Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe wisn't thal Joe. A
Speaker 1: lot has happened in the past few days. I don't
Speaker 1: even know where to start, really, yeah, I mean I
Speaker 1: don't either, but I would say, look, the developments I
Speaker 1: think related to Silicon Valley Bank, the speed of the
Speaker 1: run and the speed of the response are extraordinary, and
Speaker 1: it feels to me like this episode could change like
Speaker 1: how banks work in this country. I mean, it's incredible.
Speaker 1: It's like all deposits seeming like they're de facto guaranteed,
Speaker 1: changing the collateral schedule so that banks don't have to
Speaker 1: take a mark to market hit on some of their assets.
Speaker 1: This is extraordinary stuff here, absolutely, And I am going
Speaker 1: to start this particular Lots with the caveat which is
Speaker 1: that obviously things are very fast moving and we're trying
Speaker 1: to get some emergency episodes out as quickly as possible.
Speaker 1: So this is our first entry into what I'm sure
Speaker 1: will be very you know, a lot more on this topic.
Speaker 1: But we are going to be speaking with Dan Davies.
Speaker 1: He is a managing director at Frontline Analysts. He's also
Speaker 1: a former regulatory economist at the Bank of England. He
Speaker 1: was a banking analyst for a very long time and
Speaker 1: the author of Lying for Money, which is a book
Speaker 1: all about financial fraud, A very good book. I might add, Dan,
Speaker 1: thank you so much for coming on. All thoughts. Oh,
Speaker 1: thanks very much for having me. It's always news whether
Speaker 1: people want to. I was going to say at short
Speaker 1: notice as well, but we appreciate you coming on. So
Speaker 1: why don't we just start with a very big picture question.
Speaker 1: But how would you characterize the events of the past
Speaker 1: week or so. I think what's happened is that we're
Speaker 1: seeing why certain kinds of deposits are considered to be
Speaker 1: hot money. At the end of the day, you've got
Speaker 1: corporate deposits, which people like to think are sticky, and
Speaker 1: wealth management deposits in signature in New York, which is
Speaker 1: the other bank that's been shut down and taken over
Speaker 1: by the FDIC this weekend, which people like to think
Speaker 1: are sticky. But their big amounts of money. It's not
Speaker 1: like a few thousand in the bank that people have
Speaker 1: for their transactions. It's a sum of money that people
Speaker 1: get worried about if they they're going to lose it,
Speaker 1: and that means it can be sticky for a while,
Speaker 1: but when it moves, it really moves. And that's why
Speaker 1: most regulators don't let you fund long dated assets out
Speaker 1: of that kind of deposits or put limits on your
Speaker 1: ability to do it. So I didn't. So what was
Speaker 1: this case with Silicon Valley Bank specifically, in which it
Speaker 1: would I mean, not only did it accumulate an extraordinary
Speaker 1: amount of a corporate deposit, but also highly all more
Speaker 1: or less in sort of one industry. Yeah, I mean, well,
Speaker 1: Silicon Valley Bank, according to everyone I've spoken to about it,
Speaker 1: we're just very good at customer service with tech companies
Speaker 1: in Silicon Valley. And there was no particular magic to
Speaker 1: the business model. It's just they built themselves around that.
Speaker 1: They did a lot of business on the golf course,
Speaker 1: I'm told. And when you had a venture capital funded
Speaker 1: startup which might easily have ten million dollars in the bank,
Speaker 1: they would be the guys who would onboard you, easily,
Speaker 1: give you a bunch of corporate credit cards for your
Speaker 1: kind of teenage coders who've never had a credit card before,
Speaker 1: and just generally look after you in a way. The
Speaker 1: other banks weren't as sharp on the consumer customer service.
Speaker 1: My wife used to be involved in a tech startup
Speaker 1: in New York City, and she said, like every elevator
Speaker 1: event where startups would like get money or like raised
Speaker 1: from vcs, there are always just reps from Silicon Value Bank.
Speaker 1: They're ready to like show people how to open up
Speaker 1: an account like instantly, And that was just like part
Speaker 1: of the process of raising VC money was basically part
Speaker 1: and parcel with getting your Silicon Value Bank account, you know,
Speaker 1: and being good at gathering those deposits. It means that
Speaker 1: you gather a huge amount of those deposits. And then
Speaker 1: through the last couple of years, when you had a
Speaker 1: massive boom in terms of vcs putting money into their portfolio, companies,
Speaker 1: they just got these huge inflows of deposits. So, I mean,
Speaker 1: one of the most difficult things to manage your banking
Speaker 1: is rapid growth. And in particular, you had rapid growth
Speaker 1: in deposits at a time when interest rates were very low,
Speaker 1: so you know, the actual equilibrium covering their cost of
Speaker 1: business spread on these deposits. You know, they might have
Speaker 1: had to pay negative fifty basis points of interest rates
Speaker 1: and the company doesn't want to do that because it's
Speaker 1: going to damage the franchise in the water. The company
Speaker 1: certainly doesn't want to turn business away. So what they
Speaker 1: end up doing is putting the money in how you
Speaker 1: yield of securities, and to do that, you've got to
Speaker 1: move out from the maturity curve. And this is the
Speaker 1: sort of thing that are switched on Bank Supervisor ought
Speaker 1: to be stopping you from doing right. So I do
Speaker 1: want to get into the regulation aspect of it, but
Speaker 1: before we do, just on SVB specifically, I mean, it
Speaker 1: seems to me like you had these inflows of hot money.
Speaker 1: You had a concentration of depositors in the tech industry
Speaker 1: where money tends to be very volatile and momentum driven,
Speaker 1: and certainly over the past year you can imagine a
Speaker 1: lot of people were pulling stuff out, and so you
Speaker 1: had the sort of classic asset liability duration mismatch. But
Speaker 1: why didn't they hedge more? Because it would seem like
Speaker 1: this was an obvious vulnerability just based on the dynamic
Speaker 1: that I just described. Yeah, I think that's you know,
Speaker 1: that's a really really good question that presumably they're going
Speaker 1: to be asking themselves right now. And I think to
Speaker 1: some extent, they haven't realized the extent to which their
Speaker 1: customers were not separate entities in terms of their financial
Speaker 1: decision making. So you know, you might have thought you
Speaker 1: had some diversification there, but in fact, if all these
Speaker 1: people are funded by the same few vcs, and all
Speaker 1: those vcs are on the same WhatsApp group, they're actually
Speaker 1: behaviorally this isn't a thousand guys with ten million each.
Speaker 1: It's one big conglomerate of guys with ten billion. And
Speaker 1: the real trouble was though, that their commercial incentives were
Speaker 1: completely the other way. You've got these deposits. You're providing
Speaker 1: this excellent customer service, which was the backbone of their franchise,
Speaker 1: that costs a lot of money. So you've actually got
Speaker 1: to do something that earns you a bit on the
Speaker 1: asset side, or give up the business. And if you
Speaker 1: start hedging out the risk, then you're hedging out the
Speaker 1: return as well. And so you know, they could have
Speaker 1: managed it more smarter. And I think you pointed to
Speaker 1: a story showing that they had discussed internally whether they
Speaker 1: should be reducing that risk position, but all of the
Speaker 1: incentives were to push them in the direction of taking
Speaker 1: that interest rate risk, and then obviously interest rates themselves
Speaker 1: moved quite a bit faster than anyone was expecting, so
Speaker 1: they were just caught on the wrong side of the trade. Yeah,
Speaker 1: this was a story that I wrote with some of
Speaker 1: our Bloomberg colleagues, but it sites internal documents from SVB
Speaker 1: where they discussed this exact issue, and they were actually
Speaker 1: talking about the need to reduce duration exposure, so exposure
Speaker 1: to interest rates, and they had an estimated cost for
Speaker 1: how much it would affect their net interest margin or
Speaker 1: their earnings, and I think they say it was in
Speaker 1: the millions of dollars, you know, eighteen million the first
Speaker 1: year and then going up to thirty six million over
Speaker 1: the next few years. And so it seems there was
Speaker 1: a conscious decision not to actually do it. Absolutely. Yeah, Dan,
Speaker 1: you know, one of the you mentioned that perhaps one
Speaker 1: of the sort of analytical errors that either the bank
Speaker 1: made or regulators made was not appreciating that they did
Speaker 1: not actually have really thousands and thousands of depositors, but
Speaker 1: actually just a handful of depositors who may have all
Speaker 1: taken their cues from a small group of vcs and
Speaker 1: a few WhatsApp rooms. The scale of the withdrawals that
Speaker 1: have been reported on, particularly that happened on Thursday or Friday.
Speaker 1: Is there any amount of sort of like um liquidity
Speaker 1: requirements that could have satisfied them, because there's talking to like, oh,
Speaker 1: they should have had more on hand, they should have
Speaker 1: been treated, you know, some of the DoD frank requirements
Speaker 1: should have been extended to a bank of that size,
Speaker 1: But like, is there a level of run that can
Speaker 1: happen in which no amount of like preparation can really
Speaker 1: prepare for. Well, it's kind of difficult to know what
Speaker 1: the counter factual was. Sure, just in share amounts of
Speaker 1: numbers of the amount of money that left, there was
Speaker 1: nothing that could have stood in the way of us. Yeah, okay,
Speaker 1: that's correct. On the other hand, there's no quantum of
Speaker 1: funds they could have had hanging around that would have
Speaker 1: stood up to that kind of a deposit run. But
Speaker 1: you have to ask whether the room would have been
Speaker 1: so big or whether it would have happened at all
Speaker 1: if they've managed financing more conservatively. Is the other part
Speaker 1: of this is that it's not just the kind of
Speaker 1: hot money on the deposit side. There were big unrealized
Speaker 1: losses on the securities portfolio because they'd kept that interest
Speaker 1: rate risk there. And if you're hanging around with an
Speaker 1: unrealized loss on securities that's bigger than your shareholders funds.
Speaker 1: You know, the former bank regulator in me says, if
Speaker 1: you're doing that, then something bad is going to happen
Speaker 1: soon or later. You know, it's not a good idea
Speaker 1: to ever let yourself get into that position, right, So,
Speaker 1: something I wanted to ask is just on the bond
Speaker 1: portfolio losses, which have obviously garnered a lot of attention,
Speaker 1: A lot of these were unrealized losses. They were on
Speaker 1: bonds that were classified as held to maturity, which means
Speaker 1: we're going to hold them into maturity, and so we
Speaker 1: don't have to take mark to market losses on them
Speaker 1: unless you know they're impaired in some way, because we
Speaker 1: fully expect to get the money back, versus securities that
Speaker 1: are usually held as available for sale, where because you
Speaker 1: might sell them at any point in time, you would
Speaker 1: mark them to market and those losses would show up
Speaker 1: on your balance sheet. So, because of the proportion of
Speaker 1: bonds held by SVB in HTM, and because of the
Speaker 1: extent of the losses, there is now this concern about
Speaker 1: broader debt and interest rate exposure in the banking system,
Speaker 1: and especially at some of the smaller banks where they
Speaker 1: might have been more pressured to generate net income margin
Speaker 1: by taking additional duration exposure. Can you talk to us
Speaker 1: about those concerns. How worried should we be about other
Speaker 1: banks versus how much of that this is maybe an
Speaker 1: SVB specific story where it's a mix of FLDY depositors
Speaker 1: plus a lot of duration exposure. Yeah. Well, it's clear
Speaker 1: that the Federal Reserve is concerned that it's not necessarily
Speaker 1: confined to those two backs because this new facility they've
Speaker 1: put up there, the bank term Finance program just looks
Speaker 1: to me like a term finance program that's there for
Speaker 1: the FED to say, if you've got any of these
Speaker 1: kind of things, if you've got any of these problems
Speaker 1: hanging around on your balance sheets, the Fed is put
Speaker 1: together this term funding facility in order to allow banks
Speaker 1: that have got some kind of problem or something on
Speaker 1: their balk sheet that they need to get rid of
Speaker 1: and trade out of those positions in a reasonably graceful
Speaker 1: and orderly fashion. And you can tell that there this
Speaker 1: is the concern because they've said that they will provide
Speaker 1: funding against the face value or the power value of
Speaker 1: any of these bonds, rather than the market value, which
Speaker 1: could be thirty percent. Other How extraordinary is this, because
Speaker 1: this to me seems like a huge, a pretty extraordinary
Speaker 1: like intervention to say, okay, these you can pledge these
Speaker 1: assets as clatter or potentially, as you said, thirty percent
Speaker 1: higher than they're currently trading. And isn't this like a
Speaker 1: deft actel capital injection? Basically it's it's not quite that.
Speaker 1: But obviously, if you're sort of got bonders valued at
Speaker 1: seventy and you're lending a hundred against it, then slightly
Speaker 1: more than half of your loan, a third of your
Speaker 1: loan is unsecured. It's not unknown for central banks to
Speaker 1: lend unsecured in emergency situations. It would be a complete
Speaker 1: departure if they started doing that in the normal course
Speaker 1: of business. But this does look like it's a specific,
Speaker 1: time limited hostility that's going to go on for a year,
Speaker 1: and where I would expect that most of all the
Speaker 1: borrowing that's ever going to be done moderate is going
Speaker 1: to be taken out in the next couple of weeks.
Speaker 1: You know, you touched on this earlier, but you can
Speaker 1: you talk a little bit more about where regulators were
Speaker 1: specifically for SVB. But I guess on the wider bond
Speaker 1: exposure question, because it does seem like one of the
Speaker 1: things that's emerging now is maybe the smaller banks, the
Speaker 1: regional lenders, escaped some of the extra regulatory scrutiny that
Speaker 1: was heaped on the larger systemically significant banks in recent years,
Speaker 1: and so now they are more vulnerable to the threat
Speaker 1: of both deposit flight and higher interest rates. Well, yeah,
Speaker 1: they did. I mean, what basically happened is that in
Speaker 1: the USA there were a couple of buzzle international standards
Speaker 1: that were meant to address pretty much this exact risk,
Speaker 1: which were only implemented for a very small number of
Speaker 1: the largest internationally active banks. And a lot of that
Speaker 1: appears to be because medium sized and community banks in
Speaker 1: the USA have got a strong political lobby. Not running
Speaker 1: this risk was, as we discussed, a threat to the earnings,
Speaker 1: and so people decided that they were going to be
Speaker 1: hard to get these things restricted to the very biggest banks,
Speaker 1: and as a result, Silicon Valley Bank wasn't required to
Speaker 1: calculate or report some of what I'd regard as the
Speaker 1: key regulatory ratios with regard to its use of hot
Speaker 1: money to financial liquid assets, and it's kind of high
Speaker 1: quality liquid assets on HAPD. Those policies were just really
Speaker 1: meant to be managed by the company itself and by
Speaker 1: the company in discussion with its supervisor. But because there's
Speaker 1: no hard and fast regulatory number being calculated there, it's
Speaker 1: easy to lose track. And it seems that that's what's
Speaker 1: happened Dan, just you know, sort of zooming out for
Speaker 1: a second. And as someone who analyzes banks around the world,
Speaker 1: how unusual is the sheer number of banks regional community
Speaker 1: banks that exist in the United States relative to other
Speaker 1: rich countries. It's not all known. It's not as extreme
Speaker 1: as in Germany, where you have lots of with whats
Speaker 1: and lots of really really small savings banks, but it
Speaker 1: is quite unusual to have that much of the banking
Speaker 1: system in small kind of local savings banks, you know.
Speaker 1: And then you have these things like Silicon Valley Bank,
Speaker 1: which grew so quickly that although it was a local
Speaker 1: Silicon Valley and a local tech industry entity as recently
Speaker 1: as four or five years ago, by the time both
Speaker 1: last week it was the sixteenth biggest bank in the
Speaker 1: United States of America by asset sis. So one of
Speaker 1: the things that seems kind of inevitable now is the
Speaker 1: idea that you are probably going to see some consolidation
Speaker 1: of smaller banks and you are going to see more
Speaker 1: money flowing into some of the big guys if there is,
Speaker 1: you know, concern about the health of the banking system.
Speaker 1: And I was just talking to one tech person just
Speaker 1: this morning. He just got his oh, I should say,
Speaker 1: we are recording this on Monday, March thirteenth, but he
Speaker 1: just got some of his first wire transfer from SVB
Speaker 1: out and he's moving it into JP Morgan. So that
Speaker 1: seems kind of inevitable money going into the bigger gesibs.
Speaker 1: And also maybe the smaller banks have to start raising
Speaker 1: their deposit rates as they try to hold on or
Speaker 1: compete for more customers. And yeah, I think so when
Speaker 1: you have something like this, you're always going to see
Speaker 1: what they call a flight to safety or a flight
Speaker 1: to quality. And in the case of deposit runs like this,
Speaker 1: because people look at the too big to fail banks
Speaker 1: prosing that they've got a defacto guarantee despite the fact
Speaker 1: that actually what we've seen in the case of the
Speaker 1: Signature and Silt and Valley is that the fd I
Speaker 1: see seems to be quite happy to extend coverage to
Speaker 1: one insured deposits, even in this kind of second tier
Speaker 1: and Signatures actually quite small bank, as long as they
Speaker 1: are reasonably happy about the quality of the assets, and
Speaker 1: as long as there is a decent cushion of unsecured bondholders.
Speaker 1: Because obviously the bondholders in these banks are going to
Speaker 1: be taking loss, it's they're covered in the way that
Speaker 1: the latch depositors are. Well, this is a question I
Speaker 1: was going to ask you, which is that, like, are
Speaker 1: all deposits de facto now ensured at any size? Like
Speaker 1: can you envision a scenario of future bank failure in
Speaker 1: which depositors aren't made all? Or is this over if
Speaker 1: if you're a depositor, you'll be insured. It's actually quite
Speaker 1: unusual for depositors of any sort of fools money in
Speaker 1: a bank resolution. Usually you have a cushion of bondholders
Speaker 1: today and de facto deposits are considered to be senior
Speaker 1: to bondholders. Can only think it's happened a couple of
Speaker 1: times in the USA, and there are actually regulations on
Speaker 1: the way to just generally say that you've got to
Speaker 1: have a layer of bondholders in there, which are you know,
Speaker 1: they're not going concerned capital, but they're an extra cushion
Speaker 1: for the deposits. So I don't think anyone's ever really
Speaker 1: thought of deposits of any sort as being money at risk,
Speaker 1: you know, I mean, the depositors of Silicon Valley Bank
Speaker 1: didn't think of their deposits as being money at risk
Speaker 1: before Wednesday Thursday of last week. And it's turned out
Speaker 1: that they were correct. It's turned out that they're getting
Speaker 1: all of their money back. So one thing that I'm
Speaker 1: still trying to get a handle on is this notion
Speaker 1: that it's it's not as if banks do not have
Speaker 1: access to emergency lending facilities, you know, before the events
Speaker 1: of the weekend and the announcement of the new FED facility.
Speaker 1: And this is something that Joe and I talked about,
Speaker 1: I think just last month, the episode on banks tapping
Speaker 1: the discount window. And you also have the possibility of
Speaker 1: banks borrowing from the FHLBS, the federal homelan banks, and
Speaker 1: yet it's teams like there was an issue at least
Speaker 1: when it comes to SVB, But what could have happened there?
Speaker 1: Why couldn't it tap more short term cash from either
Speaker 1: the FHLBS or the discount window or was it the
Speaker 1: case that you know, at some point no amount of
Speaker 1: short term liquidity is actually going to cover the amount
Speaker 1: of deposit outflows that the bank was seeing. I think
Speaker 1: it's the second of those. Really, there did seem to
Speaker 1: be something going along with the FHLB where just simply
Speaker 1: Silicon Valley Bank was very large when you compared it
Speaker 1: to the San Francisco Federal Homeland Bank for the Federal
Speaker 1: Reserve and the other discount window operations. You have access,
Speaker 1: but it's access against collateral. Previously to this week, it
Speaker 1: was against collateral market value. So if you've got a
Speaker 1: mark to market loss on that portfolio, you can only
Speaker 1: raise money against a haircut on the market value. And
Speaker 1: it's going to be the right collateral broad together in
Speaker 1: the right place at the right time. So as you can,
Speaker 1: you know, in ordinary situations, you can always deal with
Speaker 1: the ordinary problems of banking. What you can't deal with
Speaker 1: is something absolutely kind of off the chance, crazy like
Speaker 1: we saw on Thursday and Friday last week. What does
Speaker 1: it tell you if anything that no private buyer stepped up,
Speaker 1: because as you said, you know, they had great customer service,
Speaker 1: there's great product fit that seemed to really fit with
Speaker 1: the valley. It seems like, you know, some banks probably
Speaker 1: kind of offer commodity banking services and Silicon Valley Bank didn't,
Speaker 1: and they seem to have some sort of unique franchise value.
Speaker 1: A lot of people like the bank. What should we
Speaker 1: read into the fact that there was no buyer and
Speaker 1: also what is your take on whether it should have
Speaker 1: been sold to a g SIB like a Chase, an
Speaker 1: entity that could have easily absorbed it. I'm genuinely surprised
Speaker 1: that didn't happen. The London operations, the UK subsidiary was
Speaker 1: brought by HSBC over the weekend and it looks like
Speaker 1: HSBC have brought themselves a small because it's obviously small
Speaker 1: compared to the overall bank, but nice little local tech
Speaker 1: banking business. The thing about banks is that when banks
Speaker 1: go into resolution, all sorts of strange things start kind
Speaker 1: of bubbling up, and things that you never knew were
Speaker 1: going on tend to be uncovered. So people tend to
Speaker 1: be a little bit risk averse. But yes, I'm surprised
Speaker 1: that none of the big players felt that they could
Speaker 1: buy this one, although you know that's still a possibility
Speaker 1: over the coming which the FDIC is still, as I understand,
Speaker 1: it's looking to sell this thing as a going concern,
Speaker 1: as an operating business. So it might be that they'll
Speaker 1: just keep on doing their due diligence by their time
Speaker 1: and bid for it in the auction. So what are
Speaker 1: you looking out for going forward? And in terms of
Speaker 1: wider contagion, because you know, as I mentioned, it's Monday,
Speaker 1: March thirteenth, there's a lot happening. There will, no doubt
Speaker 1: be a lot of developments that have happened by the
Speaker 1: time we release this episode, but for now, there are
Speaker 1: quite a few bank stocks that are down, which you know,
Speaker 1: maybe that makes sense because the Federal Reserve Facility, the
Speaker 1: new one, is going to help in terms of some
Speaker 1: of those bomb losses, but it's not necessarily going to
Speaker 1: do anything for equity holders, and so there's an expectation
Speaker 1: that banks will have to raise additional capital. But what
Speaker 1: are you on the lookout for. I think I want
Speaker 1: to look out for a real signs that the authorities
Speaker 1: are taking this because the one thing we learned over
Speaker 1: the kind of great financial crisis, and then again those
Speaker 1: of us who are active in Europe learned it in
Speaker 1: the euro crisis is that if you're dealing with the
Speaker 1: crisis of market confidence, you need to bring the absolute
Speaker 1: entire power of the state and the central bank to bear.
Speaker 1: One thing I was quite disappointed seeing with the announcement
Speaker 1: of these facilities was all of these announcements saying this
Speaker 1: is not a bailout, send go, taxpayers money is at risk.
Speaker 1: And I think that the market sees those things and
Speaker 1: it doesn't go, you know how fiscally responsible, It sees
Speaker 1: those things and thinks nobody's taking this seriously. What you
Speaker 1: need is someone to do what Marry or Druga did
Speaker 1: and come out to bang the table and say, this
Speaker 1: is a bailout. Taxpayers money is at risk. We have
Speaker 1: unlimited firepower. We will stop this thing in its tracks.
Speaker 1: We will underpindle the good is of the US financial system.
Speaker 1: And you know, it's always my view that with these
Speaker 1: things always going to end up doing that. So you
Speaker 1: might as well save yourself a couple of days heart
Speaker 1: sake and do it right out of the gate. Right
Speaker 1: Europe spent about you know, Angelo Merkel spent about three
Speaker 1: years trying to avoid that and then it ended up
Speaker 1: being massively costly in the end, is your view that
Speaker 1: what has happened is it a bailout? And be like,
Speaker 1: how do you even define that? Is it useful to
Speaker 1: define that? Or if someone asked you, Dan, what's a bailout?
Speaker 1: What is that? Well, I think people people have stopped
Speaker 1: asking me what's a bailout? Keep giving them, you know,
Speaker 1: I'll keep giving them the wrong answer, and yeah, it's
Speaker 1: a bailout, and bailance are good. Bailance are almost always
Speaker 1: the right thing to do. And there's a bailout just
Speaker 1: means that the state steps in and provides insurance so
Speaker 1: that something economically destructive doesn't happen. And lots of people
Speaker 1: who did economics degrees start talking about moral hazard. But
Speaker 1: I noticed that there's very few people who work in
Speaker 1: the insurance business whose first concern right now is about
Speaker 1: moral hazard. Also, very much doubt that anyone involved with
Speaker 1: Silicon Valley Bank, even those that are getting paid back
Speaker 1: at one hundred cents in the dollar, will look back
Speaker 1: at this last week and regard it as a case
Speaker 1: a moral hazard where they got looked after really well,
Speaker 1: in a crisis, you just need someone to stand in
Speaker 1: and show that they are managing it. And there's a
Speaker 1: lot of my mind, really quite silly rhetoric about bailouts
Speaker 1: because when it happens, it's kind of easy to do
Speaker 1: a political speech about how you're against bailouts and how
Speaker 1: you're in favor of saving money for the taxpayer, but
Speaker 1: it doesn't actually solve anything. And the next time a
Speaker 1: crisis comes around, it's still a crisis and it still
Speaker 1: needs something to be done about it. And all that
Speaker 1: happens is that that necessary corrective action takes longer to
Speaker 1: execute because there's still people who think that they can
Speaker 1: gain short termple of skill advantage by shouting about bailants.
Speaker 1: And that's the story of the euro crisis, and I'm
Speaker 1: very much hope that it doesn't happen in the USA
Speaker 1: right now. Yeah, it just feels like at the height
Speaker 1: of a crisis isn't necessarily the time to start addressing
Speaker 1: systemic injustices and weaknesses. Dan, We're going to have to
Speaker 1: leave it there. We very much appreciate you coming on
Speaker 1: add Lots our Emergency add Blots episode for an emergency
Speaker 1: banking crisis. So thank you so much. Thanks very much,
Speaker 1: have a great rest of the day. So Joe, I
Speaker 1: thought that was a really good summary of what's been
Speaker 1: going on. There are a lot of moving parts, and
Speaker 1: as I mentioned a couple of times, I'm sure we
Speaker 1: are going to be talking about this for a long
Speaker 1: time to come. But I thought dan point about how
Speaker 1: this is and isn't a bailout was a really good one,
Speaker 1: because yes, you know, in some sense depositors are being protected.
Speaker 1: You know, the FED is flinging a lot of money
Speaker 1: at this problem. But on the other hand, you are
Speaker 1: seeing the bank stock reaction this morning, there is clearly
Speaker 1: still a concern that even with the additional facility, banks
Speaker 1: are going to have to go out and raise capital
Speaker 1: and that's either going to be dilutive to shareholders or
Speaker 1: wipe them out completely. And you know, Dan made the
Speaker 1: point about when you're in crisis mode, you kind of
Speaker 1: have to leave some of the issues of moral hazard
Speaker 1: at the door, come back and solve them later, but
Speaker 1: now might not be the best time. No, I thought
Speaker 1: that was a great point that you like, you want
Speaker 1: to like, oh, we're protecting the taxpayer, it's not a bailout.
Speaker 1: It's not unlimited, there's finite. It's like exactly like if
Speaker 1: you want to nip it in the bud, those are
Speaker 1: the opposite of what you want to say. So I
Speaker 1: think that's really interesting and maybe really telling about some
Speaker 1: of the other bank stock weakness. And then just like
Speaker 1: some of these interesting dimensions, you know, like about the
Speaker 1: idiosync he I thought Dan described really well what made
Speaker 1: Silicon Valley Bank unique, particularly having just a handful of
Speaker 1: defective depositors. On paper, it looks like you have thousands
Speaker 1: and thousands of depositors all around the world. In practice,
Speaker 1: if they all have a few sort of top vcs
Speaker 1: that they listen, they're all on the same what then
Speaker 1: they only have a few deposit book face. And if
Speaker 1: it's known that corporate deposits are much less sticky, then
Speaker 1: you really like do create some like a flight risk? No. Absolutely,
Speaker 1: to me, this is as much as sort of cultural
Speaker 1: or social story as it is a financial one, where
Speaker 1: you have this group of really tight knit depositors, all
Speaker 1: of whom are talking to each other, are very plugged
Speaker 1: in online, and also have a sort of tendency to
Speaker 1: want to be first. I mean, you know you're talking
Speaker 1: about Silicon Valley and move fast and break things and
Speaker 1: all of that, Like they want to get out there
Speaker 1: with the bragging rights about warning people of an impending
Speaker 1: banking collapse, and so you know, to some extent they
Speaker 1: were successful with that, but obviously they caused a larger problem.
Speaker 1: And then I wouldn't want I don't want to underplay
Speaker 1: the very subpar risk management. And I'm choosing my adjectives
Speaker 1: very carefully here and I'm being very conservative and how
Speaker 1: I describe this, But the hedging of the interest rate
Speaker 1: exposure left a lot to be desired on the side
Speaker 1: of SVB. Yeah, but you know, I do. I mean,
Speaker 1: it was clearly mistakes were made, to say the least,
Speaker 1: but like you, I get it right. It's like they
Speaker 1: have a costly franchise to run because it's obviously so
Speaker 1: high touch. You get this huge flight of capital inflows
Speaker 1: at a time of very low interest rate when there
Speaker 1: isn't yield. You have to pay for that high touch service.
Speaker 1: So I do sort of in my mind, like at
Speaker 1: least get why they felt this impulse which many banks
Speaker 1: don't do, to like just go so far out on
Speaker 1: the yield curve. Obviously turned out to be sort of
Speaker 1: like catastrophic, but at least the story sort of like
Speaker 1: fits together of why they ended up in that position. Well,
Speaker 1: it's also interest rate exposure squared, right, because all your
Speaker 1: depositors and everyone you're lending money to is in the
Speaker 1: tech industry and they're massively affected by higher interest rates.
Speaker 1: And at the same time, all your assets are in
Speaker 1: long duration stuff that's also impacted by higher interest rates.
Speaker 1: Seems to be a bad situation, very bad, and hopefully
Speaker 1: for the broader economy, etc. Hopefully the unique badness of
Speaker 1: that situation means it doesn't spread. But I think it's
Speaker 1: way too early to know whether, you know, people would
Speaker 1: just say, look, I don't want to have money in
Speaker 1: a regional bank. What's the point I can be in chase.
Speaker 1: So we'll see. Yeah, more to come, but for now,
Speaker 1: we leave it there. Let's leave it there. Okay. This
Speaker 1: has been another episode of the Old Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe wi Isn'tal. You can follow me
Speaker 1: on Twitter at the Stalwart. Follow our guest Dan Davies,
Speaker 1: phenomenal Twitter user at d squared Digest. Follow our producers
Speaker 1: Kermen Rodriguez at Kerman Arman and Dash Bennett at Dashbot.
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