WEBVTT - Dan Davies On What Brought Down Silicon Valley Bank 0:00:10.680 --> 0:00:14.360 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:14.440 --> 0:00:18.040 I'm Tracy Alloway and I'm Joe wisn't thal Joe. A 0:00:18.200 --> 0:00:22.200 lot has happened in the past few days. I don't 0:00:22.239 --> 0:00:25.360 even know where to start, really, yeah, I mean I 0:00:25.360 --> 0:00:29.319 don't either, but I would say, look, the developments I 0:00:29.360 --> 0:00:33.080 think related to Silicon Valley Bank, the speed of the 0:00:33.159 --> 0:00:37.360 run and the speed of the response are extraordinary, and 0:00:38.280 --> 0:00:41.360 it feels to me like this episode could change like 0:00:41.520 --> 0:00:43.880 how banks work in this country. I mean, it's incredible. 0:00:43.880 --> 0:00:47.600 It's like all deposits seeming like they're de facto guaranteed, 0:00:48.080 --> 0:00:51.440 changing the collateral schedule so that banks don't have to 0:00:51.479 --> 0:00:54.320 take a mark to market hit on some of their assets. 0:00:54.320 --> 0:00:57.480 This is extraordinary stuff here, absolutely, And I am going 0:00:57.560 --> 0:01:01.480 to start this particular Lots with the caveat which is 0:01:01.520 --> 0:01:04.760 that obviously things are very fast moving and we're trying 0:01:04.800 --> 0:01:09.240 to get some emergency episodes out as quickly as possible. 0:01:09.640 --> 0:01:12.679 So this is our first entry into what I'm sure 0:01:12.800 --> 0:01:15.840 will be very you know, a lot more on this topic. 0:01:16.240 --> 0:01:18.640 But we are going to be speaking with Dan Davies. 0:01:18.800 --> 0:01:22.280 He is a managing director at Frontline Analysts. He's also 0:01:22.319 --> 0:01:26.120 a former regulatory economist at the Bank of England. He 0:01:26.319 --> 0:01:29.080 was a banking analyst for a very long time and 0:01:29.120 --> 0:01:31.840 the author of Lying for Money, which is a book 0:01:31.959 --> 0:01:35.520 all about financial fraud, A very good book. I might add, Dan, 0:01:35.840 --> 0:01:38.000 thank you so much for coming on. All thoughts. Oh, 0:01:38.080 --> 0:01:40.360 thanks very much for having me. It's always news whether 0:01:40.360 --> 0:01:44.960 people want to. I was going to say at short 0:01:45.000 --> 0:01:47.680 notice as well, but we appreciate you coming on. So 0:01:47.720 --> 0:01:50.960 why don't we just start with a very big picture question. 0:01:51.080 --> 0:01:54.480 But how would you characterize the events of the past 0:01:54.480 --> 0:01:58.200 week or so. I think what's happened is that we're 0:01:58.240 --> 0:02:01.720 seeing why certain kinds of deposits are considered to be 0:02:01.760 --> 0:02:07.160 hot money. At the end of the day, you've got 0:02:07.400 --> 0:02:12.280 corporate deposits, which people like to think are sticky, and 0:02:12.480 --> 0:02:15.560 wealth management deposits in signature in New York, which is 0:02:15.560 --> 0:02:18.880 the other bank that's been shut down and taken over 0:02:18.880 --> 0:02:22.119 by the FDIC this weekend, which people like to think 0:02:22.160 --> 0:02:26.880 are sticky. But their big amounts of money. It's not 0:02:27.000 --> 0:02:29.720 like a few thousand in the bank that people have 0:02:29.800 --> 0:02:32.520 for their transactions. It's a sum of money that people 0:02:32.560 --> 0:02:34.640 get worried about if they they're going to lose it, 0:02:35.200 --> 0:02:37.640 and that means it can be sticky for a while, 0:02:37.800 --> 0:02:41.200 but when it moves, it really moves. And that's why 0:02:41.320 --> 0:02:46.679 most regulators don't let you fund long dated assets out 0:02:46.720 --> 0:02:49.640 of that kind of deposits or put limits on your 0:02:49.639 --> 0:02:53.280 ability to do it. So I didn't. So what was 0:02:53.360 --> 0:02:59.440 this case with Silicon Valley Bank specifically, in which it 0:02:59.600 --> 0:03:03.120 would I mean, not only did it accumulate an extraordinary 0:03:03.120 --> 0:03:07.920 amount of a corporate deposit, but also highly all more 0:03:08.000 --> 0:03:10.359 or less in sort of one industry. Yeah, I mean, well, 0:03:10.440 --> 0:03:14.040 Silicon Valley Bank, according to everyone I've spoken to about it, 0:03:14.760 --> 0:03:19.160 we're just very good at customer service with tech companies 0:03:19.280 --> 0:03:22.840 in Silicon Valley. And there was no particular magic to 0:03:22.880 --> 0:03:25.880 the business model. It's just they built themselves around that. 0:03:26.360 --> 0:03:28.000 They did a lot of business on the golf course, 0:03:28.040 --> 0:03:32.280 I'm told. And when you had a venture capital funded 0:03:32.520 --> 0:03:36.400 startup which might easily have ten million dollars in the bank, 0:03:37.160 --> 0:03:40.480 they would be the guys who would onboard you, easily, 0:03:40.960 --> 0:03:43.320 give you a bunch of corporate credit cards for your 0:03:43.400 --> 0:03:45.960 kind of teenage coders who've never had a credit card before, 0:03:46.480 --> 0:03:50.200 and just generally look after you in a way. The 0:03:50.200 --> 0:03:54.640 other banks weren't as sharp on the consumer customer service. 0:03:55.000 --> 0:03:57.560 My wife used to be involved in a tech startup 0:03:57.680 --> 0:04:00.440 in New York City, and she said, like every elevator 0:04:00.520 --> 0:04:03.680 event where startups would like get money or like raised 0:04:03.680 --> 0:04:07.160 from vcs, there are always just reps from Silicon Value Bank. 0:04:07.480 --> 0:04:10.440 They're ready to like show people how to open up 0:04:10.440 --> 0:04:12.920 an account like instantly, And that was just like part 0:04:12.920 --> 0:04:16.440 of the process of raising VC money was basically part 0:04:16.480 --> 0:04:19.520 and parcel with getting your Silicon Value Bank account, you know, 0:04:19.560 --> 0:04:22.039 and being good at gathering those deposits. It means that 0:04:22.120 --> 0:04:25.280 you gather a huge amount of those deposits. And then 0:04:25.480 --> 0:04:27.320 through the last couple of years, when you had a 0:04:27.480 --> 0:04:32.919 massive boom in terms of vcs putting money into their portfolio, companies, 0:04:33.240 --> 0:04:37.480 they just got these huge inflows of deposits. So, I mean, 0:04:37.520 --> 0:04:39.480 one of the most difficult things to manage your banking 0:04:40.000 --> 0:04:44.679 is rapid growth. And in particular, you had rapid growth 0:04:44.680 --> 0:04:47.159 in deposits at a time when interest rates were very low, 0:04:47.480 --> 0:04:51.240 so you know, the actual equilibrium covering their cost of 0:04:51.320 --> 0:04:54.800 business spread on these deposits. You know, they might have 0:04:54.800 --> 0:04:57.599 had to pay negative fifty basis points of interest rates 0:04:57.760 --> 0:05:00.200 and the company doesn't want to do that because it's 0:05:00.200 --> 0:05:02.800 going to damage the franchise in the water. The company 0:05:02.880 --> 0:05:06.640 certainly doesn't want to turn business away. So what they 0:05:06.800 --> 0:05:09.320 end up doing is putting the money in how you 0:05:09.480 --> 0:05:12.279 yield of securities, and to do that, you've got to 0:05:12.320 --> 0:05:15.479 move out from the maturity curve. And this is the 0:05:15.520 --> 0:05:18.719 sort of thing that are switched on Bank Supervisor ought 0:05:18.800 --> 0:05:22.000 to be stopping you from doing right. So I do 0:05:22.080 --> 0:05:24.760 want to get into the regulation aspect of it, but 0:05:24.880 --> 0:05:29.520 before we do, just on SVB specifically, I mean, it 0:05:29.560 --> 0:05:33.159 seems to me like you had these inflows of hot money. 0:05:33.400 --> 0:05:38.240 You had a concentration of depositors in the tech industry 0:05:38.320 --> 0:05:42.919 where money tends to be very volatile and momentum driven, 0:05:42.960 --> 0:05:45.160 and certainly over the past year you can imagine a 0:05:45.160 --> 0:05:48.400 lot of people were pulling stuff out, and so you 0:05:48.440 --> 0:05:53.920 had the sort of classic asset liability duration mismatch. But 0:05:54.080 --> 0:05:59.560 why didn't they hedge more? Because it would seem like 0:05:59.600 --> 0:06:04.840 this was an obvious vulnerability just based on the dynamic 0:06:04.920 --> 0:06:07.520 that I just described. Yeah, I think that's you know, 0:06:07.560 --> 0:06:10.039 that's a really really good question that presumably they're going 0:06:10.080 --> 0:06:12.640 to be asking themselves right now. And I think to 0:06:12.760 --> 0:06:17.400 some extent, they haven't realized the extent to which their 0:06:17.400 --> 0:06:21.640 customers were not separate entities in terms of their financial 0:06:21.680 --> 0:06:24.479 decision making. So you know, you might have thought you 0:06:24.520 --> 0:06:29.000 had some diversification there, but in fact, if all these 0:06:29.040 --> 0:06:32.560 people are funded by the same few vcs, and all 0:06:32.600 --> 0:06:35.560 those vcs are on the same WhatsApp group, they're actually 0:06:35.600 --> 0:06:40.839 behaviorally this isn't a thousand guys with ten million each. 0:06:41.440 --> 0:06:45.279 It's one big conglomerate of guys with ten billion. And 0:06:45.960 --> 0:06:48.920 the real trouble was though, that their commercial incentives were 0:06:48.920 --> 0:06:53.240 completely the other way. You've got these deposits. You're providing 0:06:53.240 --> 0:06:57.440 this excellent customer service, which was the backbone of their franchise, 0:06:57.800 --> 0:07:01.000 that costs a lot of money. So you've actually got 0:07:01.040 --> 0:07:03.560 to do something that earns you a bit on the 0:07:03.560 --> 0:07:07.919 asset side, or give up the business. And if you 0:07:08.000 --> 0:07:10.560 start hedging out the risk, then you're hedging out the 0:07:10.600 --> 0:07:13.800 return as well. And so you know, they could have 0:07:13.840 --> 0:07:17.640 managed it more smarter. And I think you pointed to 0:07:17.680 --> 0:07:21.320 a story showing that they had discussed internally whether they 0:07:21.320 --> 0:07:24.800 should be reducing that risk position, but all of the 0:07:24.840 --> 0:07:27.920 incentives were to push them in the direction of taking 0:07:27.960 --> 0:07:32.040 that interest rate risk, and then obviously interest rates themselves 0:07:32.280 --> 0:07:35.080 moved quite a bit faster than anyone was expecting, so 0:07:35.200 --> 0:07:37.679 they were just caught on the wrong side of the trade. Yeah, 0:07:37.720 --> 0:07:40.240 this was a story that I wrote with some of 0:07:40.240 --> 0:07:44.160 our Bloomberg colleagues, but it sites internal documents from SVB 0:07:44.360 --> 0:07:48.240 where they discussed this exact issue, and they were actually 0:07:48.320 --> 0:07:52.200 talking about the need to reduce duration exposure, so exposure 0:07:52.240 --> 0:07:55.200 to interest rates, and they had an estimated cost for 0:07:55.320 --> 0:07:58.240 how much it would affect their net interest margin or 0:07:58.280 --> 0:08:00.440 their earnings, and I think they say it was in 0:08:00.480 --> 0:08:02.920 the millions of dollars, you know, eighteen million the first 0:08:02.960 --> 0:08:05.200 year and then going up to thirty six million over 0:08:05.200 --> 0:08:08.440 the next few years. And so it seems there was 0:08:08.440 --> 0:08:28.320 a conscious decision not to actually do it. Absolutely. Yeah, Dan, 0:08:28.720 --> 0:08:32.360 you know, one of the you mentioned that perhaps one 0:08:32.400 --> 0:08:35.760 of the sort of analytical errors that either the bank 0:08:35.840 --> 0:08:39.280 made or regulators made was not appreciating that they did 0:08:39.320 --> 0:08:43.120 not actually have really thousands and thousands of depositors, but 0:08:43.240 --> 0:08:45.640 actually just a handful of depositors who may have all 0:08:45.679 --> 0:08:48.640 taken their cues from a small group of vcs and 0:08:48.679 --> 0:08:53.720 a few WhatsApp rooms. The scale of the withdrawals that 0:08:53.760 --> 0:08:59.120 have been reported on, particularly that happened on Thursday or Friday. 0:08:59.280 --> 0:09:03.839 Is there any amount of sort of like um liquidity 0:09:04.000 --> 0:09:07.200 requirements that could have satisfied them, because there's talking to like, oh, 0:09:07.200 --> 0:09:09.280 they should have had more on hand, they should have 0:09:09.320 --> 0:09:13.080 been treated, you know, some of the DoD frank requirements 0:09:13.200 --> 0:09:16.000 should have been extended to a bank of that size, 0:09:16.480 --> 0:09:19.080 But like, is there a level of run that can 0:09:19.160 --> 0:09:23.040 happen in which no amount of like preparation can really 0:09:23.080 --> 0:09:25.560 prepare for. Well, it's kind of difficult to know what 0:09:25.600 --> 0:09:28.840 the counter factual was. Sure, just in share amounts of 0:09:28.960 --> 0:09:32.280 numbers of the amount of money that left, there was 0:09:32.320 --> 0:09:34.400 nothing that could have stood in the way of us. Yeah, okay, 0:09:34.520 --> 0:09:39.000 that's correct. On the other hand, there's no quantum of 0:09:39.200 --> 0:09:41.920 funds they could have had hanging around that would have 0:09:41.920 --> 0:09:44.480 stood up to that kind of a deposit run. But 0:09:45.000 --> 0:09:47.719 you have to ask whether the room would have been 0:09:47.760 --> 0:09:49.920 so big or whether it would have happened at all 0:09:50.320 --> 0:09:56.040 if they've managed financing more conservatively. Is the other part 0:09:56.120 --> 0:09:58.640 of this is that it's not just the kind of 0:09:58.800 --> 0:10:02.920 hot money on the deposit side. There were big unrealized 0:10:02.960 --> 0:10:06.520 losses on the securities portfolio because they'd kept that interest 0:10:06.600 --> 0:10:10.240 rate risk there. And if you're hanging around with an 0:10:10.280 --> 0:10:14.280 unrealized loss on securities that's bigger than your shareholders funds. 0:10:14.880 --> 0:10:17.440 You know, the former bank regulator in me says, if 0:10:17.480 --> 0:10:19.440 you're doing that, then something bad is going to happen 0:10:19.520 --> 0:10:21.679 soon or later. You know, it's not a good idea 0:10:21.760 --> 0:10:25.640 to ever let yourself get into that position, right, So, 0:10:26.160 --> 0:10:29.280 something I wanted to ask is just on the bond 0:10:29.440 --> 0:10:33.880 portfolio losses, which have obviously garnered a lot of attention, 0:10:34.800 --> 0:10:37.280 A lot of these were unrealized losses. They were on 0:10:37.360 --> 0:10:42.079 bonds that were classified as held to maturity, which means 0:10:42.520 --> 0:10:45.000 we're going to hold them into maturity, and so we 0:10:45.080 --> 0:10:47.440 don't have to take mark to market losses on them 0:10:47.640 --> 0:10:51.000 unless you know they're impaired in some way, because we 0:10:51.120 --> 0:10:55.320 fully expect to get the money back, versus securities that 0:10:55.360 --> 0:10:58.840 are usually held as available for sale, where because you 0:10:58.920 --> 0:11:02.320 might sell them at any point in time, you would 0:11:02.400 --> 0:11:04.960 mark them to market and those losses would show up 0:11:04.960 --> 0:11:08.160 on your balance sheet. So, because of the proportion of 0:11:08.200 --> 0:11:12.200 bonds held by SVB in HTM, and because of the 0:11:12.240 --> 0:11:16.880 extent of the losses, there is now this concern about 0:11:17.040 --> 0:11:21.520 broader debt and interest rate exposure in the banking system, 0:11:21.600 --> 0:11:25.040 and especially at some of the smaller banks where they 0:11:25.120 --> 0:11:30.199 might have been more pressured to generate net income margin 0:11:30.400 --> 0:11:34.400 by taking additional duration exposure. Can you talk to us 0:11:34.440 --> 0:11:38.600 about those concerns. How worried should we be about other 0:11:38.720 --> 0:11:42.280 banks versus how much of that this is maybe an 0:11:42.480 --> 0:11:46.760 SVB specific story where it's a mix of FLDY depositors 0:11:46.880 --> 0:11:51.200 plus a lot of duration exposure. Yeah. Well, it's clear 0:11:51.240 --> 0:11:55.239 that the Federal Reserve is concerned that it's not necessarily 0:11:55.280 --> 0:11:59.160 confined to those two backs because this new facility they've 0:11:59.200 --> 0:12:03.439 put up there, the bank term Finance program just looks 0:12:03.480 --> 0:12:06.200 to me like a term finance program that's there for 0:12:06.280 --> 0:12:08.800 the FED to say, if you've got any of these 0:12:08.880 --> 0:12:11.240 kind of things, if you've got any of these problems 0:12:11.280 --> 0:12:14.280 hanging around on your balance sheets, the Fed is put 0:12:14.320 --> 0:12:21.080 together this term funding facility in order to allow banks 0:12:21.080 --> 0:12:23.240 that have got some kind of problem or something on 0:12:23.240 --> 0:12:25.040 their balk sheet that they need to get rid of 0:12:25.200 --> 0:12:28.400 and trade out of those positions in a reasonably graceful 0:12:28.400 --> 0:12:31.960 and orderly fashion. And you can tell that there this 0:12:32.160 --> 0:12:35.000 is the concern because they've said that they will provide 0:12:35.000 --> 0:12:38.040 funding against the face value or the power value of 0:12:38.280 --> 0:12:40.960 any of these bonds, rather than the market value, which 0:12:41.000 --> 0:12:44.800 could be thirty percent. Other How extraordinary is this, because 0:12:44.840 --> 0:12:48.880 this to me seems like a huge, a pretty extraordinary 0:12:48.960 --> 0:12:53.319 like intervention to say, okay, these you can pledge these 0:12:53.360 --> 0:12:55.959 assets as clatter or potentially, as you said, thirty percent 0:12:56.080 --> 0:12:59.480 higher than they're currently trading. And isn't this like a 0:12:59.600 --> 0:13:04.319 deft actel capital injection? Basically it's it's not quite that. 0:13:04.920 --> 0:13:08.240 But obviously, if you're sort of got bonders valued at 0:13:08.240 --> 0:13:12.440 seventy and you're lending a hundred against it, then slightly 0:13:12.480 --> 0:13:14.840 more than half of your loan, a third of your 0:13:14.920 --> 0:13:19.600 loan is unsecured. It's not unknown for central banks to 0:13:19.720 --> 0:13:24.320 lend unsecured in emergency situations. It would be a complete 0:13:24.320 --> 0:13:27.319 departure if they started doing that in the normal course 0:13:27.320 --> 0:13:32.000 of business. But this does look like it's a specific, 0:13:32.240 --> 0:13:37.080 time limited hostility that's going to go on for a year, 0:13:37.600 --> 0:13:39.800 and where I would expect that most of all the 0:13:39.840 --> 0:13:41.800 borrowing that's ever going to be done moderate is going 0:13:41.840 --> 0:13:43.679 to be taken out in the next couple of weeks. 0:13:45.200 --> 0:13:47.640 You know, you touched on this earlier, but you can 0:13:47.679 --> 0:13:51.200 you talk a little bit more about where regulators were 0:13:51.720 --> 0:13:55.840 specifically for SVB. But I guess on the wider bond 0:13:56.040 --> 0:13:59.800 exposure question, because it does seem like one of the 0:13:59.800 --> 0:14:04.600 things that's emerging now is maybe the smaller banks, the 0:14:04.679 --> 0:14:09.800 regional lenders, escaped some of the extra regulatory scrutiny that 0:14:09.920 --> 0:14:14.800 was heaped on the larger systemically significant banks in recent years, 0:14:14.800 --> 0:14:18.120 and so now they are more vulnerable to the threat 0:14:18.160 --> 0:14:21.520 of both deposit flight and higher interest rates. Well, yeah, 0:14:21.560 --> 0:14:24.640 they did. I mean, what basically happened is that in 0:14:24.680 --> 0:14:29.479 the USA there were a couple of buzzle international standards 0:14:29.800 --> 0:14:32.600 that were meant to address pretty much this exact risk, 0:14:33.480 --> 0:14:37.320 which were only implemented for a very small number of 0:14:37.360 --> 0:14:41.600 the largest internationally active banks. And a lot of that 0:14:41.800 --> 0:14:45.320 appears to be because medium sized and community banks in 0:14:45.360 --> 0:14:50.200 the USA have got a strong political lobby. Not running 0:14:50.240 --> 0:14:54.840 this risk was, as we discussed, a threat to the earnings, 0:14:54.880 --> 0:14:58.000 and so people decided that they were going to be 0:14:58.040 --> 0:15:00.880 hard to get these things restricted to the very biggest banks, 0:15:01.360 --> 0:15:06.000 and as a result, Silicon Valley Bank wasn't required to 0:15:06.040 --> 0:15:10.280 calculate or report some of what I'd regard as the 0:15:10.360 --> 0:15:15.640 key regulatory ratios with regard to its use of hot 0:15:15.680 --> 0:15:19.720 money to financial liquid assets, and it's kind of high 0:15:19.800 --> 0:15:23.720 quality liquid assets on HAPD. Those policies were just really 0:15:24.200 --> 0:15:27.160 meant to be managed by the company itself and by 0:15:27.160 --> 0:15:30.680 the company in discussion with its supervisor. But because there's 0:15:30.760 --> 0:15:35.000 no hard and fast regulatory number being calculated there, it's 0:15:35.040 --> 0:15:37.080 easy to lose track. And it seems that that's what's 0:15:37.080 --> 0:15:41.200 happened Dan, just you know, sort of zooming out for 0:15:41.240 --> 0:15:44.880 a second. And as someone who analyzes banks around the world, 0:15:45.160 --> 0:15:50.440 how unusual is the sheer number of banks regional community 0:15:50.480 --> 0:15:53.280 banks that exist in the United States relative to other 0:15:53.400 --> 0:15:57.960 rich countries. It's not all known. It's not as extreme 0:15:58.040 --> 0:16:00.560 as in Germany, where you have lots of with whats 0:16:00.560 --> 0:16:04.240 and lots of really really small savings banks, but it 0:16:04.440 --> 0:16:07.760 is quite unusual to have that much of the banking 0:16:07.800 --> 0:16:12.600 system in small kind of local savings banks, you know. 0:16:12.680 --> 0:16:15.240 And then you have these things like Silicon Valley Bank, 0:16:15.360 --> 0:16:21.040 which grew so quickly that although it was a local 0:16:21.400 --> 0:16:25.320 Silicon Valley and a local tech industry entity as recently 0:16:25.320 --> 0:16:28.080 as four or five years ago, by the time both 0:16:28.480 --> 0:16:30.600 last week it was the sixteenth biggest bank in the 0:16:30.640 --> 0:16:35.040 United States of America by asset sis. So one of 0:16:35.040 --> 0:16:37.600 the things that seems kind of inevitable now is the 0:16:37.680 --> 0:16:41.320 idea that you are probably going to see some consolidation 0:16:41.480 --> 0:16:43.960 of smaller banks and you are going to see more 0:16:44.000 --> 0:16:46.920 money flowing into some of the big guys if there is, 0:16:47.080 --> 0:16:49.680 you know, concern about the health of the banking system. 0:16:49.720 --> 0:16:54.080 And I was just talking to one tech person just 0:16:54.160 --> 0:16:57.160 this morning. He just got his oh, I should say, 0:16:57.200 --> 0:17:00.400 we are recording this on Monday, March thirteenth, but he 0:17:00.640 --> 0:17:04.800 just got some of his first wire transfer from SVB 0:17:05.000 --> 0:17:08.439 out and he's moving it into JP Morgan. So that 0:17:08.560 --> 0:17:12.400 seems kind of inevitable money going into the bigger gesibs. 0:17:12.520 --> 0:17:16.280 And also maybe the smaller banks have to start raising 0:17:16.400 --> 0:17:19.520 their deposit rates as they try to hold on or 0:17:19.600 --> 0:17:24.400 compete for more customers. And yeah, I think so when 0:17:24.400 --> 0:17:27.080 you have something like this, you're always going to see 0:17:27.119 --> 0:17:29.320 what they call a flight to safety or a flight 0:17:29.400 --> 0:17:35.320 to quality. And in the case of deposit runs like this, 0:17:36.000 --> 0:17:38.879 because people look at the too big to fail banks 0:17:39.560 --> 0:17:44.760 prosing that they've got a defacto guarantee despite the fact 0:17:44.760 --> 0:17:47.280 that actually what we've seen in the case of the 0:17:47.480 --> 0:17:50.960 Signature and Silt and Valley is that the fd I 0:17:51.080 --> 0:17:55.040 see seems to be quite happy to extend coverage to 0:17:55.240 --> 0:17:58.920 one insured deposits, even in this kind of second tier 0:17:59.080 --> 0:18:03.080 and Signatures actually quite small bank, as long as they 0:18:03.080 --> 0:18:06.439 are reasonably happy about the quality of the assets, and 0:18:06.560 --> 0:18:10.960 as long as there is a decent cushion of unsecured bondholders. 0:18:11.080 --> 0:18:14.359 Because obviously the bondholders in these banks are going to 0:18:14.400 --> 0:18:16.480 be taking loss, it's they're covered in the way that 0:18:16.520 --> 0:18:20.439 the latch depositors are. Well, this is a question I 0:18:20.480 --> 0:18:22.359 was going to ask you, which is that, like, are 0:18:22.440 --> 0:18:27.040 all deposits de facto now ensured at any size? Like 0:18:27.119 --> 0:18:31.920 can you envision a scenario of future bank failure in 0:18:31.960 --> 0:18:35.240 which depositors aren't made all? Or is this over if 0:18:35.400 --> 0:18:39.080 if you're a depositor, you'll be insured. It's actually quite 0:18:39.200 --> 0:18:43.119 unusual for depositors of any sort of fools money in 0:18:43.160 --> 0:18:47.200 a bank resolution. Usually you have a cushion of bondholders 0:18:47.200 --> 0:18:50.719 today and de facto deposits are considered to be senior 0:18:50.840 --> 0:18:54.760 to bondholders. Can only think it's happened a couple of 0:18:54.760 --> 0:18:57.840 times in the USA, and there are actually regulations on 0:18:57.880 --> 0:19:01.320 the way to just generally say that you've got to 0:19:01.359 --> 0:19:04.520 have a layer of bondholders in there, which are you know, 0:19:04.640 --> 0:19:08.119 they're not going concerned capital, but they're an extra cushion 0:19:08.160 --> 0:19:11.159 for the deposits. So I don't think anyone's ever really 0:19:11.640 --> 0:19:14.800 thought of deposits of any sort as being money at risk, 0:19:15.080 --> 0:19:17.160 you know, I mean, the depositors of Silicon Valley Bank 0:19:17.240 --> 0:19:19.320 didn't think of their deposits as being money at risk 0:19:19.920 --> 0:19:23.160 before Wednesday Thursday of last week. And it's turned out 0:19:23.160 --> 0:19:25.119 that they were correct. It's turned out that they're getting 0:19:25.760 --> 0:19:29.160 all of their money back. So one thing that I'm 0:19:29.200 --> 0:19:32.159 still trying to get a handle on is this notion 0:19:32.240 --> 0:19:35.840 that it's it's not as if banks do not have 0:19:36.040 --> 0:19:40.520 access to emergency lending facilities, you know, before the events 0:19:40.600 --> 0:19:43.160 of the weekend and the announcement of the new FED facility. 0:19:43.440 --> 0:19:45.800 And this is something that Joe and I talked about, 0:19:45.880 --> 0:19:50.520 I think just last month, the episode on banks tapping 0:19:50.560 --> 0:19:54.000 the discount window. And you also have the possibility of 0:19:54.119 --> 0:19:59.040 banks borrowing from the FHLBS, the federal homelan banks, and 0:19:59.160 --> 0:20:03.040 yet it's teams like there was an issue at least 0:20:03.040 --> 0:20:06.880 when it comes to SVB, But what could have happened there? 0:20:06.960 --> 0:20:11.200 Why couldn't it tap more short term cash from either 0:20:11.240 --> 0:20:14.199 the FHLBS or the discount window or was it the 0:20:14.280 --> 0:20:17.639 case that you know, at some point no amount of 0:20:17.720 --> 0:20:20.479 short term liquidity is actually going to cover the amount 0:20:20.480 --> 0:20:23.400 of deposit outflows that the bank was seeing. I think 0:20:23.400 --> 0:20:26.080 it's the second of those. Really, there did seem to 0:20:26.119 --> 0:20:30.959 be something going along with the FHLB where just simply 0:20:31.080 --> 0:20:34.320 Silicon Valley Bank was very large when you compared it 0:20:34.400 --> 0:20:38.600 to the San Francisco Federal Homeland Bank for the Federal 0:20:38.640 --> 0:20:42.800 Reserve and the other discount window operations. You have access, 0:20:42.840 --> 0:20:47.160 but it's access against collateral. Previously to this week, it 0:20:47.200 --> 0:20:51.160 was against collateral market value. So if you've got a 0:20:51.520 --> 0:20:54.200 mark to market loss on that portfolio, you can only 0:20:54.280 --> 0:20:57.719 raise money against a haircut on the market value. And 0:20:57.800 --> 0:21:00.480 it's going to be the right collateral broad together in 0:21:00.480 --> 0:21:04.119 the right place at the right time. So as you can, 0:21:04.320 --> 0:21:07.879 you know, in ordinary situations, you can always deal with 0:21:07.920 --> 0:21:11.480 the ordinary problems of banking. What you can't deal with 0:21:11.680 --> 0:21:15.800 is something absolutely kind of off the chance, crazy like 0:21:15.840 --> 0:21:34.880 we saw on Thursday and Friday last week. What does 0:21:34.920 --> 0:21:40.480 it tell you if anything that no private buyer stepped up, 0:21:40.520 --> 0:21:43.520 because as you said, you know, they had great customer service, 0:21:43.560 --> 0:21:46.320 there's great product fit that seemed to really fit with 0:21:46.359 --> 0:21:48.840 the valley. It seems like, you know, some banks probably 0:21:48.920 --> 0:21:54.000 kind of offer commodity banking services and Silicon Valley Bank didn't, 0:21:54.040 --> 0:21:56.639 and they seem to have some sort of unique franchise value. 0:21:56.680 --> 0:21:59.639 A lot of people like the bank. What should we 0:21:59.680 --> 0:22:02.080 read into the fact that there was no buyer and 0:22:02.160 --> 0:22:05.439 also what is your take on whether it should have 0:22:05.440 --> 0:22:09.840 been sold to a g SIB like a Chase, an 0:22:09.960 --> 0:22:12.880 entity that could have easily absorbed it. I'm genuinely surprised 0:22:12.880 --> 0:22:17.760 that didn't happen. The London operations, the UK subsidiary was 0:22:17.840 --> 0:22:22.280 brought by HSBC over the weekend and it looks like 0:22:22.600 --> 0:22:27.760 HSBC have brought themselves a small because it's obviously small 0:22:27.800 --> 0:22:31.680 compared to the overall bank, but nice little local tech 0:22:31.760 --> 0:22:38.399 banking business. The thing about banks is that when banks 0:22:38.440 --> 0:22:42.120 go into resolution, all sorts of strange things start kind 0:22:42.119 --> 0:22:44.680 of bubbling up, and things that you never knew were 0:22:44.720 --> 0:22:47.840 going on tend to be uncovered. So people tend to 0:22:47.880 --> 0:22:51.280 be a little bit risk averse. But yes, I'm surprised 0:22:51.400 --> 0:22:55.800 that none of the big players felt that they could 0:22:55.800 --> 0:22:59.359 buy this one, although you know that's still a possibility 0:22:59.440 --> 0:23:03.080 over the coming which the FDIC is still, as I understand, 0:23:03.119 --> 0:23:05.840 it's looking to sell this thing as a going concern, 0:23:06.200 --> 0:23:09.359 as an operating business. So it might be that they'll 0:23:09.400 --> 0:23:13.000 just keep on doing their due diligence by their time 0:23:13.000 --> 0:23:15.000 and bid for it in the auction. So what are 0:23:15.040 --> 0:23:19.359 you looking out for going forward? And in terms of 0:23:19.480 --> 0:23:23.199 wider contagion, because you know, as I mentioned, it's Monday, 0:23:23.359 --> 0:23:26.560 March thirteenth, there's a lot happening. There will, no doubt 0:23:26.680 --> 0:23:29.000 be a lot of developments that have happened by the 0:23:29.000 --> 0:23:32.439 time we release this episode, but for now, there are 0:23:32.560 --> 0:23:35.879 quite a few bank stocks that are down, which you know, 0:23:35.960 --> 0:23:39.399 maybe that makes sense because the Federal Reserve Facility, the 0:23:39.440 --> 0:23:42.240 new one, is going to help in terms of some 0:23:42.320 --> 0:23:45.240 of those bomb losses, but it's not necessarily going to 0:23:45.280 --> 0:23:49.040 do anything for equity holders, and so there's an expectation 0:23:49.080 --> 0:23:51.840 that banks will have to raise additional capital. But what 0:23:51.920 --> 0:23:54.560 are you on the lookout for. I think I want 0:23:54.600 --> 0:23:59.200 to look out for a real signs that the authorities 0:23:59.200 --> 0:24:02.480 are taking this because the one thing we learned over 0:24:02.520 --> 0:24:06.200 the kind of great financial crisis, and then again those 0:24:06.240 --> 0:24:07.840 of us who are active in Europe learned it in 0:24:07.840 --> 0:24:10.520 the euro crisis is that if you're dealing with the 0:24:10.560 --> 0:24:14.560 crisis of market confidence, you need to bring the absolute 0:24:14.880 --> 0:24:17.600 entire power of the state and the central bank to bear. 0:24:18.160 --> 0:24:21.399 One thing I was quite disappointed seeing with the announcement 0:24:21.440 --> 0:24:25.040 of these facilities was all of these announcements saying this 0:24:25.119 --> 0:24:28.440 is not a bailout, send go, taxpayers money is at risk. 0:24:29.040 --> 0:24:31.320 And I think that the market sees those things and 0:24:31.440 --> 0:24:34.879 it doesn't go, you know how fiscally responsible, It sees 0:24:34.920 --> 0:24:38.520 those things and thinks nobody's taking this seriously. What you 0:24:38.640 --> 0:24:40.840 need is someone to do what Marry or Druga did 0:24:41.320 --> 0:24:44.440 and come out to bang the table and say, this 0:24:44.560 --> 0:24:47.960