speaker 1: are going to be talking about this for a long 454 00:27:57,880 --> 00:28:01,600 Speaker 1: time to come. But I thought dan point about how 455 00:28:01,640 --> 00:28:05,720 Speaker 1: this is and isn't a bailout was a really good one, 456 00:28:05,880 --> 00:28:09,800 Speaker 1: because yes, you know, in some sense depositors are being protected. 457 00:28:10,720 --> 00:28:13,560 Speaker 1: You know, the FED is flinging a lot of money 458 00:28:13,760 --> 00:28:17,360 Speaker 1: at this problem. But on the other hand, you are 459 00:28:17,440 --> 00:28:21,160 Speaker 1: seeing the bank stock reaction this morning, there is clearly 460 00:28:21,320 --> 00:28:24,359 Speaker 1: still a concern that even with the additional facility, banks 461 00:28:24,359 --> 00:28:26,920 Speaker 1: are going to have to go out and raise capital 462 00:28:27,000 --> 00:28:29,439 Speaker 1: and that's either going to be dilutive to shareholders or 463 00:28:29,440 --> 00:28:32,919 Speaker 1: wipe them out completely. And you know, Dan made the 464 00:28:32,960 --> 00:28:36,520 Speaker 1: point about when you're in crisis mode, you kind of 465 00:28:36,560 --> 00:28:39,280 Speaker 1: have to leave some of the issues of moral hazard 466 00:28:39,360 --> 00:28:42,320 Speaker 1: at the door, come back and solve them later, but 467 00:28:42,600 --> 00:28:45,560 Speaker 1: now might not be the best time. No, I thought 468 00:28:45,560 --> 00:28:50,160 Speaker 1: that was a great point that you like, you want 469 00:28:50,200 --> 00:28:53,400 Speaker 1: to like, oh, we're protecting the taxpayer, it's not a bailout. 470 00:28:53,440 --> 00:28:56,959 Speaker 1: It's not unlimited, there's finite. It's like exactly like if 471 00:28:57,000 --> 00:28:58,680 Speaker 1: you want to nip it in the bud, those are 472 00:28:58,720 --> 00:29:01,640 Speaker 1: the opposite of what you want to say. So I 473 00:29:01,680 --> 00:29:04,160 Speaker 1: think that's really interesting and maybe really telling about some 474 00:29:04,200 --> 00:29:07,160 Speaker 1: of the other bank stock weakness. And then just like 475 00:29:07,200 --> 00:29:10,120 Speaker 1: some of these interesting dimensions, you know, like about the 476 00:29:10,200 --> 00:29:14,040 Speaker 1: idiosync he I thought Dan described really well what made 477 00:29:14,440 --> 00:29:19,560 Speaker 1: Silicon Valley Bank unique, particularly having just a handful of 478 00:29:19,600 --> 00:29:22,800 Speaker 1: defective depositors. On paper, it looks like you have thousands 479 00:29:22,840 --> 00:29:25,920 Speaker 1: and thousands of depositors all around the world. In practice, 480 00:29:26,120 --> 00:29:28,520 Speaker 1: if they all have a few sort of top vcs 481 00:29:28,520 --> 00:29:30,960 Speaker 1: that they listen, they're all on the same what then 482 00:29:31,000 --> 00:29:33,680 Speaker 1: they only have a few deposit book face. And if 483 00:29:33,720 --> 00:29:38,640 Speaker 1: it's known that corporate deposits are much less sticky, then 484 00:29:39,040 --> 00:29:42,640 Speaker 1: you really like do create some like a flight risk? No. Absolutely, 485 00:29:42,680 --> 00:29:45,160 Speaker 1: to me, this is as much as sort of cultural 486 00:29:45,360 --> 00:29:48,280 Speaker 1: or social story as it is a financial one, where 487 00:29:48,320 --> 00:29:52,160 Speaker 1: you have this group of really tight knit depositors, all 488 00:29:52,160 --> 00:29:55,200 Speaker 1: of whom are talking to each other, are very plugged 489 00:29:55,240 --> 00:29:58,800 Speaker 1: in online, and also have a sort of tendency to 490 00:29:59,000 --> 00:30:02,240 Speaker 1: want to be first. I mean, you know you're talking 491 00:30:02,280 --> 00:30:04,760 Speaker 1: about Silicon Valley and move fast and break things and 492 00:30:04,800 --> 00:30:06,960 Speaker 1: all of that, Like they want to get out there 493 00:30:06,960 --> 00:30:10,600 Speaker 1: with the bragging rights about warning people of an impending 494 00:30:10,680 --> 00:30:14,719 Speaker 1: banking collapse, and so you know, to some extent they 495 00:30:14,720 --> 00:30:19,080 Speaker 1: were successful with that, but obviously they caused a larger problem. 496 00:30:19,160 --> 00:30:22,600 Speaker 1: And then I wouldn't want I don't want to underplay 497 00:30:22,880 --> 00:30:28,280 Speaker 1: the very subpar risk management. And I'm choosing my adjectives 498 00:30:28,400 --> 00:30:30,959 Speaker 1: very carefully here and I'm being very conservative and how 499 00:30:31,000 --> 00:30:34,240 Speaker 1: I describe this, But the hedging of the interest rate 500 00:30:34,280 --> 00:30:37,640 Speaker 1: exposure left a lot to be desired on the side 501 00:30:37,640 --> 00:30:41,560 Speaker 1: of SVB. Yeah, but you know, I do. I mean, 502 00:30:41,600 --> 00:30:45,200 Speaker 1: it was clearly mistakes were made, to say the least, 503 00:30:45,320 --> 00:30:47,400 Speaker 1: but like you, I get it right. It's like they 504 00:30:47,440 --> 00:30:50,560 Speaker 1: have a costly franchise to run because it's obviously so 505 00:30:50,800 --> 00:30:55,360 Speaker 1: high touch. You get this huge flight of capital inflows 506 00:30:55,680 --> 00:30:58,800 Speaker 1: at a time of very low interest rate when there 507 00:30:58,840 --> 00:31:01,640 Speaker 1: isn't yield. You have to pay for that high touch service. 508 00:31:02,000 --> 00:31:04,360 Speaker 1: So I do sort of in my mind, like at 509 00:31:04,440 --> 00:31:08,720 Speaker 1: least get why they felt this impulse which many banks 510 00:31:08,760 --> 00:31:10,800 Speaker 1: don't do, to like just go so far out on 511 00:31:10,880 --> 00:31:13,040 Speaker 1: the yield curve. Obviously turned out to be sort of 512 00:31:13,080 --> 00:31:16,920 Speaker 1: like catastrophic, but at least the story sort of like 513 00:31:16,960 --> 00:31:20,160 Speaker 1: fits together of why they ended up in that position. Well, 514 00:31:20,200 --> 00:31:24,160 Speaker 1: it's also interest rate exposure squared, right, because all your 515 00:31:24,240 --> 00:31:27,280 Speaker 1: depositors and everyone you're lending money to is in the 516 00:31:27,320 --> 00:31:30,640 Speaker 1: tech industry and they're massively affected by higher interest rates. 517 00:31:30,680 --> 00:31:32,960 Speaker 1: And at the same time, all your assets are in 518 00:31:33,040 --> 00:31:36,520 Speaker 1: long duration stuff that's also impacted by higher interest rates. 519 00:31:36,840 --> 00:31:40,800 Speaker 1: Seems to be a bad situation, very bad, and hopefully 520 00:31:41,520 --> 00:31:46,000 Speaker 1: for the broader economy, etc. Hopefully the unique badness of 521 00:31:46,040 --> 00:31:49,240 Speaker 1: that situation means it doesn't spread. But I think it's 522 00:31:49,320 --> 00:31:53,440 Speaker 1: way too early to know whether, you know, people would 523 00:31:53,440 --> 00:31:54,760 Speaker 1: just say, look, I don't want to have money in 524 00:31:54,760 --> 00:31:56,960 Speaker 1: a regional bank. What's the point I can be in chase. 525 00:31:57,040 --> 00:31:59,720 Speaker 1: So we'll see. Yeah, more to come, but for now, 526 00:32:00,120 --> 00:32:02,400 Speaker 1: we leave it there. Let's leave it there. Okay. This 527 00:32:02,480 --> 00:32:05,440 Speaker 1: has been another episode of the Old Thoughts podcast. I'm 528 00:32:05,440 --> 00:32:08,520 Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy 529 00:32:08,600 --> 00:32:11,320 Speaker 1: Alloway and I'm Joe wi Isn'tal. You can follow me 530 00:32:11,440 --> 00:32:15,120 Speaker 1: on Twitter at the Stalwart. Follow our guest Dan Davies, 531 00:32:15,200 --> 00:32:21,160 Speaker 1: phenomenal Twitter user at d squared Digest. Follow our producers 532 00:32:21,200 --> 00:32:25,760 Speaker 1: Kermen Rodriguez at Kerman Arman and Dash Bennett at Dashbot. 533 00:32:26,120 --> 00:32:28,800 Speaker 1: Follow all of the Bloomberg podcasts, some to the handle 534 00:32:28,920 --> 00:32:32,040 Speaker 1: at podcasts, and for more Odd Lots content, go to 535 00:32:32,120 --> 00:32:35,760 Speaker 1: Bloomberg dot com slash odd Lots, where we'll post the transcripts. 536 00:32:35,760 --> 00:32:38,240 Speaker 1: Tracy and I blog, and we have a weekly newsletter. 537 00:32:38,280 --> 00:32:40,360 Speaker 1: Go there sign up for it. Thanks for listening.