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E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

Sat, 11 Mar 2023 15:46

(0:00) Bestie intro!

(1:57) Overview of the SVB collapse and bank run

(17:53) Who or what is to blame? Debating venture debt

(37:11) Contagion risk, second- and third-order effects, government backstops

(1:00:36) What does this mean for the VC industry? Silicon Valley panic cycle, advice for founders

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Hey guys, I got a little friend here. What? Yeah, I think I'm gonna start a new podcast. Is that a bulldog? And I'm gonna have a bulldog as my mascot? Do you want a bulldog? Oh my god, you got my mascot. Yeah, I'm gonna take over your mascot. Well look at that now, you're actually likable, Saks. Saks, are you trying to improve your image? Don't have to say, Saks is so unlikable that he has gotten a bulldog. Oh my god, Saks, show me his face again. He's a humor her. What's his name? His name is Moose. Oh my god. Oh my god, you got a bulldog, you suck you. Yeah, it's really my mascot, Jake. I'm going solo with my podcast and I call it this weekend technology. I didn't already exist. It's the only podcast. Please don't start anymore. Three more gloves. All right, everybody. It's an emergency podcast. Silicon Valley Bank has been taken over by the FDIC. Sorry, is this the twist livestream? Am I on the twist livestream? I mean, guys, if you couldn't just interrupt me well, but never going to get through this. It's all hard to get through. The world needs to hear our opinions. If you care about us, click like and subscribe. And if you like the like and subscribe button, click the like and subscribe button. Make sure you search for this week in startups and write a review in the comments. If you don't get enough J-cal, you can get me four more times a week. The name of the other podcast is this week in startups. Thanks for the free promo, guys. It is a huge day today in Silicon Valley. We haven't seen a black swan like event happen here in a long time. Since 2008. I thought the last time was when you published the book Angel. Oh, God. We have to get to work. Tramoth, I saved the jokes. I'm trying to give you a cold open. We did that. Here we go. Three, two. We're like your winners, right? Rainman David Sack. And it said we open source it to the fans. And they just go crazy. Love you guys. I think Queen of kilowatt. Okay, everybody. It's been a while, 36 hours here. We're going to get into Silicon Valley bank imploding. The FDIC has shut down Silicon Valley bank. And there's many different things we have to discuss with me today. As always, the dictator himself, Tramoth, Polly, Hapatia, the Rainman David Sacks, and the Prince of Panic attacks no more. His wire's cleared. David Freiberg, the Sultan of science. Welcome boys. How is everybody just to start this off? Contextually, the last 24 hours. Can you recall a time in our careers where it's felt this acute or insane or intense? 2008 and COVID. Okay, and I think that this is right up there. Could be two, probably three, in terms of the level of panic and concern. We're in the middle of it. We don't know what's going to happen this weekend. So there's a lot of anxiety right now, a lot of panic going on. And a lot of unlike COVID and 08 really acute effects that many companies and investors are actively dealing with right now, like not just a few thousands of companies that are really in a state of like distress right now. So it is potentially from a Silicon Valley perspective worse than 08 or COVID. Oh, for sure, for sure. I mean, this is basically a Lehman sized event for Silicon Valley. Remember when Lehman brothers went out of the basic fall for bankruptcy in 2008 started the whole financial crisis. The federal authorities thought that the best plan for Lehman was to fall for bankruptcy. They didn't try to save it. And that basically led to a cascade where the whole financial system almost collapsed. I think that SVB, this is a Lehman sized event for Silicon Valley. There's two big things happening. One is the impact on the startup ecosystem. So you're seeing probably thousands of companies now cannot make payroll in the next few weeks because their money is trapped and tied up at Silicon Valley bank, which is now under receivership. So if you wired your money out yesterday, you're good. And a lot of people managed to do that. But there are a lot of people who were head wires in the hopper didn't make it today, logged into the website, can't log in. The money's just frozen. And we don't know when they're going to be able to get their money out or how many cents of the dollar you're going to get. So basically the whole startup ecosystem is in payroll. I think Gary Tann called it an extension level event. Yes, exactly. That was a good term. And just to be really clear, this is not big tech at risk. I know there's a lot of people out there who don't like the idea of bailing out big tech. This is not Google. It's not Amazon. So basically those companies that are planning a cast are fine. This is small companies. Companies with 10 to 100 employees. And you're looking at maybe thousands of them just being wiped out for no reason. They didn't do anything wrong because of this. This could have a very damaging effect on the startup economy and the whole United States economy. This is little tech. These are the future companies that will keep the United States competitive versus China and the rest of the world. And then the other big thing that's happening, this all happening real time, is a regional banking crisis. Because when depositors see that their money was not safe at SVB, which was a top 20 bank, that as far as everyone knows was in regulatory compliance. Nobody has said that SVB wasn't compliant. As far as we know, they had a regulator seal of approval. And now you find out your money was not safe and it's not FDIC insured above $250,000. So the conversations we're all seeing in our chat groups with leading investors is why the hell would you keep your money anywhere but JP Morgan or a top four bank? And so I think that unless the Fed steps in here over the weekend, we're going to see potentially a run on the regional banking system, a cascade like we saw in 2008. Well, facts, let's just take a step back before because I think you're right. But we should talk about why that happens, the contagion drivers. And just so people know, Silicon Valley bank is used by 50% of venture backed startups. And I would say the majority of venture firms also have their money there. So this morning I got a note from a fund I'm an LPN. They have millions of dollars that they can access to invest in startups. So Chimoff, there are many products and services that Silicon Valley provides. One is banking services to startups. Another is to venture capitalists. They do the mortgages for venture capitalists and for founders as well. They provide those kind of like love services. But you also mentioned in our group chat, they also provide loans to GPs, general partners to people who run venture firms. So the impact could also hit there. Maybe you could explain what that is. And then we'll get into what happened here. Well, I think it's important maybe actually just for freeberg to just explain what's happening. But okay, maybe let me just do the lead in and then freeberg can do the details. But for those that are far away and aren't even sure what's going on. The basic problem that we have right now is in the last 36 hours, a key part of the financial plumbing of Silicon Valley has basically been turned off. And as a result, billions of dollars of deposits have basically been frozen. It means that people can't pay their bills. It means that people can't access their deposits. It means that credit lines could be in default. It means that payroll can't be met. And so as a result, we have this potential contagion on our hands. But in order to understand it on the packet, I think it's important to explain exactly how this came to pass. So let me just hand the ball to freeberg and then we can talk about some of the implications of which there are many. Yeah, before freeberg starts with the Y, just the what that's happened as well. This all started on Wednesday evening when Silicon Valley banks CEO, publisher letter to shareholders announcing that the bank was rebalancing its balance sheet by selling tens of billions of dollars worth of mostly US securities, I'm sorry, Treasury's, and then they announced they would raise some money and sell some shares in Silicon Valley bank. The then the shares in Silicon Valley bank is a publicly traded entity. Drop 60% on Thursday than another 60% on Friday. Of course, then the entire world got focused on this. And then every venture capitalist started telling, or I would say the overwhelm of majority of venture capitalists, told their founders to get their money out of SVB. Then you had a classic run on the bank. A small number of venture capitalists gave advice to say, hey, we should support Silicon Valley bank. I understand that, but it turned out to be really bad advice. And then trading was halted on Friday morning, pending news. And then finally, the FDIC shut down Silicon Valley bank at noon on Friday. And there's a lot of speculation of what will happen over the weekend. But maybe you could walk us through technically what happened to Silicon Valley bank and why they had this cash shortfall. And this, we explained the run on the bank basically. But what led up to this? The irony is it really was an is prior to the quote run, a financially solvent business. So I have a few slides. If you're on YouTube, you can see it that we pulled one slide that was kind of made by us and the other set that come from Silicon Valley bank's actual presentations. But if you look at their balance sheet, this is from the end of the year 2022. You can kind of look at the stuff that they owe their liabilities, which is what they owe their customers that sits in deposits. Because when customers give you cash in a deposit, you owe them that money back. So that sits as a liability. And then they had some other debt. So in total, Silicon Valley bank at the end of the year had about $195 billion in liabilities, $173 billion of customer deposits that they owe the customers and 22 billion of other debt. And then they take those customer deposits and they invest it in a number of securities. And the way that a balance sheet business like this bank would operate is, you know, the customers have access to their cash anytime they want. But in order for the bank to make money, they make longer duration investments. And those longer duration investments give them the ability to earn money on those longer duration investments more than they're paying the customers for the deposit. So if you look at their longer duration investments, they had about $208 billion of total assets sitting on the balance sheet. And compare that to the $195 billion that they owe customers and other debt holders. So, you know, the difference here between $208 and $195 is about $13 billion. That's kind of the net what people would call book value of Silicon Valley bank at the end of the year. And if the $208 billion of assets that they had, $74 billion were loans. And they've got to break down to the loan portfolio here in a minute. $21 billion were these hold to maturity securities where they don't actually adjust the value of these on a quarterly basis. And $26 billion is what triggered this panic, which is available for sale securities, mostly treasuries. And what happened is Silicon Valley banks deposits came in so quickly over the last couple of years that they went out and they bought a bunch of treasuries, you know, with the cash that they got. And the problem is that very quickly, free break gets actually NBS, they bought a bunch of NBS, 10-year-duration NBS. And important to note, of the $208 billion that they have the book value, Friedberg, there was a whatever, 10% of its in cash or something. So they do have some cash there. That's right. Yes, sorry. It's a good point if you go back. So, like, you know, let's say that of the hundred of the $173 billion of customer deposits, you know, they've got $14 billion of cash. And then they've got all these treasury securities they can sell, call it $40 billion. So if 25% of customers said tomorrow, hey, we want our cash back, theoretically they could just dump those treasury securities, distribute the cash and give it all back to customers. The problem is if suddenly more than 25% want to get their cash back, well, now they have a problem. And that is effectively what triggers the run on the bank. As soon as some folks think that others might be pulling money out, then everyone rushes to be the first money out the door. And that's what triggers a classic run on the bank. There was a statistic, I think, in the 1920s, there were several hundred banks that had runs every year for almost the entire decade. And this was like a regular kind of occurrence that happened in the 1920s that are shared in a lot of our modern securities laws that are meant to kind of create the necessary liquidity provisions in how these banks are able to operate to make cash available to customers. But what happened is so much so by the way, freeberg that they made a movie. It's a wonderful life about the bank run. So basically one of the bigger problems that Silicon Valley bank, they ran into two big problems. Number one is deposit decline where VCs were not investing new money. And when they were not investing new money and startups were burning more money, then Silicon Valley had modeled they would be burning because they thought everyone was going to reduce spend and reduce burn and they didn't. So deposits were going down while all these startups were burning money. No VCs were investing. So total deposits were on the decline. Meanwhile, their bond portfolio, the assets that they hold on the balance sheet, also declined in value. And I kind of just put a really simple illustration here on why if you have a hundred dollar kind of face value bond that earns 2% which is basically where these treasuries were a year ago and you hold that for 10 years, that 10 year bond yields 122 dollars. If the interest rate goes up to 5% then that bond should yield 163 dollars. So the value of the first bond actually goes down by 25% because of the market conditions. That's how significant the value changes with just a 3% change in the interest rates. And that's effectively what happened with that available for security segment of the Silicon Valley bank portfolio balance sheet. They had this bond portfolio that suddenly got devalued and they had declining deposits. So when deposits start to decline, you got to make sure you have enough assets sitting on the balance sheet. So they sold a bunch of them said we're going to raise more money. And at that point everyone kind of perked their head up and said, oh my gosh, what's crazy is in Q4 by the way? Seeking alpha this website you guys know they had actually done an analysis and said is SVB about to blow up. And they put together a bunch of slides that highlighted why this might be the case because they saw that deposits were declining. That their assets that they hold were basically declining in value because of the massive and very quick rise in interest rates. And that SVB had bought a bunch of bonds that were long long derated bonds. So it led to a you know obviously a real short term problem. If you look at the rest of SVB's loan portfolio, there's also a question of how distressed that all is. So 10% of their 70 billion plus dollars of loans is in venture debt. And venture debt is very questionable in this market right because historically the way venture debt makes money is that they assume that VCs are going to keep funding the companies that they're providing debt to. And if the VC stopped funding the companies and the venture debt defaults. And so if you go to the last slide in the stack, you'll kind of see SVB's performance on their venture debt portfolio. Yeah, so look at this. This is the performance results on just the warrants that they get on their venture debts. So when you when you issue venture debt, you take a write down or you get paid back. And then you also get some warrants. You get some a right to buy shares in the winners and the startups that work. And so the way that SVB's made money on their venture debt portfolio historically is hopefully they get paid back on all their loans. Some of them they don't. But then they'll make a bunch of money on selling their warrants or the company's going public or getting bought. And in Q4 of 2022, it just fell off a cliff and their venture debt portfolio really started to show distress. And that's 10% are these realized gains or these are marked a market gains. This is the net gains on on their warrants. So they don't mark the market warrants. I think this is what they actually exercised and got out. So there was there was obviously a ton of exits in 2021. So they made $560 million in profit on their warrants that they had in their venture debt portfolio in 2021. That number collapsed to 148 in 2022. And you better believe most of that was in the early part of 2022. So you know, they didn't do a quarterly breakdown on this. This was like their full year numbers. But their venture debt portfolio, which is another $7 billion capital, also distressed. Certainly wasn't going to perform as everyone had modeled. So when you kind of start to add this all up. And remember, if you go back to the beginning, they only had $15 billion of true net book value, which is the difference between their assets and their liabilities. And so if you really start to adjust what are those assets really worth? Are they really worth what they're holding them at the book at? And if people start to pull money out and you got to sell them at a distressed price in order to give people their cash that they're owed on deposits, that's when you have a classic run on the bank problem. And then everyone tries to be the first out the door. And that's basically like what triggered this this week. Can I give you guys my little version of all of this? I think there are three buckets. But before I go into the three buckets, I just want to say to all of the employees at these companies, I think we, the four of us, are so truly sorry for what's going on and what you guys are going through. And then to founders that are trying to navigate this, it must be unbelievably tough. There are a few founders in our portfolio. So, you know, from all of us, just know that we're thinking of you guys. And hopefully everybody ends up on the other side of this by Monday or Tuesday with not a lot of damage. So let's just put that out there as sort of like goodwill and kind of good juju in the world for the next couple of years. This is going to be a really difficult weekend for people who are trying to navigate this. Yeah, I think it's well said. I mean, I, who didn't get paid a session at all. I mean, I'm really, really tough shape right now trying to figure out how do I make payroll? And it's a big question. Okay, so just putting a pin in that because we'll come back to it. I think that this whole debacle, I guess, is the maybe the best word. There's a little bit of blame that you can put at the feet of three different groups of actors. And I just want to get your guys's reaction to this. Group number one and freeberg just mentioned this is we, the four of us have been talking for the last 18 months about the impact of rising rates. And you know, we talked a lot about, for example, like in our portfolio, my partner's an eye walked into every company and made them have at least enough money to get through mid 2025. Right. I've said this a bunch of times. And so that was about having very difficult conversations about making sure that you were husbanding cash so that you had enough to weather any storm that came on the horizon. But it turns out that there was some group of VCs and companies that just didn't get that memo and just kept spending like nothing had changed. But when other VCs have stopped giving you money and you're continuing to spend like it was 2020, that's what caused this mismatch. And it was really the spark that lived the fuse. So I think it's a really sad commentary at some level about the lack of governance that we have inside of some of these companies where folks are just not doing the job that they're supposed to at these board levels. I think people and we've talked about this have made venture too much of a popularity contest where they are, you know, glad handing and smiling and not doing the hard work of holding folks accountable. And so some handful of VCs and some handful of founders just didn't get this memo and it made what could have been a slower train wreck faster unnecessarily. So I think that's worth talking about. Then I think if you look at what actually practically happened over the last year and a half at SVB was that they were so desirous of profits that they basically had a duration mismatch. So what is that? Imagine you get a job and you know somebody's like, hey, freeberg, I'll pay you $100,000 monthly over some number of months right in normal pay every two weeks. Or I'll pay you $200,000 but you only get paid once a year. Well, the problem with that second thing is you still have monthly bills that you have to make up for before you get paid. And so most people wouldn't take that job even if they paid you a lot more because you have this duration or mismatch. You have to pay rent every month. You have to pay bills on a monthly basis. You have credit card bills, all these things. And so you need to match the timing of your cash flows. And so I think somewhere along the way, the risk folks at SVB just made a really large miscalculation. They basically went and bought 10-year risk in order to pay back money that could be called on a daily or weekly basis. That obviously in hindsight was not a good idea. But more importantly, tomorrow they didn't adjust fast enough. Well, they can't because they have these market assets that were just getting clobbered in the head as rates got raised. And then the third thing is around regulators. After the great financial crisis, we went through a period where there was hundreds of bank failures. And then for the last decade, they've been virtually none. They've been like a few here or there. And the last one was just during COVID. So the regulators, I think, have done a really good job with Dodd-Frank and all of these other things to clean up the banking laws and the reporting requirements and the capital structures so that runs on banks are more and more infrequent. But they kept this crazy loophole around the accounting treatment of assets. And they allow these durational mismatches to appear in a bank's balance sheet. And so I think there's a piece here for the regulators, which is here's an opportunity that's glaring and obvious now and screaming about how we need to tighten some more of the transparency that's required. It shouldn't be a group of armchair slutes on seeking alpha that sniff this out three months before it happened. It should have actually been a regulator that said, hey, hold on a second. Something is happening here that we don't like. And so we need to figure it out. But I think those are the three actors that are in play and they each share a bit of the blame here. Freeberg, Sachs, what do you think? Who is to blame here most for this blow up? Or is this just the extravagant event of the rate hikes happening in such a short, compressed period of time? No, I mean, look, I think that SVB's risk management was terrible. Obviously they signed up for these long data securities when the market they serve is incredibly volatile like Jamassah's durational mismatch. And I think that's really good point. I would also say that there's a weird regulatory treatment where apparently if you buy these 10 year bonds, these 10 year mortgage back securities or 10 year treasuries, you don't have to recognize the loss until you sell them, which is just bizarre. I should have been marking the positions to market. And instead they just were allowing these losses to a crew. I don't understand how the regulators can allow that kind of system. I also don't understand how the regulators can allow a bank to take customer deposits and loan them out to startups with his venture debt that we've been talking about in the show where 10% of the portfolio is basically being loaned out to startups who have no credit. That's crazy. We talked on the show a few months ago. Actually, it's a good time to play the clip here because what we saw, and Sachs and I, you know, seeing at the series A level, you have a lot of times founders would get this basically free money in their minds. I raised 10. I get five in venture debt. I can extend my runway. But that money comes due. And here's the clip for when Sachs and I were talking about it just a couple episodes ago. I don't trust is whether the return models on venture debt that were created over the last five to 10 years will be a good predictor of what the returns will be in the next five to 10 years when a lot of the mortality that should have happened in the past now happens in the future. Yeah, I mean, this is just four or five episodes ago. We kind of nailed it. But startups have no collateral. There's no security for that loan. How does that make sense to make a loan to a credit startup? Not true. Guys, look, I disagree with you on this point. Look, if you pull up the slide that breaks down. Let's talk about venture debt for a second because I've actually invested in a venture debt fund. And I've seen the economics on it. The way that the venture debt model typically works is the lender loans money to the startup. And what they underwrite is what the current VCs in the startup say they're going to do to support the company in the future. So their ability to get paid back in the future is largely predicated not on underwriting the company and the performance of the business or the assets they have. But it's underrided by the fact that the VCs are committed to continuing to put money in and hopefully see that this thing has a big outcome. There is no commitment. There is no commitment. I'm sorry. I didn't. But let me tell you. Hold on. Let me just finish. I get it. But the asset as an asset class, we can make fun of it all we want. It's actually performed pretty well. These guys have generated typically 18% as an industry. Kind of a market and yeah, you're right. It's the same as venture and the way votes and the way that they generate those returns is that they're loaning money to the startups. A bunch of those startups fail. They don't get paid back. And then the ones that succeed, they actually take warrants in the startups. So they have some equity upside in the startup. And that's the way the model works. We can make fun of it all we want. It actually works as an industry. Let me tell you why that broke. It goes back to the point you made earlier in the show, which is the lender has this expectation that the VCs are going to keep investing. Well, what if they don't? Now, we've been in a generally up into the right bull market since the last crash in 2009. I believe for all these models is skewed because it assumes again an environment in which companies keep raising up rounds. As soon as you get into a crisis in which that breaks, then the whole asset class breaks. That's right. And I think this was completely predictable. But even if you think that this asset class is legitimate, I don't understand why banking deposits could ever be used to fund it. If you want to be a venture debt fund, go out and raise money from LPs because what happens is when you raise it with customer deposits, you're creating systemic risks for the banking system. 100% you're in the regulation. Never allow that. Even worse, under two assets are correlated because you're you're loaning it to people who are depositing it. And in every other part of the private credit market that is exactly what you do, what SAC said, you can't use customer deposits to do some CLO deal or to do like, you know, to back a PE play. These are LP capital that goes towards that. This is the only sliver as far as I know where you take customer deposits to create very risky loans, wrapped with warrant coverage. And by the way, this stuff is never free, right? So they make you keep your money there. They make you have enough money to cover the size of the loan in the first place. So it's not even that valuable because if they give you eight million dollar loan, you have to have eight million dollars always on deposit. Otherwise you violate the otherwise you know, you breach the loan. So there is no free lunch in venture debt. There has never been and I still think venture debt is very much like venture capital, which is most of these gains are on paper. Most of these gains haven't really been realized. And now we're going to go through this sorting process when all of this stuff gets whacked. I do want to see your reaction to this, though, which is the thing that started this was the fact that VCs seeing the markets imploding stopped giving companies money, but they didn't do enough work to help founders cut burn. As we said it themselves, the burn stayed the same. What is going on inside of these? Well, I think that's crazy because listen, I mean, we started doing portfolio updates with our entire portfolio of founders in February last year saying the Syriegim change. You got to cut costs. We did another one in May. You can watch them both on YouTube. Okay. And we were telling founders, hot your burn, do it now. Don't wait. We were beating the drum on this so hard in every board meeting and privately. And I like, you know, and it takes multiple times, frankly, to get through. I think your point, Tremoth, about not wanting to be unpopular with the founder crowd led some young capital allocators to maybe say, okay, yeah, let's try this, Dick Eppert, before we do, you know, another riff. Let's try this new product. Let's change our sale strategy. I don't think it's young versus old. I think it's experience versus unexperienced. No, I think it's okay. That's better. I think that's more. I think there is an experience. Listen, if you've never lived through a bear market, you don't know how bad can get. And tech is a boom bus cycle. And the bus are really hard. Really hard. Really hard. And if you never lived through a regime change before, like there was in 2008, 2009 or in 2000, 2001, the worst. 2001 to three. Yeah. You're totally a member of an idea. And you know, and I think experience does matter. And there aren't that many VCs around who live through the Dockham crowd. No, probably 85% of not. By the way, if you guys pull up the dissettled slide on the loan portfolio at SVB, I just want to make the case. I hear you. It's a risky. It seems like a risky investment to make. But don't you guys agree that a balance sheet business like SVB or an insurance company or any business that has, you know, some amount of money coming in that sits on the balance sheet and then they invested for a period of time. There's a laddering of risk. And there's a laddering of duration that you have. And so if you look at Silicon Valley bank from there from the update they did last week that figured all of this. SVB's loan portfolio 70% or really these asset back loans, which are 56% of the portfolio is like, you know, prepayments on LP commitments and then 14% is private banking loans, which is loans against, you know, public securities that people have. Only 10% of the portfolio is venture debt, which is 7 billion. And you know, look, if the asset historically performed at an 18% kind of rate of return. And what is the, you venture debt portfolio going to look like in the distressed environment, is it negative 100% is it negative 50% negative 40% negative 30%. I mean, you guys can have a point of view on this. But you look, I mean, for any business that's managing a large balance sheet of assets against, you know, a short kind of liability tree, they're going to have some riskier assets. I think, you know, the question is was 10% too much of the loan portfolio. I think 1% is too much. Yeah, I know. To that, you know, one of the issues here that we saw qualitatively and Saxony, both so qualitatively is the standard for giving these and the size of them got lower and lower. In fact, the covenants went away. And this is what we kept having 100% to us. It has no covenants. They offer be no covenants. I don't have to have a certain amount of cash. I don't have a half a certain amount of revenue. Those covenants were there for a reason to filter out the people who can't afford the house, right? And this is exactly what happened in 2008 when people started giving those no recourse or no background check mortgages. Remember those where like you didn't have to do a background check to get a mortgage. That's what happened in venture. They just gave these. I saw at first hand, Willie Nilly, I begged founders to not take them. And I only won that discussion. Saxone out of five times because founders are like money. We're having this debate, but there's no indication and there were no losses in this portfolio to date that show the venture debts under performing. We're saying this is what's the expression? What's the expression? Cash performance is no guarantee a future performance. It's obvious to us on this podcast. You guys are arguing about venture debt when the real loss that happened at SVB. No, we understand that they bought a bunch of treasuries and no one has a rate went from 2% to 5%. Let me have a look at that. There's two things going on here. Okay, free bird. When I see your chart and you talk about laddering this and laddering that and X percent in all this kind of stuff, I think about the smartest guys in the room. Okay, this is long term capital management. This is N1. This is the 2008 bank failure. They think they can basically do financial engineering to make this work. You know why it doesn't work is because number one, they're not in fully liquid assets. Number two, they're not marking to market every day. If you're a deposit bank, you should be required to keep all of your assets in fully liquid securities that you mark to market every day. It's that simple. And what do they do? They put it in 10-year duration mortgage bonds. We need to explain this. They know where the value got devastated with the rise of interest rates. They didn't have to mark that to market. And second, they put 10% of the portfolio in basically loans to creditless startups. So when there is a run on the bank, you have a roughly 30% gap between deposits and the value of their portfolio. And listen, that shouldn't be allowed. And the reason it's allowed is frankly, I think regulators are completely asleep at the wheel. Where's Powell? Where's Yellen? Two days ago, two days ago, Powell was testifying in front of the banking committee. And they asked him, do you see any systemic risks in the banking system because of the rapid rise in interest rates? He said, no, no systemic risks. Sacks is right. I agree. The rise in interest rates is the key driver here. It drove down venture investing. It drove down valuations. And it's driving down the value of long-gerated bond portfolios, which by the way is the main standard of how a lot of these businesses invest and operate. And it's caused a distress and stress on the system. My biggest concern is the contagion effect that arises next. If you go in and you continue to assume interest rates climb and everyone's holding onto these bonds and they're getting written down, meanwhile you owe people all this money and cash. And the other thing that's happening, if you hold cash today, you're likely want to hire interest rate to compete with treasuries. Because you can invest in treasuries today and make sure that's a second here. I just want to make sure that the audience understands. And Yellen put out a statement today, Jake, I'll just to finish the thought that they're monitoring the situation. Yes. She's sitting there like a bump on a log. I mean, it's ridiculous. They need to be out front. Understand like that this is a cascading situation. This is either this weekend either this weekend, they place SVB in the hands of a JP Morgan. They do basically a post. They either do that this weekend or this thing keeps cascading next week. And look, I could be wrong. Maybe they're working on it right now behind the scenes. If they are crudos to them, the Lovett announcement before the market opens on Monday. But if they're not and Yellen's just like we're monitoring the situation. While three days ago, she was in Ukraine. This is incompetence at work. All right, hold on. We'll figure out a way for you to do this and to January six next take a pause. He connected Silicon Valley bank to Ukraine. It was exactly beautiful. The piece here that's. What's our situation? Treasury doing in Ukraine. I mean, seriously. Take it easy, easy. Here's what happened just so people understand US Treasuries were at 102. You get like a 2% a year. They bought a bunch of those. That was actually when you think about it, you would say that's a safe bet. The problem is those are locked up for 10 years. And nobody anticipated on the Silicon Valley bank team that the rate hike would happen so quickly, so violently. Remember, we saw the 25, 25, 50, 50, 75, 75, all those increases. Now what happens to a 2% US Treasury when the interest rate goes up is they get devalued. They're not worth as much. So if you did need to sell them, you would have to sell them at a discount. If you held them to maturity, you would get that complete return. And what happened here is they needed to sell these early and they sold them early and they took a massive loss, billions of dollars. And that's what lit the fuse. That's the slide I showed like the price base. I just want to make sure the audience understands that if they had sold these earlier, or if they had bought these, they would have not have to stop it. Now why, why in that meeting did they have to decide to emergency sell? It's because VCs stopped giving startups money. So startups couldn't deposit more money into the bank, but they kept spending at the same rate that they were spending. Which means that the deposits went down. In the last 18 months, not enough folks read the memo. Yes. And by the way, the tragedy of that is let's just say that you did get the memo and you did make the hard cuts. Right. Now, let's say you're working on something and you can fill in the blank on the thing that you care about. Okay. So for the listeners, let's say it's climate change. Let's say it's breast cancer research, whatever it is. They said nothing to do with you four days ago. You had your money in the bank. You did everything you needed to do to go and you know, figure out product market fit. You know, try to get to market, try to sell your product. And all of a sudden, because of some other set of folks and actors who couldn't get their act together. Now you're on the precipice of bankruptcy in 36, 48 hours. That's crazy to me. This is the challenge. Sax, I think you could speak to this as well, is we did all this portfolio management over the last year. These were the troubled companies. And then you had the companies, a large portion who did the right thing. They had a big war chest and they had set the burn at the right pace. And now they, the other portion are poor portfolio that had big war chest. They're now at risk. So if you're a capital allocator right now, you're looking at a group of companies that you tried your best to save and they're, and they're angled and they're wooded. And now the strong ones are wounded too. This is had a cosmic for Silicon Valley. If this does not get stopped this weekend, not only an, I don't want to be hysterical. This is a meteor hitting the dinosaur. It's extinction level event. You're right, Jake Allison. We have portfolio companies that had tens or millions or more in Silicon Valley bank. And their account showed that their money was in the safest money market funds. Money market funds with a publicly traded ticker symbol that were managed by BlackRock or Morgan Stanley. That's what their accounts showed them they had. And then they're told all of a sudden, no, you're only protective to $250,000. Everything above that, that your money market fund is just an asset of SVB, which is in receivership. You got a certificate. Yeah, and you got a certificate. Do you see this announcement? By the way, I mean, the California regulator made things worse. The California regulator stepped in and they froze everything. So our companies were in the process. We have companies that submitted a wire yesterday. By the way, we spent all day yesterday on the phone with our portfolio companies trying to get them out. We had wire requests that went in for the deadline and for some reason, we're in a queue. They didn't get through and they didn't get out. They didn't get through. And then the California regulator steps in this morning and freezes everything. And what do they announce? They said, oh, you're good. You're good for your insured amounts. How much is that? $250,000? For your uninsured amounts, which is everything above 250, you're going to get a certificate. A certificate. What does that mean? That means you're a creditor in bankruptcy. So the mutual fund that you thought you owned was actually not hypothesated in your name. It was in SVB's name at BlackRock. And so our companies have been calling BlackRock and calling Morgan Stanley saying, hey, do you have my money market fund? And they're like, no, sorry, that's SVB. So now this is the crazy thing. They're sitting in a creditor line in bankruptcy. We got to explain this. These were called sweep accounts. So what Silicon Valley bank did with some of these large portfolio holders? Let's say, sacks and a bunch of other VCs gave you 30 million bucks. Yes. And they would they took your money. And they said, you know what? Just to be safe. We're going to take your money will automatically sweep it and distribute it across to other accounts. So we got this BlackRock over here for you. Great. We got this Morgan Stanley over here. Great. Whatever it is. You could only get to those through the Silicon Valley bank interface. And so it was supposed to protect you. But there is no recourse. It seems those are frozen to so the only thing you can do. That's logical. And I had a mentor 30 years ago when I had the magazine and we started hitting millions of dollars in revenue. And he said, I said, how much money we have in the bank? He's like, which bank account? And he had four bank accounts and he would load balance them. And he did it every Friday. God bless, Elliott Cook. He did it every Friday for me. And I've always done that. I've always had multiple bank accounts and load bounce them. But in this case, Silicon Valley bank did it through one interface. I have multiple startups today who did this exact thing sacks. And they couldn't even log into Silicon Valley bank today to even see where they're at. I mean, I think you can't work now. Yeah, you're right. Everything got frozen and the California regulator frozen and the bottom of the FDIC. So there's a couple of problems now with the working out of this. This is basically a bankruptcy process or a receivership process. It's that we've got all these companies that you make payroll in the next few weeks. Right. And so these processes don't work at startup time. If you could just figure out like over the weekend, OK, SVB lost 30 cents on the dollar. And everyone's just going to be pro rated. You're going to get 70 cents on the dollar and you get your money on Monday. It would be a hit to the starbeer ecosystem, but people would recover and move on. But the fact of the matter is it's not going to be on Monday. It could take weeks or months to figure out how many cents on the dollar you have. Are they liquidating Silicon Valley bank? Are they selling the debt? Is everybody getting laid out? Yeah, he's going to FDIC is going to liquidate everything. Well, you have two paths here. Path number one is if you actually try to sell these assets. But the problem is, who do you think the buyer is the buyer? Are the sharpest sharps on Wall Street? Who will purposefully underbeade these assets? And so that then takes you to path to, which is then the only other real solution is for the Fed to warehouse them and guarantee them. And that's an equivalent version of what they had to do during the great financial crisis, which it was this thing called tarp, which is the troubled asset relief plan. It was just a backstop and a mechanism so that these at the time, those toxic assets, which were a bunch of mortgage back loans, could be cleared through the system over time, which effectively meant that the Fed basically warehouse that risk. So I think what we need to see now is is, sacks, it could be 50 cents on the dollar. It could be 60 cents if you want immediate liquidity. You know, a friend in our group chat was mentioning that there was one claim, a company that had a hundred million dollars inside of SVB, was offered 60 cents on the dollar today for that claim. Now, that's a really from a third party who said, I will take you, I will give you 60 million today in return for that certificate plus the 250,000 that says you're owed 100 million. Because they're willing to take the risk that they'll get, you know, 80 million, right? And then they take the difference. Now, the point is that if you're, if you're seeing today that kind of a discount, that's not a good sign, I think. And it does speak to the fact that regulators have to step in now. Here's the other reason why I think it's important. I think what regulators and I think the people and there's a lot of them in Washington that listen to this, what this does is it torches years of US innovation. And you should not let that happen. There are companies working on really important things for the United States and for the rest of the world. And if it's, if the company fails because they can't make the product work so be it. We take that risk every day. If the company fails because customers don't want to buy it so be it. If the product fails because a better product comes out so be it. But it shouldn't fail because we can't get money that is in, forgot your paid deposit. That should not be why we torch hundreds of startups in what they're working on. This is maybe thousands. Yeah, this is a, this would be a lost decade, a lost decade for Silicon Valley. First of all, do you guys want to talk about second and third order effects? We have to really understand those because I think it's important to highlight why it's not just about a couple hundred tech bros in Silicon Valley not being able to make payroll. But there's important downstream consequences. For example, there are payment processing companies in Silicon Valley that use Silicon Valley bank to store their capital and to move money around. There are payroll companies that do payroll for many businesses, not just tech businesses, but many businesses in different parts of the economy that store their cash at Silicon Valley bank and process money through Silicon Valley bank. Today was announced that rippling one of those companies could not hit their payroll cycle today because they had money tied up at Silicon Valley bank. Fortunately, they announced that they also have money at JP Morgan and other places. So they will be able to get the payroll processed early next week and get everyone back on track. But this is hundreds and potentially thousands of companies that use their payroll software to process and pay their employees. And then there's all the payment processors. We don't know how many of them have what level of exposure and a lot of infrastructure companies that move money in and through Silicon Valley bank. And so if they start to go down and then payroll doesn't hit the air conditioning company that's using the tool in some, you know, in Arizona. And then, you know, the Stripe service isn't able to process e-commerce payments for a small business owner that runs a website. You can start to see how there can be very significant trickling effects. And more importantly, like we saw in 08, perhaps to a different degree, but still a significant concern is the contagion of panic. Where people say if there isn't reliability in the things that I thought were reliable before. I start to have real questions in the soundness of the system overall. And that's why it's so important to sac said to step in, shore up the problem this weekend. I don't think it's about bidding 50 cents or 60 cents on the dollar. Every depositor needs to get paid 100% of their money and that cash needs to be made available to them by early next week. And if that money is not available to them within the first 48 or 72 hours of the end of this weekend, then we're going to have a real crisis on our hands. Because then you will see a lot of people trying to move money away from any institution that stores their money in some sort of security that's not 100% like with like cash. And that's going to cause that's going to cause a massive run. And so some what has to happen the only way this can happen is if someone takes over Silicon Valley bank this weekend. And that the federal government, unfortunately, as much as I hate to say it because I absolutely hate the federal government having a role in this stuff has to say we will guarantee 100% of those deposits to the company that takes over the bank that takes over this portfolio. And so let the portfolio of assets run its lifetime, see what you get paid, whatever the Delta is will make it up to you. But we need to make sure that there's cash here today for all of these depositors to get to. You had something you want to say if not I have something I want to say. The other big thing that SVB was was an on ramp for a lot of investors, including many US investors to get money into China. And without commenting on whether that's right wrong or indifferent the point is that China has a very complicated capital market structure, which requires you to basically use an offshore bank i.e. non domesticated Chinese bank. And to be able to get those dollars and so what would happen is Chinese startups that raise money would raise money from US investors and abroad using these bank accounts. And so this issue now doesn't just touch the United States innovation economy. It also touches China's innovation economy, which you know creates actually a complicated set of tradeoffs for the US government and Treasury as they think about what they want to do in this heightening great power conflict that SACs talked about last week. I want to just make a very important nuance point here. I know there is no bank that the public specifically, you know people who don't want to support you know rich people already like big tech or billionaires. The reason to backstop this with public money is because we have a roadmap for this. People don't know this widely, but tarp was just over 400 billion dollars. It actually returned a $15 billion profit to the American people. This would require maybe $25 or $50 billion. 10% maybe 5% of the totality of tarp would be enough to cover what's happening here with Silicon Valley Bank and work this out. That's $50 billion for the people listening in Washington or for the people who will say hey why are we you know bailing out big tech. You're bailing out small tech as Chimalt said you're bailing out innovation on breast cancer on you know renewable energy. But most importantly this can easily be structured so that the American people return 20% 30% maybe even double their money. You could structure this so it is senior to everything else and is exactly what the government is supposed to do. When there is a crisis that doesn't mean the people who run Silicon Valley Bank should have their equity worth a lot. They should get wiped out. They didn't do their job properly. The equity the people who ran the management team there if they don't get anything that's okay. They understand that but the people who had their money at deposit to pay the salaries and to pay for this innovation. It is unconscionable that we wouldn't backstop it and the guarantee you the US government could get some warrants on those companies or warrants in ownership in Silicon Valley Bank and make at least 50 cents on the dollar maybe even double and that's the way this bailout should be structured and it has to be done this weekend. You bring up a great idea. I think I think if the US balance sheet does step in over the weekend. I'm going to say on behalf of the US taxpayer you must get a piece of these companies. And the reason why is that that's the way to make it fair for everybody that's not in tech who's on the outside looking in. If you look inside of Twitter as an example there's a lot of negative sentiment around even the idea of a bailout happening and it's for this exact reason because I think people believe that it will benefit just a small sliver of people. So to step in and to save these companies Jason would still be really only helping say several hundred thousand or several and the thing that that gets wrong in my opinion is that these companies if they're allowed to germinate should be building things that actually help everybody. And so including you and so if you can view it that way and if you can view a share of it obviously look we're very we have a very deep incentive for that to happen. But I think it's important to present the other side of it the other side would say this industry has a little bit run them up. It's not well regulated. You know you guys push the boundaries and get away with a lot and there's a lot of consequences. You're saying the tech industry. No, I'm saying that the average person that's on the outside looking into the tech industry can make that claim and now they would be pointing at big tech but the problem is we all get swept in together under the same thing. And then what they would say is I don't think it's right to to step in and I think that you have to give the US taxpayer an incentive if they are going to do it. And I think the incentive should be that they should just get a share in all this innovation if they take over the venture debt portfolio then they would have that right the venture debt portfolio comes with warrants so they would have that I think there's a big risk here that precisely because tech is unpopular. I think are confusing big tech with small tech that the government doesn't step in here and the the dominoes start falling and we start getting all the systemic risk playing out. Remember the beneficiaries here aren't just these the sort of current generation of tech companies and everyone they do business with. It's also wherever the contagion goes next and we're already seeing I think multiple regional banks under pressure. There's stock down people asking questions we know people in our tech groups who are wiring money out as fast as they can. Just because why take a chance. You know that you have to understand that the game theory around these bank runs people describe them as a panic but that implies that it's irrational. It's not a rational. It's actually rational. And what this is really highlighted is that what you said earlier at the beginning sacks which is that the regulatory oversight is actually extremely pristine at the biggest banks. But the smaller and smaller you get there's a level of opacity and well here lack of regulatory follow through that allows us to build. So the Wall Street Journal right now is reporting that US banks have 620 billion of unrealized losses just on treasuries. I don't know what the unrealized losses are on these long dated mortgage back securities. Like I said I have no idea why regulators allow banks to hold these bonds at their book value instead of marking them to market every day. That's crazy. And on the equity side you have to do it. Buffett talks about this all the time the equity side you have to market the equity portfolio at the end of every quarter. And he sees these wild swings and he complains about it but it's the right thing to do for exactly this reason. Right. So think about the game theory here. Okay. The banking system the banking regulators have created this opacity in the system. You've got all these assets are being held by these banks that are not marked market. So nobody really knows what the true level of exposure is. So what's the response why take a chance to move your money to JP Morgan. So I think there's a chance that if the if the government doesn't step in here the whole regional banking system could be decimated and you're going to be left with 4 to big to fail banks. How's that benefit anybody that doesn't benefit the little guy. Guys there's a pretty good set of regulatory disclosures that happen but I do think that the real question is you know are the ratios right. Do they should they really be allowed to invest in these types of assets with the positive capital and if so with what percent of the depositor capital should they be allowed to do it and maybe. You know that seems to be where the biggest you know issue is we've come a long way. I mean I just pulled up the statistic. It's insane there were 505 banks that failed in 1921. Failures continue to rise in the early 20s and averaged oh six hundred and 80 banks per year failed between 1923 and 19. So obviously you know coming out of a weight. There was a lot of controversy around hey banks can't make money anymore it's too restrictive the disclosures and so on. The disclosures are actually quite good you know you guys can go to these these sites that regulate the banks. You can go to the SEC site you can get a very detailed schedule of every asset held by every one of these banks. It's good transparency I would argue but should they be allowed to invest in securities that are effectively not fully liquid. Better risky that are long dated with short dated deposits right it seems it's a fundamental question about what banks are supposed to be doing in a world of computers that can calculate everything. The idea that you can't solve duration matching doesn't seem like one of those problems that's intractable in 2023. I mean if people can make it a I version of the podcast they could do that yeah. I mean free burger also like take this I think venture that's the most extreme example. How do you mark to market alone to a series a startup I mean that just 100% depends on whether you're going to raise. I actually I'm a believer you can underwrite anything I think you can under for the right interest rate for the right premium you can underwrite insurance you can underwrite loans. I mean there's a lot of ways that you could kind of how do you mark that to market on a daily basis. No you cannot you're right absolutely yeah yeah and so from a reporting perspective that's why I think. So you just close it how does that solve the problem no one has got different they've got different tiers of regular Tory capital guys and so you know they're rules. Around what the ratios need to be and where you need to fall and so they they they bucket the stuff up differently right if you're a bank and you want to buy. Securities you want to invest in something that's not liquid and marked a market every day you should have to. Package it up in some period of time and sell it if you want to make a loan to a you know to venture back startup. Package those up and syndicate that and sell it as a security and if you can't do that you probably should be investing in the asset class anyway same thing with like. You know mortgage these mortgages already get packaged up and sold right so I just doesn't make sense to me that like customer deposits as we're talking about which. You assume should always be a hundred percent safe right this is not a source of capital where anyone's ever expecting to lose money if you want to use risk capital to get some sort of outsize return go raise that from LPs but to like take customer deposits and use it on on risky non liquid investments. Yeah it makes sense there's one thing I could I could just help people frame this. The aggregate amount of dollars in these bank accounts I would estimate equals 10% of the value of the startups they represent would we all agree on that it's about 10% of the value of those startups maybe 20. If you were what how do you how do you calculate about the start-ups recently did around a funding they diluted 10% that represents all of their treasury or half of their treasury so if that cash for the startup portion of this equals 10% of the value of startups I can guarantee you those startups with access to that capital again Monday will be able to outperform the backstop that the government provides this sounds like and run math to me no okay if you want to start up to take any your startups. They have 30 million. We don't have time listen we don't have time here for the government to figure out how to be a partner in an investor in all these startups I'm sorry we don't. I don't step in or they don't. If you step in you'll have systemic failure no no but do the math of me here of one of the companies pick one of the companies that has 20 you have a company that has 20 million there are 30 million there what is that represent if you were to take their valuation from last year when they raise that money cut in half. It doesn't matter it doesn't matter who's the depository does not matter it matters for people to understand how much value is going to be lost. And how easily recoverable it is if these companies are allowed in aggregate to deploy that capital that's the point you're not getting or I'm not explaining to properly if allowed to deploy that it's going to return a multiple an adventure multiple to three four five X but if we destroy that money these companies are going at a business next month. That money is there money that's their deposit. I'm trying to create a framing here for people to understand exactly how much value is going to be lost. I think the better framing is that when you put your money in a FDIC insured bank and you put it in a customer deposit that's supposed to be completely safe that's paying you a couple of percent interest and that is reflected even as a money market fund in your account. You do not expect that money to be turned around by the bank and put in a right. Yeah, that makes no sense. Crazy. Yeah, the bank should not work that way. Look, I think it's crazy that you could set up a bank account. Okay, because you just want to write checks and you could lose that money because the bankers decided to loan it to some startup. That's insane or the bankers decided to buy a 10 year mortgage back security who doesn't understand interest rate risk. That's not the way this system is supposed to work and you got all these people on Twitter pushing back no bailouts or whatever. That's the depositors money. I agree. No bailout for SVB. They should lose everything. All those executives or stock compptions are worthless. All the stockholders of that company, their shares are worthless. But the question is should depositors lose money in these banks? They just thought they're starting for a checking account. I mean, are you kidding me? And if you let that happen, there will be a cascade here because the logical consequence will be everybody is going to say, put my money in JP Morgan or Wells Farger or Bank of America. There will be four banks. That's it. And all the regional banks are going to shut down. That's what happens. Tens of thousands of highly paid workers and not just tech workers are going to be out of jobs and they don't have jobs waiting for them at Amazon or Google to bail them out. And this is the start of a contagion if it doesn't get somebody to do wrong. What do they do wrong? They used what is considered one of the most reputable banks in the world. They used a top 20 bank that the regular said was in compliance. So did they do something wrong or were the regulators asleep at the wheel? I don't know. Some way I think it's this is Biden's fault or it's a landscape. It's the buyer is the list keeps false. What do you guys think this means for VC? It is a chilling effect. I talk with some LPs in the last two days in the VC world. I'll give you a couple anecdotes. I have a friend runs a fund. He looked at his portfolio. They have $270 million or sorry $350 million tied up at Silicon Valley bank. They need $27 million for cash for the next 30 days. So he's called his LPs and he's trying to get his LPs to front him money to wire money so that he confront his company's money so they can actually pay their operating expenses and cover their payroll. Then I spoke with a couple of LPs in the last 48 hours. They have gotten dozens of calls from various venture funds. Everyone is asking the same question. Can we do a capital call? Can we get money delivered early? Can we use that money to support our companies because their cash is stuck? Coming out of this, the uncertainty that this creates in the investment environment, I think it's going to have a real chilling effect. Not just with the GPs and their percolivity to sign term sheets right now and wire new money over. But also with the LPs as they're making capital commitments and actually following through with capital commitments that have already been made, given where is the capital actually going to land up. That was never a question mark before. It was never anything that anyone even considered that capital could be disappeared or locked up or tied up. And the fact that this is adding this unique friction in the market is the layer on top of an already distressed and challenged environment for fundraising for GPs for LPs and it seems to be exactly the icing on the cake we did not need right now no matter how this gets a result. I think private markets and VC could seize I think you're going to see people pull term sheets maybe half as many fundings are going to occur as people try to do triage another VC for an amount just send me a text he can't make payroll next week. He has a fund for VC fund his VC fund their employees cannot he cannot pay his employees on Monday Lord. And so yes, I do think funds could shut down coming out of this it I think that companies that were call it you know 75% distressed are done for now no one's going to step in and bridge them and fund them. It's going to accelerate a lot of shutdowns because people are now cash is king now cash is king or right it's like a big shift. I think that was really well said I think you're right about all that J. How you tweeted that you think this is a cause of 68 freeze and deal making activity I think that's more or less right you're right because you know all all of these things out there have to think about showing up there existing portfolios exactly what if you got companies that are now in distress are perfectly good companies. You got to focus on maybe you're going to make a few winners you're picking one or two winners you know you're going to focus on that you're going to say you know what the rest of them could be good but I can't it's it's kind of a tough decision. I have three open deals right now that we're doing I now have to figure out how to get those deals done and I have four companies that are in this payroll situation in a major way so now I've got capital and I've got to and we're not personally affected by the Silicon Valley bank thing thank God but now we have to do triage the known winners in your portfolio that did nothing wrong or do you make the next three investments or four investments and I'm going to do that. And I'm going to make good on those three investments but next month maybe not maybe next month I'm taking off and I'm focusing on the portfolio and I think that's what's going to happen writ large. We're in triage mode now full on triage mode if this doesn't get resolved if they can't get those. Timoth what do you think this dark I had a meeting three weeks ago with us LP and you know you guys know how I run this business here but it's there's there's like a lot of risk management you know we think about this stuff a lot and the message that came back to me was I don't think risk management is worthwhile adventure I didn't understand where that was coming from because if you're investing your money across a very risky asset class you have to be always thinking about how you could lose money and I think that venture has always romantically been described as like buying lottery tickets and so it doesn't matter if you lose but when you have that kind of attitude you just become super complacent and you don't think about left tail risk you only think about right tail outcomes and this is an example of like left tail risk that came out of nowhere that could wipe out entire portfolios so you had you know folks invest into funds that spent a few years probably 2019 2020 2021 really miss allocating money right writing ginormous checks into companies that valuations that didn't make sense who then went and burned it and now what little cash they had left may also be gone which means those valuations are even more impaired which means that the LPs that gave them the money are even more underwater and that cycle I think is really terrible that'll take a so maybe this is the wake up call where now risk management is actually invoked and cool and it's important to know this stuff I don't know we have breaking news while the taping this the department of financial protection innovation of the state of California has published findings on SVB will pull it up on the screen for the best days to respond to on March 8th 2023 the bank announced a loss of approximately 1.8 billion from the sale of investments we've talked about that already on March 8th 2023 the banks holding company announced it was conducting a capital raise despite the bank being in sound financial condition prior to March 9th 2023 investors and deposit is reacted by initiating withdrawals of $42 billion in deposits so that would be over 20% I think of the of the total deposits from the bank on March 9th or even more 2023 causing a run on the bank as of the close of business on March 9th the bank had a negative cash balance of approximately 958 million despite attempts from the bank with the assistance of regulators to transfer collateral from very sources the bank did not meet its cash letter with the federal reserve the precipitous deposit withdrawal has caused the bank to be in capable of paying its obligations as they come to the bank and the bank will sit in stock beginning 42 billion dollars or would be a loss is 25% of total deposits but 42 billion is greater than the 14 billion a cash they had on hand and the 26 billion of liquid securities that they had so you add those two up together you're 40 billion and then to get more cash they're going to have to sell a bunch of loan portfolios and selling loan portfolios you got a package and up it takes weeks or months to do that and they're going to be sold to distress prices so this is where a classic run on the bank problem actually causes a decline in the asset value of the business and the assets of the own because if you have to go and turn around and sell those assets in the market super fast you're going to take a huge loss you guys remember that movie margin call with demi more and what's his name and they make this plan to go and market like we got a sell after so easy no not Patrick so easy no the Jeremy Irons Jeremy Irons he plays the best character is like the chairman of the bank and they're like we have to sell all this but we're going to take a huge loss and they make this big trade that happens at the beginning of the morning but that's what happens when you have to sell a lot of assets very fast as you guys know you end up selling them at a discount so the rate at which deposits are coming out of the bank can actually impact the asset value held at the bank and that's fundamentally what a run on the bank causes and the irony is as they point out the company was fundamentally financially sound they had enough assets marked at the current market value or whatever to meet all of their obligations but the rate at which assets started to get pulled out is what drove those that you drove the company the bank into distress and if you think about it it's an ironic point of view on Silicon Valley because Silicon Valley operates with such we all joke about what it heard mentality and what an incredibly tied and deep network Silicon Valley is we all got dozens and hundreds of texts and messages from friends colleagues co-workers yesterday all relaying the news about what they were going to do and as soon as that happened that's how tightly intertwined Silicon Valley is within 24 hours every CEO and every venture capitalist was on a chat group or on a message group with other people in the valley and once there was any indication of panic the entire market flipped and you guys saw this we all saw this within 24 hours beginning of the day yesterday it was like it will get through it will be fine they just took a little mark down on their portfolio they got plenty of assets but then it's like well founders fund said we should probably get out OK well founders fund is getting out maybe we should get up before everyone else does well we got to get up before and else let's go now I'm getting out right now I'm telling my best friend getting out right now and then everyone tells their second best friend and then all the sun the whole valley knows it and then all valleys running for the door and this is a really interesting unique scenario it's not like the classic consumer run on the bank where you're trying to pull cash out it's the Silicon Valley 24 hour cycle of we all got to do it because everyone else is doing like what we're seeing with investing cycles in Silicon Valley where everyone chases and these bubbles emerge the reverse I think happened yesterday where the herd mentality drove us all to rush for the doors quickly as possible you know I'm not sure that that that might be why it's not as much of a contagion you know as you might expect elsewhere because places other kind of regional banks don't have the same sort of inter-windedness as we saw with all the depositors here in Silicon Valley bank I don't know I don't know I'm just be aware of yeah this is where I think that describing what happened as a panic kind of misses the fundamental rationality of the response so to by the way yeah so it does seem like a panic but that doesn't mean that each individual decision makers motivation is panic I actually think it's a rational upside down side calculation I mean this is all game theory so if you think that there's a risk of other people pulling out their assets and in fact you're hearing that they are you don't want to wait and be the last one to leave and so you think about it there's no penalty or downside to taking your money out right so the the downside of taking your funds out immediately is zero and the upside is you might save 100% your money so it's a rational decision when confidence is lost to take out your money and in fact it was rational there were a bunch of VCs not a lot but some of them tweeting yesterday that you know SVB's been a great player in the ecosystem for 30 years we should show our support right now by not taking your money out well guess what what happened to them they got stuck and now their money is frozen and they're not sure whether you get you know pennies on the dollar or not whereas the people who rushed for the exits yesterday got the money out it's prisoners dilemma it is a prisoner still on that but here's the thing it's it's not even about anymore whether the institution is solvent it's about whether there's confidence and I think there is a risk now of contagion spreading to these other regional banks because people are sure and there's already huge cash outflows leaving these other banks because why take a chance the game theory of it is move your money out until this is over and if you're okay with you moving it back in a few weeks if it turns out not to be around the bank that's fine so a lot of this can be self fulfilling you have to remember that runs on the bank free where you said this 100 years ago works extremely common every decade there was be a giant financial panic and there'd be a run on the bank run on many banks and the only way that the federal government stopped it was by interesting FDIC and they said they said to depositors your money is safe and at that time $250,000 was enough the problem we have is that with these business banks to $250,000 is not enough so all of a sudden there's going to be a crisis of confidence if you think a business bank can go under again you're just going to leave all these regional banks you're going to go to the top four that's going to be it so I think that the situation right now is really dynamic and if the Fed does nothing and just says up you know these depositors should have known better you know the losses on them then I think the rational reaction for depositors at all these other banks would be just to leave because I don't think depositors are in a good position to assess the liquidity and credit worthiness of a bank I just don't think they are I think stockholders are there are the people who should lose all their money if the bank goes under but not depositors any advice or takeaways for founders and capital allocators going forward obviously have your money in multiple bank accounts I sent you guys a list that was just published of all of the funds that custody at S. V. B. and it's unbelievable the list it's every single major VC in Silicon Valley wow where did you get this I have my ways directed from SEC filing Scott it okay thank you yeah this is amazing wow holy shit I mean everybody's in there it's always 500 Sequoia we're going pretty fast here but yeah yeah everyone did a fund I mean this is wow I feel like I do very fortunate that we were we were out we know what you got a few months ago when we were talking about venture debt on the pod I didn't believe that S. V. B. should be in this business so I told well look there's craft there's craft no well hold on I'll tell you does it say how much money we got in there yeah go to the right I'll tell you what happened is so after the conversation on this the show about venture debt I'm like I don't really like that S. V. B. is in this business so I told my guys step into council where else we did that so we moved our firm accounts over and we're just using S. V. B. to make you know warehouse loans or whatever so I thought they were just a lender to us so yesterday when all this stuff went down I said to our guys like we're out of there right they're like well actually we had about 45 million dollars that we're about to distribute to L. P.s. and I'm like whoa that's crazy so we were able to sweep that to an account we used to make in kind distributions and then we got on the phone and we called as many portfolio companies we could it to get them out and we got a huge number of them out but unfortunately some of them didn't get out here's the thing that I think people in Washington don't understand we're doing this with the next set of banks the triage is still happening guys I will tell you look sex I appreciate the the siren call but I think the only way that what you're saying because you're saying that triggers this the next siren call and the contagion spreads I'm not blaming you I'm just saying it's a reality and you're you're right the game theory optimal way to play this as a depositors to move your money out of it somewhere that it's completely safe and you know you have your cash secured or by a security and a brokerage account where it's totally safe and it's registered with a securities exchange or something but in the meantime for this to get resolved there has to be a bear hug solution offered up this weekend I'll say it again yeah in order to stop the next set of siren calls to drive the next car call listen this is the thing I hate about the run on the bank is that if you warn people that there's a possible run on the bank happening you're actually creating the run on the bank that's why it's so pernicious when these things get started and yesterday we were calling all of our portfolio companies because we were warning them because our obligation was to them but we weren't you know I don't think we're putting out like a siren to the world and by the afternoon it was really clear that if they listen and got their money out there and much better shape the ones who didn't listen so this is the pernicious thing is that every individual actor has to do it's in their best interests and we're not trying to start a another run sorry what hold on but we know things we know that people very close to us big players are withdrawing their money from other banks right now I have a bunch of so let me just finish my point my point is what you're saying makes a ton of sense and it's going to cause this as you describe kind of an anxious escalatory problem and the only way to stop it is a bear hug which may not cost the taxpayer anything if the Fed or some federal agency stepped in and said we are going to backstop all of these banks with all of these deposits with cash and we're going to guarantee it today and here's a $500 billion facility and just by saying that everyone stops trying to pull their money out and you don't actually need to backstop it with any money it's it's already started so Nick if you just the link that I sent you in the in the group chat you just throw that link up there I think this is the best proxy for what SACS is talking about so sort of I think very unemotionally how would we know that there is a contagion that's a foot you would look at the equity layer of all these regional banks so what is this this is the I shares regional banks ETF and what you start to see is this decay and go to the one week view Nick please it just starts to fall off of a cliff and so why is this happening what's happening because the equity tier of these banks are now increasingly worried that their equity will get wiped out and so that's why they're selling and so the I think what David said is already a foot unfortunately it starts at SVB but forget the name for a second and take Silicon Valley out of it this is a top 20 bank that now is in the receivership of you know the authorities and so there does need to be something that needs to happen in really short order because what's to prevent bank number 35 let me just say it again if a federal agency comes in if the Fed comes in and says you know what we are going to backstop all of these banks and we're going to put $500 billion behind it and we're going to guarantee that all these deposits are going to be made whole it stops the panic at that point you don't even have to put up any money because as soon as it's a first derivative problem it's a feedback loop as soon as you stop people from doing the withdrawals the whole market subsides you don't actually get you don't plug it and I think that's what needs to happen this weekend that's what should I have to plug it today is they number one need to go get Silicon Valley bank handed over to a big balance sheet and guarantee that balance sheet that they're going to make money by taking this thing on and number two they got to make a statement we got another 500 billy for you where's the president where's yelling well they'll make a profit on it too so I mean they don't need to use any money to do it right the thing that's missing in our system is that there's no FDIC for 25 million dollar accounts what like 250 is not an effective amount that's a personal account it's for a personal account but businesses need confidence in our economy in our banking system or the whole thing starts to on spool so what the quit pro quo should be is you can get a 25 million FDIC business banking account and the bank is highly restricted and what it can do with that money yes you can't put that money in Fagazie venture debt you can't put that money in ladder ten year bonds that don't get marked a market is only a highly liquid secure marked a market assets and the the downside of that for the bank is they'll make less money and pass on less interest to the the business the the depositor the shareholders so what that's the way it should work how are stable coins looking like a better option right now I mean the crypto guys right now are like what it's not a cow I've done a joke was a joke nothing can revive the crypto market as we're seeing today even in a run on the bank which is exactly what everybody was afraid of in a Bitcoin world that thing is down 10% so what we have the equity whenever liquidity whatever the reason for that schemoth is just that what we've seen is that liquidity is all correlated so when people are panicking about the state of their finances and worried about getting access to their cash the first thing they dump is crypto because it is very liquid so yeah everyone is trying to free up cash right now I just want to be clear as it ended the show here we were dancing around is this going to be a contagion and I think what we know and what we're seeing is the the next dominoes are already falling and so it cannot be a contagion it cannot be a contagion we have to stop it that's the point that you're feeling is we and I agree with you but I just want to make sure people understand we started this we didn't want to go there you know I think with some reticent reticence to to going there let's let's put it this way if you if anybody if you have initiated a wire in the last 24 hours you are worried about contagion yes if you're in DC and you have any ability it matters and if you have any ability to influence what's going to happen this weekend we strongly advise on put someone comes in and bear hugs the market this weekend and says we will not let contagion happen with a very big slug of capital to support it that will likely not even be needed to support it because once you say that the contagion will stop the got a common sense free freeberg we're going to know on Monday whether these regulators had in the administration know what they're doing at all the other black swan problem is that this weekend we will find out what some of the unintended second and third order consequences are going to be of SVB being in a receivership this weekend we talked a little bit about the pipes problem but there may be several other businesses and other other institutions and companies that we don't know about that may trigger another set of cascading effects that are unrelated to a banking problem but could drive some more significant business and economic problems that we're going to kind of probably end up talking about next week so you know this weekend with payroll but there are other things that this money goes towards mortgages or rents so the cascading effect of this if people stop paying their rents if people stop paying mortgages I mean real estate let's say I didn't visit a keyv instead of East Palestine yell and visit a keyv instead of slug of all these people know what's going on here come home they promise more financial assistance for Ukraine and they're saying they're monitoring the situation here we're in the process of what's the bill for Ukraine this month earlier yeah get on the case the bill for Ukraine this month versus this ballot is you know probably the same so I think we have to really think this through folks yeah you're going to go well no on Monday with these people have a clue or not no they have to be on TV tonight or tomorrow this has to be a pressure on Sunday hold on I think I think a lot of these guys do know what they're doing so let me just say it to them in language they understand folks when you look at the equity tier of these regional banks people are liquidating the equity tier because they know that that is the first domino to fall if banks go into receivers ship please act accordingly you can see it in the ETFs you can see it in the trade flows this is not a Silicon Valley problem anymore it is a regional bank problem and it will get worse unless you do something to make it better right and I and Jake out this user were bail out only that word because not a ballot backstop there were big you too big to fail banks in 2008 in the financial crisis who did get bailed out those people should have lost the value of their stock okay that was wrong that's not what we're talking about here the party is wiped out already what we're talking about is protecting depositors these are people who trusted that when they put their money in a top 20 bank that our regulatory system is compliant that they will not lose their money when it says on their computer screen that my money isn't a black rock or a Morgan Stanley mutual fund or money market fund rather the safest instrument there is that that money is where it's supposed to be and if regulators allow that bank to put their money in stupid assets that are not marked to market and that's why they shut down that is not a good reason for depositors to not get their money 100% we're taking care of depositors here not bailing out stockholders yes this is not for the executives at the banks it's for the depositors who did nothing wrong and nor did their employees and their customers and the innovation that they're working on all right this has been a great all-in-podcast sorry we didn't have time to talk about the shaman QAnon shaman I know that's a passion project for Hugh Sacks but you can announce your Kickstarter for him and you go fund me for the shaman for the shaman where's the bulldog we're giving that bulldog one more time the shaman the shaman the shaman is an intersection of three of a very interesting then diagram he is very athletically fit incredibly hairy and all the attitude that's a that's a trifecta that you rarely see you rarely see that in you know so cultural appropriation so yeah we have to keep that in mind and conspiracy theories I mean this guy's got it all are we gonna play poker this we get it just like as the as the it's kind of it's kind of sad towards the valley he's kind of he's kind of an odd the the seriously the the shaman what's his name is Jake he doesn't seem like he's all that sure no he's he's a guy who has diagnosed mental illness but he's completely nonviolent he's completely nonviolent he actually believes in the philosophy of Mahatma Gandhi of no violence towards any creatures is it sure yeah he you know he's a bit of an odd duck and freeberg of QAnon and he didn't assault anyone he did what just wandered through the capital apparently getting a tour from police officers were just guiding him through it he's the January six four years I don't know if I can get four years in jail for that because he became the face of an insurrection because he just looks so weird with the Viking horns and the face pain or whatever he also made threats to the politicians too but yeah I mean it does seem like it might not be the appropriateness he wrote a note saying we're coming for you I think on the case but he was sentenced by a Republican judge from Texas and he had made threats written threats and put them on the desks of folks and he was one of the first people into the building so I think they got him for that but I agree with you they're listening to the building if he didn't break at door down or didn't smash a window if he if he damaged property that's one thing if he assaulted someone that's one thing but he just wandered through the capital I think four years is kind of excessive and I think the reason why the guy got four years illness he's not able to defend himself the way that he should be this is just a fun amount of liberal liberties issue if you have any compassion at all you shouldn't let a guy like that gets scapegoated there's four hundred people who of the thousands of people who broke in who were violent and who got sentences of some degree they were all settled like a plea bargain including his they didn't go to trial and if you know I think we can all agree the violence that occurred that day is you know should be punished and the non-violent stuff should be at speeding ticket you know we don't need to I think three categories Jason I think violence the assault on cops or been so forth punished fully significantly then damage a property and then but the people are just people who just trespassed or wandered through who may not even have known they were trespassing probation that that that's not that's not jail time that's not a felony yeah I mean we want to promote peaceful protests if they had come with guitars and saying kumbaya and we shall overcome we'd be having a different discussion here instead they beat cops you know and you can't beat cops up sorry those ones go to jail yeah period full stop we're in agreement okay everybody has been another amazing all in podcast sorry we couldn't get to all the news but we felt that this required a big unpacking for the Sultan of science the dictator and the rainman I am the undisputed world's greatest moderate we'll see you next time on the all-in podcast this week that's my dog take it away she's right wait we should all just get a room and just have one big huge or two because they're all it's like it's like this like sexual tension but we just need to release some of them what you're the bee what you're a bee you're a bee bee what you're a bee we need to get mercy I'm doing I'm doing