WEBVTT - What Was SVB And Why Did It Fail? 0:00:04.360 --> 0:00:12.319 Welcome to tech Stuff, a production from iHeartRadio. He there, 0:00:12.320 --> 0:00:15.880 and welcome to tech Stuff. I'm your host, Jonathan Strickland. 0:00:16.000 --> 0:00:19.800 I'm an executive producer with iHeartRadio, and how the tech 0:00:20.239 --> 0:00:25.759 are you. I don't frequently dedicate Monday episodes to the news, 0:00:25.840 --> 0:00:27.880 but I feel like this time I kind of have to. 0:00:28.080 --> 0:00:32.360 So last Friday, I was in the Atlanta airport and 0:00:32.440 --> 0:00:34.959 I was getting ready to board a flight to Austin, 0:00:35.080 --> 0:00:38.800 Texas so that I could participate in an iHeartMedia panel 0:00:38.880 --> 0:00:43.040 discussion at south By Southwest, which went really well. But 0:00:43.080 --> 0:00:45.560 that's neither here north Air. So there I am in 0:00:45.600 --> 0:00:48.159 the airport. I'm just sitting at the gate waiting for 0:00:48.240 --> 0:00:51.000 my zone to get called, and I hear a little 0:00:51.040 --> 0:00:54.760 bit of a hubbub, perhaps even occur fuffle, not a 0:00:54.800 --> 0:00:58.480 full blown commotion, but something is definitely going down right, 0:00:58.560 --> 0:01:02.560 like there's some chat going on, and I had my 0:01:02.600 --> 0:01:05.520 earbuds in I was listening to podcasts. At that point, 0:01:05.560 --> 0:01:08.240 I popped my earbuds out just to find out, you know, 0:01:08.319 --> 0:01:10.720 being snoopy, what the heck is going on? And I 0:01:10.840 --> 0:01:16.959 hear a bunch of very well dressed people speaking in hushed, 0:01:17.120 --> 0:01:20.720 concerned tones. And I could tell that there was something 0:01:20.720 --> 0:01:22.840 that was going on and it had to do with money, 0:01:22.920 --> 0:01:24.959 but that was about all I could figure out. So 0:01:25.959 --> 0:01:29.000 I pop out my phone to check for the news 0:01:29.040 --> 0:01:31.240 to see if there's something that's come up that I 0:01:31.240 --> 0:01:34.280 should be concerned about. And I'm looking at the headlines 0:01:34.280 --> 0:01:37.440 and I don't see anything immediately that leads me to 0:01:38.000 --> 0:01:41.560 real concern. But whatever it was that was happening must 0:01:41.600 --> 0:01:46.639 have been pretty bad. These folks were clearly agitated, maybe 0:01:46.680 --> 0:01:50.120 not quite at panic level, but not too far from that. 0:01:50.680 --> 0:01:52.960 And then after I scoured the breaking news some more, 0:01:53.040 --> 0:01:56.000 I finally figured it out. These folks were really important 0:01:56.040 --> 0:01:59.240 people who work in the tech sector. They were on 0:01:59.240 --> 0:02:02.840 their way to the tech conference portion of south By 0:02:02.880 --> 0:02:08.079 Southwest like that's their world, and a bank that has 0:02:08.120 --> 0:02:12.160 been a pivotal component in the tech and startup industries 0:02:12.720 --> 0:02:16.760 had just collapsed. So today we're going to talk about 0:02:16.880 --> 0:02:22.200 Silicon Valley Bank or SVB and what happened there, because 0:02:22.280 --> 0:02:24.880 it does end up having an impact on the tech sector. 0:02:25.160 --> 0:02:28.640 And it also was the second bank collapse in a week, 0:02:28.919 --> 0:02:31.240 and then after that there was a third one, which 0:02:31.240 --> 0:02:34.160 will cover at the end of this episode. So I 0:02:34.280 --> 0:02:38.799 mentioned Silvergate Bank collapsed last week. So this was a 0:02:38.880 --> 0:02:42.000 real estate bank or a bank that mainly dealt with 0:02:42.040 --> 0:02:45.160 like real estate loans and that sort of stuff back 0:02:45.240 --> 0:02:48.799 in southern California, but had jumped over to become a 0:02:48.840 --> 0:02:52.960 bank in the crypto space. Around twenty fourteen. They had 0:02:53.000 --> 0:02:56.120 their own crypto exchange, and they served as sort of 0:02:56.320 --> 0:03:01.200 a bridge between the world of you know, US dollars 0:03:01.400 --> 0:03:04.800 and then cryptocurrencies, or the way I often think about it, 0:03:04.800 --> 0:03:06.639 even though I know it's ridiculous to think this way, 0:03:06.680 --> 0:03:09.000 I think of it in terms of real money and 0:03:09.080 --> 0:03:12.880 digital money. It's all digital, none of it's real. So 0:03:13.120 --> 0:03:16.400 I realized this is just you know, a bias talking 0:03:16.480 --> 0:03:20.400 in my head. Anyway. Silver Gates issues hit when some big, 0:03:20.440 --> 0:03:24.320 big customers cryptocompanies in fact, like I'm not talking about 0:03:24.440 --> 0:03:26.880 like a person, I'm talking about an entire company that 0:03:27.320 --> 0:03:30.799 has a corporate account with Silvergate. Well, some of these 0:03:30.840 --> 0:03:34.200 big customers were withdrawing lots and lots of money from 0:03:34.200 --> 0:03:40.640 silver Gates accounts, and Silvergate had already been on rocky 0:03:40.680 --> 0:03:45.000 ground when FTX collapsed late last year, and on top 0:03:45.040 --> 0:03:47.400 of that, the US government was starting to look into 0:03:47.520 --> 0:03:50.080 Silvergate to see if maybe there was anything hinky going 0:03:50.120 --> 0:03:53.680 on with silver Gate, and whether there was stuff going 0:03:53.720 --> 0:03:55.800 on or not. And I have no reason to believe 0:03:56.160 --> 0:03:59.880 that hinkiness of any nature was happening. It doesn't really 0:04:01.080 --> 0:04:03.960 matter in the long run, because the perception that there 0:04:04.000 --> 0:04:08.920 could be trouble spooked a lot of customers of Silvergate 0:04:08.960 --> 0:04:12.240 and they decided to pull their funds out in case 0:04:12.680 --> 0:04:16.800 an investigation might uncover something that could lock up their money. 0:04:17.160 --> 0:04:19.719 So there was a run on the bank at Silvergate, 0:04:20.240 --> 0:04:23.800 and Silvergate did not have enough funds to cover all 0:04:23.880 --> 0:04:29.280 the withdrawal requests, and as a result, it ultimately shut down. Now, 0:04:29.440 --> 0:04:34.039 Silicon Valley Bank has some similarities to Silvergate in that 0:04:34.200 --> 0:04:39.360 what led to svb's collapse was also ultimately a run 0:04:39.400 --> 0:04:42.359 on the bank. So your classic run the bank happens 0:04:42.680 --> 0:04:46.400 when customers lose confidence in a bank or a savings 0:04:46.440 --> 0:04:49.000 and loan company in the case of it's a wonderful life, 0:04:49.520 --> 0:04:52.880 or maybe there's some external financial pressure that convinces customers 0:04:52.880 --> 0:04:55.280 they need to pull all their money out. Maybe they 0:04:55.279 --> 0:04:58.919 don't have a loss of confidence in the bank itself, 0:04:59.240 --> 0:05:03.800 but other economic conditions make people convince that they need 0:05:03.920 --> 0:05:07.320 access to cash right, like, it's a liquidity problem. Again, 0:05:07.680 --> 0:05:11.600 the cash and wealth are two different things, so it'll 0:05:11.640 --> 0:05:15.039 get kind of muddled as we talk about this. But 0:05:16.080 --> 0:05:18.919 the thing that happens is customers will rush to the 0:05:18.960 --> 0:05:21.720 bank to retrieve their cash, to pull all their cash out. 0:05:22.480 --> 0:05:24.719 They might think that that would be safer in their 0:05:24.720 --> 0:05:26.800 hands than rather in a bank that could potentially be 0:05:26.880 --> 0:05:31.239 in trouble. But the problem is banks typically they don't 0:05:31.320 --> 0:05:34.200 have all of their customers money, Like the money you 0:05:34.320 --> 0:05:38.360 deposit in your bank is not necessarily at your bank anymore. 0:05:39.080 --> 0:05:42.520 At least, banks don't have everybody's money all at the 0:05:42.520 --> 0:05:46.960 same time because banks are businesses, and as a business 0:05:47.040 --> 0:05:49.320 they need to make money. And the way that banks 0:05:49.360 --> 0:05:53.400 make money, the way they generate wealth, is that customers 0:05:53.480 --> 0:05:56.880 deposit money into a bank. The bank then takes these 0:05:56.880 --> 0:05:59.760 deposits and starts to loan out some of that money 0:05:59.880 --> 0:06:04.120 to other people who pay the loan back with interest. 0:06:04.680 --> 0:06:08.039 So over the long haul, your money is safely stored 0:06:08.080 --> 0:06:10.920 in the bank and the bank is making money through 0:06:11.160 --> 0:06:15.279 interest through its loans, and everybody's happy. But you know, 0:06:15.320 --> 0:06:18.640 banks have lots and lots of customers. Under normal conditions, 0:06:19.040 --> 0:06:21.120 there wouldn't be very much of a problem. If you 0:06:21.160 --> 0:06:23.120 decide to go to your bank and close out your 0:06:23.120 --> 0:06:26.680 account and withdraw all of your money. Normally that would 0:06:26.680 --> 0:06:30.479 be fine because there are tons of other customers. There's 0:06:30.520 --> 0:06:32.839 lots and lots of money in the bank. There's plenty 0:06:32.839 --> 0:06:35.240 of it in there for the bank to send you 0:06:35.240 --> 0:06:39.680 your cash and close out your account. So as long 0:06:39.720 --> 0:06:41.960 as the bank is keeping a careful tally of where 0:06:42.000 --> 0:06:46.599 all those dollars are ultimately going and earmarking where they're 0:06:46.680 --> 0:06:50.040 meant to be, everything's fine and you can just skid 0:06:50.080 --> 0:06:53.120 at all. Depending on how active the bank is in 0:06:53.320 --> 0:06:56.760 loaning out cash, you know, if a lot of people 0:06:56.839 --> 0:06:59.520 come in to do the same thing, there could be 0:06:59.560 --> 0:07:02.840 a serious shortfall. Right. If it's one person closing out 0:07:02.839 --> 0:07:07.200 their account, that's nothing, but if it's say sixty percent 0:07:07.279 --> 0:07:11.440 of your customers, that is a huge issue. And you 0:07:11.520 --> 0:07:14.240 get into the statement that you'd hear in It's a 0:07:14.240 --> 0:07:17.240 wonderful life, you know, Oh, well, the money's not here. 0:07:17.720 --> 0:07:21.240 It's a Joe's house that's right next to yours. George 0:07:21.240 --> 0:07:23.680 Bailey would say, shout out to Shay who made me 0:07:23.720 --> 0:07:29.000 watch that movie. So, if the bank's customers include large companies, 0:07:30.120 --> 0:07:33.600 like companies that depend upon massive bank accounts in order 0:07:33.640 --> 0:07:38.640 to do stuff like pay employees, like that's the payroll account. 0:07:39.120 --> 0:07:42.280 Things can get really really bad, right if there's a run, 0:07:42.400 --> 0:07:44.720 Like if a company says, you know what, I don't 0:07:44.920 --> 0:07:48.200 trust that this bank is going to be able to 0:07:48.240 --> 0:07:51.680 stay in business. I've got hundreds of millions of dollars 0:07:51.680 --> 0:07:53.920 in there. I need to pull it out. That's going 0:07:54.000 --> 0:07:55.920 to be a massive hit to that bank, and it 0:07:56.000 --> 0:07:59.080 ends up perpetuating the very problem that you're worried about 0:07:59.080 --> 0:08:02.120 in the first place. So that's the too long, didn't 0:08:02.160 --> 0:08:05.560 listen version of this story. Like you technically know what 0:08:05.640 --> 0:08:08.120 happened to Silicon Valley Bank at this point, there was 0:08:08.160 --> 0:08:11.360 a run on the bank. SVB could not cover all 0:08:11.360 --> 0:08:15.840 the withdrawals. The us FDIC had to sweep in and 0:08:15.880 --> 0:08:18.680 shut things down and take over. But there is a 0:08:18.720 --> 0:08:21.560 lot more to this story, So hopefully you're going to 0:08:21.600 --> 0:08:23.320 stick with me for the long run, and we're going 0:08:23.360 --> 0:08:26.120 to cover the whole thing. So let's start by talking 0:08:26.120 --> 0:08:29.600 about where Silicon Valley Bank even came from in the 0:08:29.640 --> 0:08:32.920 first place. So we could go way, way way back, 0:08:32.960 --> 0:08:35.760 but let's just start with the late seventies. You know, 0:08:35.920 --> 0:08:39.120 disc goes on the decline. New wave is gearing up 0:08:39.160 --> 0:08:42.320 to take over. A little movie called Star Wars changed 0:08:42.400 --> 0:08:46.640 both film and merchandising forever. And a couple of casual 0:08:46.720 --> 0:08:49.079 poker players came up with an idea for a bank 0:08:49.120 --> 0:08:52.280 that could play an integral part in the blossoming Silicon 0:08:52.640 --> 0:08:57.160 Valley landscape. Keep in mind the seventies, that's when we 0:08:57.320 --> 0:09:02.559 just start seeing the very earliest stages of the Silicon 0:09:02.760 --> 0:09:06.480 Valley flourishing, you know, that's when we started to see 0:09:06.480 --> 0:09:12.760 the hobbyist community end up turning into the personal computer community. 0:09:13.120 --> 0:09:17.240 It was an exciting time, and stuff was changing incredibly rapidly. 0:09:17.280 --> 0:09:20.920 It seemed like the whole world was obeying Moore's law 0:09:21.280 --> 0:09:24.400 at that point. All right, Well, one of these two 0:09:24.640 --> 0:09:29.280 poker buddies was Robert Madeiras, a man from Kansas who 0:09:29.320 --> 0:09:32.600 had moved to California to attend Stanford where he studied 0:09:32.640 --> 0:09:35.920 civil engineering. Then he joined the Navy and served for 0:09:36.000 --> 0:09:38.600 three years, and after that he pursued a degree at 0:09:38.600 --> 0:09:42.360 Harvard Business School, and then after that he got into 0:09:42.480 --> 0:09:45.840 a real estate company and moved back to California and 0:09:45.960 --> 0:09:49.840 ultimately became a consulting professor back at Stanford, and there 0:09:49.880 --> 0:09:54.240 he was encountering students who were facing very similar challenges. 0:09:54.320 --> 0:09:58.640 These were students who had compelling ideas for a tech 0:09:58.760 --> 0:10:03.040 based business, but how would they secure funding. They didn't 0:10:03.240 --> 0:10:08.160 have the collateral needed to get big loans to start 0:10:08.160 --> 0:10:12.079 a business. The tech business is a challenging one to 0:10:12.160 --> 0:10:15.400 jump into. It has a lot of upfront costs that 0:10:15.440 --> 0:10:19.680 are pretty darn high. And this was before the venture 0:10:19.920 --> 0:10:25.720 capital community had really become a thing. So who was 0:10:25.760 --> 0:10:29.280 going to make the risk of loaning money out to 0:10:29.880 --> 0:10:34.280 these small startup businesses that could potentially become huge but 0:10:34.400 --> 0:10:37.840 you don't know for sure. Most of the established banks 0:10:38.160 --> 0:10:41.800 weren't interested in taking on that kind of risk. Robert 0:10:42.080 --> 0:10:46.800 or Bob as he was often called, met Bill Biggerstaff, 0:10:47.160 --> 0:10:50.720 a man who worked for Wells Fargo, so who had 0:10:50.760 --> 0:10:54.439 a lot of experience in the banking industry. These two 0:10:54.559 --> 0:10:57.560 lived in the same area. They were playing tennis together. 0:10:57.679 --> 0:11:01.160 They're the ones who went into together on a poker 0:11:01.200 --> 0:11:03.080 game that had a lot of movers and shakers and 0:11:03.080 --> 0:11:07.160 Silicon Valley in it, and Bob decided to bend Bill's 0:11:07.240 --> 0:11:12.360 ear about this idea that Bob had and essentially Bob's 0:11:12.400 --> 0:11:15.400 idea was to create a financial institution, to create a 0:11:15.400 --> 0:11:18.760 bank that primarily existed as a way to loan money 0:11:18.800 --> 0:11:22.560 to startups and help get these concepts off the ground, 0:11:22.720 --> 0:11:25.200 and in return, you know, they would end up getting 0:11:25.200 --> 0:11:27.800 money and interest in all that sort of stuff. So 0:11:27.920 --> 0:11:31.440 it was a key piece that was missing early in 0:11:31.480 --> 0:11:34.920 the days of Silicon Valley. And around this time, another 0:11:34.960 --> 0:11:38.120 important thing was happening. The Reagan administration in the United 0:11:38.160 --> 0:11:42.079 States was easing off of regulations that otherwise would make 0:11:42.080 --> 0:11:45.839 it challenging to start a new bank. So the thought 0:11:46.080 --> 0:11:50.280 was that if you ease off on regulations, then more 0:11:50.480 --> 0:11:56.000 local banks can form. People can actually make banks in 0:11:56.040 --> 0:12:02.199 their local communities. These banks will support that local community 0:12:02.320 --> 0:12:06.560 through loans, So you start to have money funneling into 0:12:06.679 --> 0:12:11.080 communities and allowing those communities to grow by easing off 0:12:11.120 --> 0:12:13.760 on the regulations that otherwise would make it difficult to 0:12:13.880 --> 0:12:19.400 establish a bank. So the regulatory environment changed. Bob recognized 0:12:19.440 --> 0:12:22.160 a need in the tech space, and Bill had the 0:12:22.200 --> 0:12:26.599 banking experience. Plus Bill was apparently really really good at networking, 0:12:26.800 --> 0:12:29.240 and he had already built up some strong connections throughout 0:12:29.240 --> 0:12:32.840 Silicon Valley. You had the Stanford connections with the students 0:12:32.840 --> 0:12:36.560 who were eager to start up their businesses fresh out 0:12:36.559 --> 0:12:40.120 of school, I mean for ages. These tech colleges have 0:12:40.240 --> 0:12:44.920 also acted kind of like incubators for tech startups. Now, 0:12:44.920 --> 0:12:47.880 this was not an overnight effort. It actually took around 0:12:48.000 --> 0:12:50.920 three years from the time they started talking about it 0:12:51.360 --> 0:12:54.040 to when they were able to secure a charter for 0:12:54.080 --> 0:12:57.480 their bank. So now we're up to nineteen eighty three. 0:12:57.559 --> 0:13:01.840 Tom Cruise has the iconic risky business hit theaters, ensuring 0:13:01.840 --> 0:13:04.120 that countless people over the years will copy his lip 0:13:04.120 --> 0:13:07.559 singing style. While wearing tidy whiteis and a half unbuttoned shirt, 0:13:08.520 --> 0:13:11.720 Bonnie Tyler was singing Total Eclipse of the Heart, the 0:13:11.760 --> 0:13:14.559 song that was originally intended for a musical about vampires. 0:13:14.559 --> 0:13:17.680 That's totally a real thing, look it up. And then 0:13:18.520 --> 0:13:23.800 Bob and Bill brought on a third founder for the SVB. 0:13:24.240 --> 0:13:26.640 This was a guy named Roger Smith who came from 0:13:26.720 --> 0:13:29.480 the banking world as well, and Roger joined just as 0:13:29.520 --> 0:13:32.920 the bank received its charter and became known as Silicon 0:13:33.280 --> 0:13:36.319 Valley Bank. We got a lot more to talk about, 0:13:36.480 --> 0:13:49.880 but before we get to that, let's take a quick break. Okay, 0:13:50.200 --> 0:13:54.520 So Silicon Valley bank establishes itself in nineteen eighty three. Now, 0:13:54.520 --> 0:13:58.720 at that time, the phrase Silicon Valley wasn't nearly as 0:13:58.880 --> 0:14:02.120 well known as it is today. There were a lot 0:14:02.160 --> 0:14:05.360 of startup tech companies that had Silicon in their names, 0:14:05.960 --> 0:14:10.199 but it's not like Silicon Valley had really taken hold 0:14:10.280 --> 0:14:14.000 in culture yet. So in many ways, the founders were 0:14:14.080 --> 0:14:16.920 lucky that things went the way they did, or you 0:14:16.960 --> 0:14:20.920 could argue they weren't lucky. Maybe they actually helped forge 0:14:21.160 --> 0:14:25.880 the reality of Silicon Valley because now tech companies had 0:14:25.920 --> 0:14:29.880 a bank that would cater to them that welcomed their business. 0:14:30.320 --> 0:14:32.960 Tech startups that had previously found it difficult to secure 0:14:33.040 --> 0:14:36.640 loans through traditional banks had another option. Now this didn't 0:14:36.720 --> 0:14:40.840 mean that SBB gave out loans to absolutely anyone. They 0:14:40.880 --> 0:14:45.040 still evaluated them, but they were much more likely to 0:14:46.120 --> 0:14:48.480 grant a loan out to someone who seemed to have 0:14:48.520 --> 0:14:53.080 a really strong idea and helped fund those early tech 0:14:53.200 --> 0:14:56.800 companies in Silicon Valley. And of course we all know 0:14:57.480 --> 0:15:03.280 that the tech industry would explode and grow to gargaguin proportions, 0:15:03.920 --> 0:15:07.440 and SVB would grow along with the rest of the industry. 0:15:07.880 --> 0:15:12.120 Along the way. It helped fuel countless startups, some of 0:15:12.120 --> 0:15:16.600 which would grow in turn, and others would, of course 0:15:16.680 --> 0:15:20.880 unfortunately flounder and fail, and more established tech companies would 0:15:20.920 --> 0:15:24.480 continue to bank with SVB and use massive accounts to 0:15:24.520 --> 0:15:27.720 handle stuff like payroll. So, as you might imagine, the 0:15:27.760 --> 0:15:30.800 payroll account has to be really, really really large for 0:15:30.880 --> 0:15:33.800 some of these tech companies. And then you had like 0:15:33.880 --> 0:15:37.720 venture capitalists who were using the bank to help fund 0:15:37.840 --> 0:15:42.280 their investments. And all of this was sort of this 0:15:42.400 --> 0:15:48.160 mutually beneficial relationship, a symbiotic relationship, but one in which 0:15:48.520 --> 0:15:54.880 if any party were to suffer disproportionately, it would ultimately 0:15:55.000 --> 0:16:00.240 hurt the others in it as well. That's foreshadowing, all right. 0:16:00.320 --> 0:16:05.360 So how do we go from a bank that is 0:16:05.440 --> 0:16:09.680 a financial pillar for much of the tech industries, really 0:16:09.720 --> 0:16:13.600 of the startup industry in particular, but for established companies too, 0:16:14.080 --> 0:16:16.720 how do we go from that to a bank that 0:16:16.800 --> 0:16:20.400 collapses in a matter of a couple of days. Well, 0:16:20.400 --> 0:16:23.280 while there are some overlaps with silver Gate, this one 0:16:23.320 --> 0:16:25.800 didn't have anything to do with crypto, but it had 0:16:25.840 --> 0:16:29.880 a lot to do about interest rates. So if you're 0:16:29.960 --> 0:16:32.680 lucky enough to never have had to worry about interest rates, 0:16:33.680 --> 0:16:36.760 I'll give you a quick explanation. An interest rate is 0:16:36.840 --> 0:16:42.200 the amount that's paid on top of a sum of money. 0:16:42.720 --> 0:16:45.640 So we mostly talked about this in the form of loans. 0:16:45.640 --> 0:16:49.640 I mean there's you know, like bank account interest rates too, 0:16:49.680 --> 0:16:53.520 which goes to the opposite direction. But with loans, you know, 0:16:53.600 --> 0:16:56.440 you have the amount that you borrowed, and the interest 0:16:56.520 --> 0:16:58.760 rate is the amount on top of what you borrowed 0:16:58.760 --> 0:17:02.720 that you will pay back to the lender. So we 0:17:02.840 --> 0:17:05.760 usually think of this as percentages. Actually we think of 0:17:05.760 --> 0:17:09.200 it an annual percentage rates or APR. So this tells 0:17:09.240 --> 0:17:11.480 you how much of a percentage of the amount you've 0:17:11.480 --> 0:17:15.600 borrowed on top of that you're going to be paying back. Right, So, 0:17:16.240 --> 0:17:18.720 if interest rates are low, folks are more eager to 0:17:18.760 --> 0:17:22.080 take out loans because they're not paying as much on 0:17:22.080 --> 0:17:25.200 top of the loan amount itself. It is less expensive 0:17:25.240 --> 0:17:27.840 to take out a loan. You keep more of the 0:17:27.920 --> 0:17:31.920 money that you make using that loan to do whatever 0:17:31.960 --> 0:17:34.520 it is you wanted to do, assuming that you know 0:17:35.240 --> 0:17:37.560 it was being put forth in a way where it 0:17:37.560 --> 0:17:39.800 was going to generate revenue. Otherwise, what you think of 0:17:39.800 --> 0:17:42.320 it is it's a way to manage debt. You don't 0:17:42.440 --> 0:17:44.400 go for a loan that has a high interest rate 0:17:44.840 --> 0:17:46.560 because that means you're going to be owing even more 0:17:46.600 --> 0:17:50.560 money in the long term. So this encourages stuff like investments. Right. 0:17:50.640 --> 0:17:54.160 A person might take out a loan to invest money 0:17:54.160 --> 0:17:57.359 into a project if there's a low interest rate on 0:17:57.400 --> 0:18:00.199 the loan because they might believe, Hey, this project's to 0:18:00.200 --> 0:18:02.960 pay out big time, and then I could pay off 0:18:03.000 --> 0:18:05.920 the loan, I can pay off the interest, I could 0:18:05.920 --> 0:18:08.399 pass go collect two hundred dollars. I'm in the clear. 0:18:08.520 --> 0:18:14.040 I've made a profit. But when interest rates go up, well, 0:18:14.119 --> 0:18:17.040 it becomes much more expensive to secure a loan. Right, 0:18:17.160 --> 0:18:19.919 You've got to pay more on top of the loaned amount, 0:18:20.000 --> 0:18:22.399 and that cuts into whatever profit you might realize with 0:18:22.480 --> 0:18:24.680 your projects. So even if your project is a success, 0:18:25.720 --> 0:18:27.240 you're not going to make as much money because you 0:18:27.320 --> 0:18:29.520 got to pay that interest rate back to the lender. 0:18:30.400 --> 0:18:34.600 So this kind of dampens down the enthusiasm to invest 0:18:34.680 --> 0:18:37.800 in projects. Right. I mean, some of these projects might 0:18:37.880 --> 0:18:42.400 take a long time to start realizing a revenue. In fact, 0:18:42.480 --> 0:18:45.560 some of them may have no business plan to speak of, 0:18:45.720 --> 0:18:49.280 and that the real plan isn't to make money as 0:18:49.320 --> 0:18:52.880 a business, but to hopefully get gobbled up by some 0:18:52.960 --> 0:18:56.480 bigger fish for a large payout. But all of these 0:18:56.480 --> 0:18:58.680 things can take time, and meanwhile, you know, you've got 0:18:58.680 --> 0:19:01.480 your loan payments at that interest rate on top of them, 0:19:01.680 --> 0:19:04.000 and that could be a real buzzkill, so it can 0:19:04.119 --> 0:19:08.280 really slow down investments in the space. But for a 0:19:08.280 --> 0:19:11.520 really long time, interest rates in the US were super 0:19:11.600 --> 0:19:14.520 duper low, and you know, more recently they were super 0:19:14.600 --> 0:19:19.080 duper duper low, and you might think, oh, super low 0:19:19.080 --> 0:19:21.720 interest rates, that means way more loans, and a bank 0:19:21.800 --> 0:19:24.199 specializing in loans to the tech sector was going to 0:19:24.200 --> 0:19:28.080 see a whole lot of business. And often that would 0:19:28.080 --> 0:19:32.919 be true, except recently you were in a tech sector 0:19:33.080 --> 0:19:40.399 where companies, including venture capitalist companies, were just flush with cash. 0:19:40.440 --> 0:19:43.719 There was very little need for loans because everyone already 0:19:43.720 --> 0:19:46.679 had the cash on hand to make investments. So, like 0:19:46.760 --> 0:19:49.880 venture capital companies, they might invest in companies that then 0:19:50.000 --> 0:19:52.800 go public, and as part of going public, the venture 0:19:52.800 --> 0:19:57.280 capitalists they get paid out, so they realize a huge 0:19:57.320 --> 0:20:01.600 return on that initial investment. So now they've got way 0:20:01.600 --> 0:20:04.719 more cash than they did before, they don't necessarily need 0:20:04.800 --> 0:20:07.400 to go and secure a loan for their next investment. 0:20:08.280 --> 0:20:13.800 So SVB actually mentioned this in their ten K report 0:20:13.840 --> 0:20:17.080 a few weeks ago. This is a straight quote from 0:20:17.080 --> 0:20:21.280 that report. Quote. Much of the recent deposit growth was 0:20:21.400 --> 0:20:25.360 driven by our clients across all segments obtaining liquidity through 0:20:25.520 --> 0:20:32.480 liquidity events such as IPOs, secondary offerings, SPAC fundraising, venture 0:20:32.600 --> 0:20:38.000 capital investments, acquisitions, and other fundraising activities, which during twenty 0:20:38.040 --> 0:20:40.879 twenty one and early twenty twenty two were at notably 0:20:41.119 --> 0:20:45.520 high levels end quote. So in other words, ain't no 0:20:45.560 --> 0:20:48.520 one going to get a loan? They are all flush 0:20:48.640 --> 0:20:54.159 with cash. So SBB saw bank accounts swell with deposits. 0:20:54.200 --> 0:20:58.280 The deposit amount was growing with SVB, but the needs 0:20:58.320 --> 0:21:02.879 for loans were dropping. So you gotta remember a bank 0:21:03.080 --> 0:21:05.600 is a business. If the bank is not issuing as 0:21:05.640 --> 0:21:10.000 many loans, how then does it make money as a business. Well, 0:21:10.560 --> 0:21:15.680 SVB started to purchase stuff like treasury bonds and government securities. 0:21:16.320 --> 0:21:19.800 These payout at a rate where it's you know, you're 0:21:19.840 --> 0:21:23.160 able to redeem them for more than what it costs 0:21:23.160 --> 0:21:25.600 to buy them, but it takes time for them to mature. 0:21:25.920 --> 0:21:28.200 If you try to cash out early, you get way 0:21:28.280 --> 0:21:30.639 less for them than if you held onto them for 0:21:30.680 --> 0:21:35.879 the whole time. Silvergate had previously poured a lot of 0:21:35.920 --> 0:21:38.879 money into these and part of silver gates crisis was 0:21:38.920 --> 0:21:42.160 that it was selling off its assets for way less 0:21:42.160 --> 0:21:45.600 than what had been planned, just to cover the withdrawals 0:21:45.640 --> 0:21:48.320 that were happening at the time, and the cascade meant 0:21:48.359 --> 0:21:52.359 that the bank was unable to remain solvent. While SVB 0:21:52.560 --> 0:21:57.040 catered to a different, more established clientele, it suffered a 0:21:57.160 --> 0:22:00.240 very similar fate. At the end of twenty twenty two, 0:22:00.560 --> 0:22:04.800 SVB held on around one hundred and twenty billion dollars 0:22:04.840 --> 0:22:08.280 worth of securities. Now it gets more complicated than that. 0:22:09.320 --> 0:22:12.120 There are different types of securities, and a bank has 0:22:12.160 --> 0:22:15.960 to say what type of security it's investing in when 0:22:15.960 --> 0:22:20.919 it doesn't so there are held to maturity or HTM securities. 0:22:21.520 --> 0:22:24.160 Those are ones that, as the name suggests, you hold 0:22:24.200 --> 0:22:26.880 onto until they mature, at which case then you can 0:22:26.880 --> 0:22:31.520 sell them off. But in the meantime they're on your accounts. 0:22:32.000 --> 0:22:35.320 Whether the market values go up or down. They have 0:22:35.440 --> 0:22:37.560 to stay there on your accounts until it's time for 0:22:37.600 --> 0:22:40.879 them to be sold because they have matured. Now to 0:22:40.920 --> 0:22:42.640 get into the real nuts and bolts of all this 0:22:43.160 --> 0:22:46.440 would require a finance podcaster type that ain't me but 0:22:46.800 --> 0:22:50.440 just know that some securities are HTM and some are 0:22:50.960 --> 0:22:54.680 you know, you can sell whenever you like, but they 0:22:54.760 --> 0:22:58.600 are subject to the fluctuations of market value, which means 0:22:58.720 --> 0:23:01.200 at times they can be worth less than what you 0:23:01.280 --> 0:23:06.680 paid for them. Previously, SBB had put a lot of 0:23:06.800 --> 0:23:12.280 its assets into the HTM style of securities. However, as 0:23:12.359 --> 0:23:16.680 long as everyone remained chill, SVB would have been fine. Right. Yes, 0:23:16.760 --> 0:23:18.880 it had poured a lot of its money into these 0:23:18.960 --> 0:23:23.560 long term securities, which meant that it was all tied up, 0:23:24.000 --> 0:23:27.480 and that meant that they didn't have as much money 0:23:27.520 --> 0:23:30.280 in their and their vault. You could think of it 0:23:30.359 --> 0:23:31.639 that way. They didn't have as much money in the 0:23:31.680 --> 0:23:35.960 vault to cover everybody's accounts. But again, if everyone had 0:23:35.960 --> 0:23:38.800 stayed chill, things would have been okay. The only thing 0:23:38.800 --> 0:23:41.159 that would really upset the apple cart would be something 0:23:41.200 --> 0:23:44.560 like interest rates going up significantly or a run on 0:23:44.600 --> 0:23:48.320 the bank. And then the interest rate went up significantly. 0:23:49.160 --> 0:23:52.040 Now the reason for that was that the US federal 0:23:52.080 --> 0:23:55.800 government was trying to counteract inflation. And again, this gets 0:23:55.840 --> 0:23:57.920 super in the weeds and it's kind of beyond a 0:23:58.040 --> 0:24:01.600 tech podcast, but we'll give the super oversimplified explanation. So 0:24:01.840 --> 0:24:08.760 when demand is high but supply is limited, prices go up. Right, Like, 0:24:09.440 --> 0:24:13.800 if everybody wants eggs, but there's only you know, enough 0:24:13.840 --> 0:24:16.360 eggs for twenty percent of the people there, those egg 0:24:16.400 --> 0:24:19.640 prices go way, way, way up. Everybody wants them, there's 0:24:19.680 --> 0:24:23.640 not enough for everybody, and the market settles this out 0:24:23.720 --> 0:24:28.120 by making them ridiculously expensive. Basic laws of supply demand, Right. 0:24:28.960 --> 0:24:32.040 But if costs keep going up, then you have a 0:24:32.080 --> 0:24:35.639 problem with inflation on your hands. That the purchasing power 0:24:35.840 --> 0:24:40.000 of your money decreases and it requires more and more 0:24:40.000 --> 0:24:43.720 and more money to buy basic stuff. And even if 0:24:43.720 --> 0:24:46.640 you are really careful with your cash, if suddenly your 0:24:46.680 --> 0:24:50.000