Silicon Valley Bank Collapses — With Dan Primack and Ranjan Roy

Dan Primack is the business editor at Axios. He joins Ranjan Roy and Alex Kantrowitz for a special edition of our Friday podcast. We typically run through the week's news in this edition of the podcast, but there is really only one tech story this week, the demise of Silicon Valley Bank, and we dive into it in depth. This episode was recorded right before the government shut down SVB, so a sale was still an option, but as you listen you'll learn exactly what contributed to the bank's collapse and what it impacts from here. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Alex Kantrowitz?

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• 0:43Alex Kantrowitz?

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• 1:15Alex Kantrowitz?

  Welcome to Big Technology Podcast, a show for cool-headed, nuanced conversation of the tech world and beyond. Well, Silicon Valley Bank just failed. That's right, California regulators stepped in, shut it down, told the FDIC that it would be the receiver of its protected insured deposits, according to reports, which basically means that if you have $250,000 or less, you're going to be insured by the FDIC. And if you have more, you're going to have to go through some sort of process that looks like a bankruptcy process. Okay, this is major news. This is Silicon Valley Bank is the bank of the tech industry. It's where a lot of VCs and a lot of startups keep their money. And if it is failing, it's going to have a major impact on the tech industry.

• 2:01Alex Kantrowitz?

  So Ron John Roy and I, as you know, if you listen to the show, we typically talk on Fridays about the news. Well, this week we recorded with Dan Primack of Axios, the business editor there, breaking down what was going to happen directly before the shutdown took place. So I'm going to play you that discussion today. We're going to go through all the things that happened with this bank, including why it shut down. And what it means, the implications, whether there's contagion and spillover. We recorded this just as this was going down. There was still some uncertainty, but I think when you finish listening, you're going to understand exactly why Silicon Valley, Silicon Valley Bank failed and what it means from here. I hope you enjoy.

• 2:43Alex Kantrowitz?

  Welcome, Ron, John, welcome, Dan.

• 2:44Speaker 01

  Hey.

• 2:45Alex Kantrowitz?

  Where does this rate on the crazy scale in terms of financial stories?

• 2:50Speaker 01

  I mean, to me, this is extraordinary. I mean, I woke up yesterday morning, yesterday being Thursday, and Silicon Valley Bank announced that they were going to do the share sale. They were going to try to raise a little over $2 billion to kind of firm up their balance sheet. They had had some, some issues, kind of some of their treasury investments kind of went sideways. But it looked, it didn't look good, but it looked like, okay, company trying to right itself a little bit. We're 24 hours later and we're talking about them being for sale and not for sale like, hey, we're hoping to get a good price. Like, please, somebody, please buy us and put us out of our misery immediately. It's extraordinary. And within Silicon Valley, for those who don't know SVB, it is the largest lender to tech startups, to life sciences startups. It's where lots of venture capital funds put their own money. It's a really big deal. It's the 16th

• 3:34Speaker 01

  largest bank in the entire country.

• 3:36Alex Kantrowitz?

  Let's go there because I feel like we should really start talking about what this is so we have an understanding of what the significance is. And I think for a lot of our listeners, they're going to be familiar with Silicon Valley Bank. But for those who aren't familiar, why does the tech sector have its own bank? At least that's the way that a lot of people view it. Why not just a normal bank?

• 3:55Speaker 01

  That's a very good question. I mean, for starters, SVB has been around a while mainly because it was one of the first banks that went after tech clients, right? Particularly tech startups that were really small, right? If you're a big, big bank, you didn't necessarily want the account of a company that had maybe, you know, half a million dollars, at best, maybe a million dollars. You know, think, think, go back, right before the average venture capital round was 10, 20, 30 million, you know, when they were raising, you know, half a million dollars, that two, $3 million Series A round. They really went after these companies and embedded themselves in the ecosystem. I mean, they're not alone. There are other banks out there and even some big ones, right? Chase, which is part of JP Morgan, has been a major player in Silicon Valley.

• 4:36Speaker 01

  But SVB has been a really big deal and it's also been a place over the years where they've gotten into wealth management. So then founders, venture capitalists, et cetera, put their own money in there and they've gotten very big into and they're big in venture lending, which when we think of venture capital, it's usually equity, but they're also companies sometimes raise debt and SVB has been a major player, kind of a groundbreaking player in that.

• 4:58Speaker 02

  Wait, so can you talk a little bit about the trajectory of Silicon Valley Bank? Because I mean, I'd seen that total deposits had risen 86% in 2021. So I mean, was this a pretty straightforward operation for a long time and then just got caught in the everything bubble along with everyone else or?

• 5:17Speaker 01

  Yeah, but when we think of the everything bubble, it wasn't so much that Silicon Valley Bank was trying. I mean, obviously, everybody, every bank wants to get bigger, but it was really a byproduct of what was happening in the venture capital market, right? You know, if companies go from raising, you know, 20, 30, 40 million dollars in a Series C round, for example, to going to raise 100 or 200 in the Series C round and they're using SVB as their bank. Well, the deposits are getting a lot bigger, right? The rounds get bigger, the deposits get bigger. If the companies do well and their revenue starts to go up, obviously that that increases the deposits as well. So SVB, yeah, it was part of the bubble and it also did start offering very, very good incentives for people to take out credit lines, et cetera, very, very good rates.

• 5:59Alex Kantrowitz?

  Didn't it do some more risky investing? And I know that's not the problem right now, but let's just talk about it quickly, that it invested in some crypto and it used pre-IPO shares as part of its collateral. Do you guys have any sense as to as to how it operated differently in that sense? Because it did. It did seem like it had a greater tolerance for risk than maybe your typical bank. Or am I reading that wrong?

• 6:21Speaker 01

  I honestly, I'm not, I don't want to speak too much out of school on that because I'm not exactly sure, except to say that seems to be a very small part of where we are now. I mean, the thing that's so stunning about this, because the comparisons obviously are going back to 2008, 2009, you know, Washington Mutual on the consumer side, but then obviously everything that happened on Wall Street. No one has really been able to say definitively here that there was actually liquidity problem. And SVB all yesterday, all Thursday, kept saying, there isn't, there isn't, there isn't. Except there now might be one because everyone pulled their money, right? A bank, you know, if everyone pulls their money, that can create a liquidity problem at any bank, no matter how strong they were when they woke up in the morning. So it seems that they did make some poor risk management decisions,

• 7:04Speaker 01

  particularly not quite realizing that interest rates were going to rise as quickly as they did at the same time. The venture capital investment and honestly, tech revenue was decreasing at the rate that it did. So it seemed to have a little bit of a delta. But that said, it felt as of yesterday morning, if it raised that $2.25 billion, it would have more than covered that gap and it should still be fine.

• 7:26Alex Kantrowitz?

  So I want to talk about the panic and then I also want to talk about the thing that caused the problem. And I think the thing that caused the problem started before the panic, obviously. So, but it seemed to me like it was the most benign thing you could possibly do, right? Which is that they invested in some mortgage-backed securities. You wouldn't imagine that that's the thing that's going to take down a bank because, you know, it seems fairly safe. But they invested in these long durations, mortgage-backed securities. And how did that lead to this panic that we're seeing now?

• 7:57Speaker 01

  They basically misjudged, they basically misjudged what rates were going to be. And obviously rates have been rising for a while, as we all know. You had Jay Powell earlier this week, really surprised the markets. I mean, you know, the Dow dropped 500 points, I think approximately after he testified in front of Congress and said rates are going to keep rising a little faster than people thought. So the market as a whole misjudged what was going to happen with interest rates. SVB was part of that. You could argue that SVB maybe was a little bit more exposed than, than, you know, was the average financial institution, just because as they kept getting more and more deposits, they needed to find places to put them and they plugged a lot into mortgage-backed securities, a lot into treasuries. But again, it didn't, it still doesn't, from what we know, look existential on its face,

• 8:41Speaker 01

  except for the fact that there was a run on deposits and everyone freaked the hell out.

• 8:46Speaker 02

  First noting that you just called mortgage-backed securities benign, which is a very different way of phrasing it from 15 years ago. But, but I think that is, I mean, echoing what Dan said, that's the most interesting part of this entire story. It's essentially a duration mismatch that they invest in longer-term treasuries and mortgage-backed securities when rates were low.

• 9:08Speaker 02

  And then the price of all those are falling as rates go up. So then, you know, their portfolios just aren't managed from a risk perspective. Well, this is not the, you know, like, there's like a bunch of stuff going around. They invest in wineries or give lower interest mortgages to, I think they called them innovation economy influencers, but basically the founders or the VCs who are involved in their ecosystem.

• 9:30Alex Kantrowitz?

  That's crazy.

• 9:31Speaker 02

  Yeah, it is. And all of that stuff looks bad, but at the core, and it was interesting. The Wall Street Journal had a piece back in November on this, that lots of banks are exposed to this in an increasing rate environment. When you don't hedge yourself properly, when you're buying longer duration assets and when you're trying to actually manage that risk, you know, you can get caught. Rates are rising, the value of all those securities that they invest in are decreasing. They're trying to plug those holes, but in the meantime, capital is fleeing. So on both sides, on the asset side and the liability side, the bank's getting hit from rising rates.

• 10:12Alex Kantrowitz?

  And I think we just lost Dan, so let me try to get him back on. But as we do, Ron, John, can you talk a little bit about what Dan was talking about in terms of these, these banks getting these deposits of money and needing to find places, riskier places in order to make money? Because I thought that was mostly just a consumer thing, but you know, this was Silicon Valley Bank doing this, which is.

• 10:32Speaker 02

  No, I think there's a couple of points on this. The first is, and coming back to ZERP, this is the ultimate ZERP story in the sense that in a zero interest rate environment, you know, capital exploded, so much money needed to find a place, it found its way to Silicon Valley Bank. They're sitting on, again, their deposits increased 86% in 2021. You're sitting there as a bank risk manager, what do you do? Normally you would loan that out to your clients in different ways, you'd come up with different lending products, but it was such an inflated amount to their portfolio that they started buying longer duration assets, treasuries, mortgage-backed securities.

• 11:14Speaker 02

  So then what you have right now, on the asset side, you know, where they're trying to actually, you know, they own treasuries, mortgage-backed securities, as I said, rates go up, the value of those decrease because again, people can get. You know, higher interest rate products at a in a shorter duration. But then on the liability side, on the deposit side, this is where they are caught right in the middle of the tech crash. Imagine, as Dan said, you know, you're a C R E C company. You raised a hundred million dollars. Suddenly that's sitting in Silicon Valley Bank. Now you're slowly burning cash. You're unable to raise more money. So, you know, your deposit slowly declines and declines and declines.

• 11:56Speaker 02

  So on the, you know, like the actual customer deposit side, they're losing as well. So on both sides are getting hit. And again, this is purely just like a risk management, boring calculation type problem that they messed up.

• 12:10Alex Kantrowitz?

  Let's get to the panic side of this, right? Because it is sort of a panic that led to them declining the way they did, right? They had enough money to pay back whatever they they need to. Maybe it would have taken a little bit longer, right? But, you know, because they had this mismatch, they had a loss. They tried to raise some money to fix it. Next thing you know, everybody runs away. So Dan, can you tell us like exactly what happened in that story? And, you know, how this goes from, okay, maybe a somewhat bad business decision from a bank's end to something that could be an existential threat to it? Oh, I think we lost him again. Okay, Ron, John.

• 12:40Speaker 02

  Yeah, yeah, yeah. No, I think so. The most fascinating part of this, and as a person who focuses on content and communications, this was really, really bad communications. This is a textbook in how not to approach this. Again, there was definitely kind of like murmurs around about these duration mismatches and the risk that Silicon Valley Bank had on its balance sheet. But, you know, people, you know, the stock was not getting annihilated. It was up in January, along with everything else. But then they come out with this seemingly innocuous, you know, capital raising strategy yesterday. There's a press release. They say that they've already sold some number of treasuries and other assets at a, I think

• 13:25Speaker 02

  it was like a 1.8 billion dollar loss. So again, none of that, sure, it hits your profitability, your net interest margin, which for banks is what matters, but it should not cause this kind of problem. However, it did. And this is, this is where the communication side is fascinating to me. First, biggest mistake as a bank CEO, never say, stay calm.

• 13:48Speaker 02

  Like the last thing you ever want to have to say is stay calm. And that's exactly what they did. Even more fascinating to me is the CEO kind of alluded to, you know, we have been there for you for many years. So be there for us now. Once you try to turn this into kind of like an emotional friendship type thing, rather than just cutthroat business, you're also kind of putting yourself in a challenging situation. And then to me, kind of, I don't want to say the funnier part, but every tweet you see right now from some startup CEOs saying, like, I stand with Silicon Valley Bank. I am going to keep my money here, is the worst

• 14:31Speaker 02

  possible thing you can do. Like, anyone who knows how social media works, if you talk about it, it will stay in the conversation and it will continue to keep people terrified. And I think that's what's happening right now. It's that it's like anything else, the same way, what's fascinating, the same way everything went up, low interest rates and kind of like hypercharged, social media-driven information flow, which is what allowed a lot of these assets and just ban the Silicon Valley Bank and tech startups to actually, you know, like explode in value, is the same thing that's hitting it on the way down.

• 15:05Alex Kantrowitz?

  So I guess I don't understand why it's a bad thing to have people say that they stand with Silicon Valley Bank and that they're keeping their assets in there.

• 15:12Speaker 02

  Oh, Streisand effect. If you talk about it, you know, that people will, like, the worst thing you can do is continue to talk about it, especially in the context of a bank run. Because by you saying out loud, I stand with Silicon Valley Bank, we should all do the right thing together. You're just keeping it in the conversation that it's potentially, it could be insolvent, that we could be in a liquidity crisis.

• 15:37Alex Kantrowitz?

  Right. And so, Dan, not, you know, first of all, welcome back.

• 15:40Speaker 02

  Thank you. Hopefully, we'll see how long I stay.

• 15:44Alex Kantrowitz?

  So Rajan and I have just now talked a little bit about what inspired, like what is behind this, what the panic might lead to. Why should we be paying attention to a bank like this? I mean, it's just, okay, it's a big bank, but what about it makes us, you know, makes this a big story?

• 16:02Speaker 01

  Okay, well, obviously, I mean, look, size does matter, right? When it comes to banks, size matters a lot. I think a couple of things. One, there is at least a suggestion that this reflects kind of the health of Silicon Valley as a whole, and I don't mean the physical region, but I mean, the theoretical one, kind of tech and life sciences startups. There's something kind of more sinister is the wrong word, but that the damage that's been done there over the past year or so is deeper than people realize. But then, more importantly, you know, they're, they're, these are real companies. And, you know, I understand the idea, and it's been talked about a lot, and I wrote it this morning in the newsletter, that the US government, at least in our lifetimes, doesn't really like banks to truly fail in the sense of customer deposits get lost, right? Like, a bank can fail, but even though

• 16:46Speaker 01

  the FDIC is only insuring, you know, business accounts up to 250 grand, well, everybody will still get their money somehow. You know, somebody will find, they're not going to let, you know, company X or company Y have their 5, 10, 50 million dollars disappear. But that is a legitimate fear right now. That's our assumption. It's based on precedent, but it's not guaranteed. It sure is hell not the law. And if you're a startup or any company that is healthy right now, who's got your money with SVB, you've got to be pretty damn scared. I mean, imagine being a company that's even a slightly profitable company, or a break even company, or god forbid, a real startup that's, you know, that's unprofitable right now, and all of your bank account disappears overnight. I mean, that's an extraordinary thing to possibly have happen. And, you know, you, you ask founders

• 17:29Speaker 01

  what keeps them up at night. This is never one of those things, but it is all of their thing right now.

• 17:35Alex Kantrowitz?

  So is there, so let's go with the impact on startups to begin with. Is there a potential world where startups are not going to have the money? And so this is like where all the VC money goes to startups when they've raised the money.

• 17:47Alex Kantrowitz?

  Is there a potential world where startups are not going to have access to that cash?

• 17:50Speaker 01

  I mean, by the letter of the law, sure. We, you know, where the bank to go under. And again, we don't, one thing that's really important, we still don't know how deep the withdrawals were in the last 24 hours from Silicon Valley Bank. They haven't said, we don't know. We do know that though, that some people who've been trying to pull their money out, including this morning, some texts that are coming into me now, have not been able to do it. Or it's taking hours and hours. And that might be because SVB, given what's happening, is putting kind of some higher checks and balances before they just let money, you know, go out the door. It's not like taking 20 bucks out of an ATM, but that's, that's adding fear. And, you know, we, you know, somebody might hear, okay, so a startup is going to struggle a little bit. Well, maybe that's payroll. This is, you know, today's Friday. I'm guessing a lot of people pay their employees today.

• 18:34Speaker 01

  That's real fear that, and the trickle down effects of, you know, missing a payroll are lots of companies, hundreds of companies, thousands of companies missing a payroll is extraordinary.

• 18:43Speaker 02

  I mean, in terms of the contagion potential here, like what's wrong with the idea that, you know, everyone moves their money in Brex and Mercury and all these other, and Chase and everyone else benefits. And we have a little, little bit of a capitalist creative destruction here in Silicon Valley Bank made some mistakes. Like, could that be the outcome and a pretty reasonable one?

• 19:06Speaker 01

  It could be the outcome. Unreasonability, the, the problem I think becomes if you're a company or, or let's say any institution, company, fund, et cetera, that has to put your money somewhere. What exactly do you do here? Because again, this isn't like, from what we can tell, that Silicon Valley Bank, and I hate to use this word, deserves what's happening to it. Right? Like, and like, it's not that, you know, there's been a massive fraud uncovered and oh my God, they were hiding the ball. That's not the case here. What you're hearing, I think, from the smarter venture capitalists is to their companies, diversify. Don't put up, don't take all your money out of SVB and then put it into First Republic or into Chase. Put a little here, put a little there, put a little bit there, which by the way, sucks for startup CFO and for their accounting team, but it's probably the wisest move right

• 19:50Speaker 01

  now and, and make sure, you know, honestly, that you've got some in the equivalent of the mattress.

• 19:56Alex Kantrowitz?

  We're here on Big Technology Podcast Friday Edition. Joining us is Dan Primack, who's the Business Editor at Axios. And as always, Ron John Roy is here with us on Fridays. We're breaking down the week's news. And this week, the news is Silicon Valley Bank. On the other side of this break, we're going to talk a little bit more about what the implications are and also what it might mean for the Fed's campaign of rate raises that we always like to discuss on this show and how that drives the economy. All right, back right after this. This episode is brought to you by Avpoint. Everyone's racing to roll out AI right now. Co-pilots, chatbots, agents doing real work. But here's the part nobody loves talking about. All that AI runs on your data. And most teams have no single way to see it, secure it, and prove it's under control.

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• 21:25Alex Kantrowitz?

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• 22:10Alex Kantrowitz?

  That's ironwell.com/bigtechnology. Learn how to stop online threats before they become real-world attacks. The link's in the show notes.

• 22:22Alex Kantrowitz?

  And we're back here for the second half on Big Technology Podcast. Dan Primack is here. He is the Business Editor at Axios and you can sign up for his terrific Prorata newsletter on Axios.com. Dan, I got that right, yes?

• 22:35Speaker 01

  That sounds right, or getprorata.axios.com.

• 22:38Alex Kantrowitz?

  Okay, there we go. And Ranjan Roy is here of Margins. You can sign up for his terrific newsletter at margins, margins.substack.com.

• 22:45Speaker 02

  Read margins.

• 22:47Alex Kantrowitz?

  Read margins. Thanks for listening, everyone. So it strikes me that it's kind of amazing that we're talking about the real possibility that this core bank in the heart of the tech industry may fail. And of course, it's a bad decision to buy these mortgage-backed securities, but it also is a product of the Fed, right? The Fed saying, keeping rates so low that it thought that the best it could do is 1.75% on a 10-year security. Now rates are much higher, so those securities that it bought are worth much less and that's where that loss comes in.

• 23:22Alex Kantrowitz?

  And there's been some discussions that maybe the Fed will keep raising rates until it breaks the system. And we talk, okay, maybe there's a possibility of contagion risk here. How do we think the Fed is thinking about this as it watches it all unfold?

• 23:38Speaker 01

  I mean, there's a lot already on Twitter of some folks in the valley, you know, pointing the finger at Jay Powell for what's happening to SVB right now. And obviously, there's more macro news that came out this morning.

• 23:48Alex Kantrowitz?

  Okay, I think we lost Dan again.

• 23:52Speaker 02

  I think Dan was probably going to be talking about the jobs number that came out this morning, that the jobs create, job growth was beat expectations. It was 311,000, whereas expected around 225,000. So on that side, that's very hawkish. But then on the other side, average wage growth actually declined from 0.3 to 0.2%. It was lower than expectations as well. So that's disinflationary. That's a good thing, which is why I think you see the markets are all over the place this morning. They opened up, the Nasdaq was like 1.5%, I think, at the open and now is trading down about 0.7, about a percent. So I think this is definitely a reminder that no one knows what is going on.

• 24:38Speaker 02

  I think our entire conversation last week was how the entire business world and economy is at a complete inflection point right now. But I do think like the idea of Blaming the Fed to me is a bit ridiculous because again, this is just straightforward the business of banking and having sat on a trading floor in September of 2008 at Bank of America and watched it all unfold, like I think Dan had started on this point, this feels like not as bad behavior. This feels like, you know, like rather than, you know, issuing all types of mortgage-backed securities and different tranches and selling them to clients even though you thought they were duds. Like this is just again, just very

• 25:22Speaker 02

  bad judgment on the part of Silicon Valley. And on that question of, you know, like the word deserve, I do think it's fair and I think people need to be, you know, understanding the fact that if you are in banking, your business is to manage this type of risk. And if you do it improperly, you know, there will be consequences to it. And I think like every client at Silicon Valley Bank is seeing that firsthand right now. So, so I think trying to push the blame onto, you know, increasing interest rates, Jay Powell, all of that, I think is definitely the wrong way to look at this.

• 25:56Speaker 01

  Yeah, and I agree with that. And also clearly SVB is running my internet connection because I keep losing you guys. I didn't know they were in that business, but they must be in that business.

• 26:05Alex Kantrowitz?

  Cascading failures. Do you agree with that, Dan?

• 26:08Speaker 01

  Yeah, I do. I do agree with that. Right. This is the job of banks to deal with this. It is the job of banks to look at every possibility when it comes to things like rates and candidly, if you're SVB also, you know, declining venture capital investment levels, that by the way is less of a surprise than the Fed continuing to raise rates, right? Like we've been talking for 12 months about venture capital investment, not going away, but slowing down and valuations coming down. We've been talking and SVB should know that better than anybody because SVB is also a lender, a venture lender. They're the ones often who are on the other side of some of these structured financings, which are really designed to help certain startups not cut their valuation, but still bring in more cash. So they're very, very attuned to the fact that there are certain, call them unicorn companies that were a little bit cash for.

• 26:52Speaker 01

  Wait, that's a great point. I mean, think about that, that not only do they have incredible visibility onto their deposit side, that they see better than anyone, whether their clients are going to be able to continue raising money and increasing their deposits, or if they're going to keep burning cash. So yeah, again, I think that's like even a worse look for them to get caught in this kind of position.

• 27:14Alex Kantrowitz?

  Okay, but rather than blame the Fed, doesn't this impact their ability to keep raising the rate? Because obviously, it's not a direct, I mean, it's not the Fed's fault. Silicon Valley Bank did a bad job managing the risk that the Fed was, you know, putting on them, or, you know, the potential of their action. But the more that these rates go up, the more potential there is for another bank to have this situation. I mean, was Silicon Valley Bank operating that far out of the realm of normal that we don't anticipate this happening again?

• 27:45Speaker 01

  Honestly, we don't necessarily know yet. And by the way, whether SVB, whether SVB was operating out of the range of normal or not, if another, if this happens to another bank, in other words, if there's another run, and First Republic is the one I'll keep looking at, because what's happening to their stock price, which again, has nothing to do necessarily with their investments, although they have some, some real estate stuff, like, if it happens to another, whether Jay Powell believes it is accurate or not, that the Fed decisions, you know, sparked this, or inappropriately sparked this, he may have some pressure on him, because you do not want to be running the Fed and have banks failing left and right. It's not technically their mandate to keep banks solvent, but ultimately, the Fed oversees banks.

• 28:28Alex Kantrowitz?

  It's a byproduct of your decisions. It's not what you want.

• 28:31Speaker 01

  It's not a good thing, although I think we're way too early to determine whether this is going to impact the Fed.

• 28:36Alex Kantrowitz?

  But it had to have been paying attention yesterday when you looked, I mean, there's a tweet from Brian Sullivan from CNBC, looking at all the red in terms of financial stocks. And you have, right, like you mentioned, First Republic down 15% yesterday, some others like Charles Schwab down close to 9%, which isn't as bad as Silicon Valley Bank's, what, 60% or whatever it was. But yeah, they have to be paying attention to this stuff.

• 28:58Speaker 01

  Well, yeah. And then in the banking sector in general, and I'm going to try not to butcher this from reading last night, but there are, so every bank after the crisis, there's two ways that it can hold assets. Either it's hold to maturity, or it's available for sale. Hold to maturity assets, you don't have to mark to market. So even if they're declining in value,

• 29:22Speaker 02

  You don't actually have to report that against your net income or anything versus available for sale. You say that these are essentially liquid. You could be moving these, selling these into the market. Those you have to mark to market. And there was definitely, you know, a lot around how banks over the last few years, even the bigger ones have taken on more risk or are sitting on bigger losses with hold to maturity assets, even the Bank of America, JP Morgan, which would just be a normal part of the cycle, though. Again, not at all saying that any of those banks could be in any trouble at all. It's more just this accounting change that happened after the financial crisis to try to allow banks to operate in a slightly more stable way could be having adverse consequences right now.

• 30:06Speaker 01

  Can I add one other thing that's worth noting here? SVB had a really high market cap. It was a big company. And so if it goes away, you're also talking about tens of billions of dollars of value wiped out of its investors, and some of which are big pension funds, et cetera. It's not the most important consequence of this, but it matters. There, again, there are always trickle down effects when there is a massive collapse of something.

• 30:29Alex Kantrowitz?

  I see. So I'm hearing these, but I am hearing like all these things. And it's like, it doesn't really feel like it's systemic risk. And that's where I sort of.

• 30:38Speaker 01

  It's, except that there is contagion without an underlying, like this would almost be as if we were all sitting in a room and we all got sick. And like the, you know, the CDC came in and said, we can't find anything floating in the air between you guys. Y'all got sick independently somehow. It's almost like we were sitting there and I started coughing and you were like, he's sick. Uh oh, now I don't feel good. It's almost in everybody's mind, but that's not, but that, that's real. Psychological damage is real damage.

• 31:07Speaker 02

  Yeah. And I, I think, again, going back to 2008, I mean, I don't want to say I'm scarred from sitting on that trading floor when Lehman went under, but I can tell you that the way we were trying to manage risk at B of A that night. Was so uncertain. I don't want to say the entire system is built on duct tape, but you know, there's like, we're trying to understand our exposure to Lehman so we could hedge against it or offset it. And then I remember vividly like, you know, at two hours after we've already offset all our positions and gone into the market, we were missing a counterparty. There was like this old Lehman counterparty called Shearson, which was like their old name. And it screwed up all the positions, all the hedging, all the work. We had to go back into the market, cross spreads

• 31:52Speaker 02

  again. Like, no one knew what was going on. And you could feel the absolute kind of fear and risk of contagion there. And I think that's like what we're talking about here is that it's something that it's hard to quantify or understand. It's, it's just, you know, it's as human and psychological as it gets.

• 32:12Alex Kantrowitz?

  This whole time we've been running up to the recession, it feels like, okay, well, you know, or we don't even know if it's going to be a recession. It's the recession everybody predicted. We're going to have a soft landing. We're going to have a no landing. And it, I guess everyone's kind of held their breath thinking, okay, maybe we're gonna have something that's gonna, you know, actually cause the problem, but hopefully it doesn't come. And maybe it's not this, but it sure feels like this is what it looks like.

• 32:37Speaker 01

  Well, and remember, I mean, SVB is, is not an avatar for the entire US economy. It's not even close. It's, it's very, very specific on a, on a certain sliver, a sliver that gets a lot more attention than do most of the other slivers. And obviously, you know, the three of us focus on it a lot more. I mean, I, I don't know. I mean, I think you could make an argument that, that the, particularly the startup sector is in recession. I mean, in the sense of, I mean, you, you look at the massive job losses kind of across the board. You look at the, you look at revenue issues. I mean, so SVB is not, you know, SVB, you know, looks at US national GDP, but that's not really where SVB is looking at. And that's not necessarily what impacts it as opposed to, you know, a much more mainstream bank.

• 33:18Alex Kantrowitz?

  Last thing I have on this is, is what's the analog here? I mean, is this 2008? Or how do we look at something like this and say, and say what it is in the context of, of history?

• 33:31Speaker 02

  I think this is uncharted territory in a nice way. It keeps us give good podcast fodder, good writing fodder. But yeah, no, no, it's a, this is something we haven't seen before. Again, like the tech sector concentrating, you know, massive amounts of capital just in the span of the last few years and the way it did. I don't think there's, I can't think of a real corollary there. This is definitely not 2001. I would not say it's 2008 either. So I think we're going to see our, you know, like a new chapter in this. And I do think, like, again, almost a best case scenario is this just lives in the world of tech. We talk about it, but the average person never even really thinks about the name Silicon

• 34:16Speaker 02

  Valley Bank. And there could be a lot of wealth and value washed out, but otherwise it just stays in the world of tech.

• 34:24Speaker 01

  I will say there is though, some mainstream fascination with this. And I'll just judge this at Axios by like, looking at our, our internal numbers on traffic for stories about Silicon Valley Bank, which I guarantee if I had written a story a week ago about, you know, Silicon Valley Bank earnings, like no one would have given a, given a shit about it. Everybody's caring about this. So I think this is a company, and I hate to put them in the same breath because they're not at all, but it is a little bit like a Theranos or even an FTX in the sense of it has gone incredibly from a niche thing that, right, people in tech in the valley know about to something that mainstream, average Americans are suddenly learning about, and it's being discussed at dinner tables. And that, that matters.

• 35:03Alex Kantrowitz?

  Have you guys been reading these long Twitter threads? It seemed to me finally like Twitter Blue is kind of working. I mean, the VCs that are posting these long threads about, or they're not even threads, they're just expanded character tweets. I found those have been pretty useful.

• 35:15Speaker 01

  Well, look, there've been some that have been trying to explain the basically banking, right? Which is a fairly arcane, you know, obscure sort of thing. Some have done so better than others. And some, some also have gone into the whole VCs are experts on everything, whatever's important at the moment. VCs are, you know, experts in whether that be virology or banking. But yeah, no, look, absolutely. But some of them have been interesting. Yeah.

• 35:36Alex Kantrowitz?

  Yeah. Okay, let's end with this. This is like another blow to tech, right? We've had the, the decrease in valuations. We've had crypto basically go up in flames. And now we have their flagship bank, you know,

• 35:54Alex Kantrowitz?

  Having a run on it, not to mention all the layoffs. What do all these factors combined do to the tech industry itself?

• 36:03Speaker 01

  I don't know what it does to the tech industry. I mean, it definitely reflects weakness. I think, I think it probably, I mean, in the practical terms, it changes some behaviors, right? Definitely in terms of diversification where people are going to hold their money for sure. But ultimately, I don't know that this will necessarily change too much. I think the bigger issue right now for tech or for venture capital, at least, you know, investing in tech is there's no way to exit companies. And at some point, limited partners are going to start screaming over this. We haven't really had a real IPO, a significant IPO in a year at this point. And with what you're seeing on the antitrust side, even though it hasn't directly gone after too many venture-backed companies, the antitrust activity, there's, you know, another thing today that the ICE is going to be blocked or attempted to be blocked by the FTC from buying Black Knight.

• 36:47Speaker 01

  It is putting a chill on big tech wanting to buy small tech. And so if you're a limited partner to venture capital fund who hasn't really gotten a distribution in months, at some point, you're looking, saying, how am I going to get my money if these companies can't go public? And they can't get acquired? What exactly is the business model of venture capital right now? And that's a big problem and it hasn't really hit yet, but at some point that's going to hit VC firms that start saying, we need to spend a lot less. You did see in a little bit of virtue signaling, but you saw Founders Fund, you know, in the last week, basically kind of hand back half of a fund it already raised in part to say the opportunities aren't necessarily there right now.

• 37:24Speaker 02

  Yeah, and I think that's a very good point in terms of at kind of at the macro VC level, you know, with the IPO freeze, lack of exits, lack of options. That's obviously completely changing the model. But I do think this is a real shot to the arm here because it's like on one side, everyone's been sitting back. They know the lack of liquidity or lack of liquidity, meaning exits or IPOs or acquisitions has been slowing and has become a problem and is going to adversely affect the way venture capital works. But then suddenly you have this moment that all the money could just disappear as well. So, so I think if nothing else, it'll make people think a lot more about that change

• 38:06Speaker 02

  in the model, which everyone knows, but everyone has seemed to have been ignoring. People are still, you know, there's still some big rounds happening. We haven't seen any major changes in public behavior, other than, you know, as you said, like Founder's Fund giving back half of their fund. But I, I think this really is going to accelerate people thinking about how VC has changed.

• 38:29Alex Kantrowitz?

  All right. Well, that'll do it for us here. Dan, thanks so much for joining. Great to have you on.

• 38:34Speaker 01

  Thanks for having me. Sorry, my connection kept dropping.

• 38:36Alex Kantrowitz?

  No, no worries. It was

• 38:37Speaker 02

  Silicon Valley bank's internet.

• 38:38Speaker 01

  I know. SVB SP. It's not a great business.

• 38:43Alex Kantrowitz?

  Exactly. Okay, Ron John, thank you. By the way, folks, catch Ron John and I at South by Southwest if you're there. We're going to be on March 13th, which is Monday at 2:30 PM at the Hilton Austin Downtown, talking about weather. Silicon Valley is dead. And then we'll be back in your feeds next Friday with another edition of our live Friday shows. And stay tuned for Wednesday, where I will drop my weekly flagship interview show as well. Thanks to everybody for watching. We have a very lively crew on LinkedIn today. That was awesome. And, and thanks to you for listening if you're here on the feed. Thanks to LinkedIn again for having me as part of your podcast network and we will see you next time on Big Technology Podcast.

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