E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more
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His name is moose.

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Jack, i'm going solo with my podcast in the court this weekend.

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Collected aren't everybody is an emergency podcast. Silicon valley bank h has been taken over by the fd.

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and subscribe to subsection ch times a week the name of the other podcast this week and started up. Thanks for the free promo guys. IT is a huge day today in silicon valley. We haven't seen a black swan like event happened here in a long time. Two thousand eight .

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Okay, everybody, it's been a while, thirty six hours here. We're going to get into silicon valley bank, exploding the fda c has shut down silicon valley bank. And there's many different things we have to discuss with me today as always, the dictator himself to my poy hopeth a.

The rain man, David sacks and the of panic attacks. No more. His wires cleared. David freeburg assault ant of science. Welcome boys.

How is everybody just to start to solve contextual? The last twenty four hours? Can you can you recall a time in our careers where IT felt this acute or insane .

or intense a two thousand eight and covered OK? I think that this is right up. There could be two probably in terms of the level of panic and concern. The problem is, were in the middle IT. We don't know it's gonna en this weekend. So there is a lot of anxiety right now, a lot of panic going on and a lot of like unlike covet and await really acute effects that many companies and investors are actively dealing worth right now, like not just a few thousands of companies that are really in a static like distress right now. So IT is um potentially from a smoking valley perspective, worse than await .

or coit h for sure for sure. I mean this this is basically a leman sized event for silicon valley member when lemon brothers went out of the basic fell bankrupcy in two thousand and eight, start of the whole financial crisis, the federal authorities thought that the best plan for leman was to fall for bankrupcy. They didn't try to save IT and that basic LED to a cascade where the whole financial system almost collapse.

I think that s will be this alleen size event for a silicon valley there. There's two big things happening. One is the impact on the start of ecosystem.

So you are 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 being, which is now under receivership. So if you worry 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 hot wires and the hopper didn't make IT today. Log in the website can't log in. The money is frozen and we don't know when they're be able to get their money out or how many sense of the doors you're going to get. So basically, the whole story of ecosystem is in peril. I think garreton called IT .

extinction level event.

Yes, exactly. That was a good term. And just to week, you're really clear this is not big look at risk there. There is a lot of people out there who don't like the idea of bAiling out big tech.

This is not google. It's not only .

those companies are playing a cat are fine, this is small companies, companies with ten, two hundred employees, and you are looking at maybe thousands of them just being wiped out for no reason that in do anything wrong because of this. This could have a very damaging effect on the stark economy and the whole united states economy. This is little tech.

These are the future companies that will keep the new competitive versus china and the us, 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 S V B, which was a top twenty bank that as far as everyone knows, was in regulatory compliance, nobody has said that S V B wasn't compliant as far as we know that a regulator seal of approval.

And now you find out your money was not safe and it's not fdc, in short, above two hundred and fifty thousand dollars. So the conversations were all seeing in our chat roots with leading investors is why the hell would you keep your money anywhere but shaping Morgan or a top four bank? And so I think that unless the fed steps in here over the weekend, we're gna see potentially A A run on the regional banking system, a cascine like we saw two thousand .

eight secs. Let's just take a step back before because I think you're right, but we should talk about why that happens. The contingent drivers .

and just the people know silicon valley bank is used by fifty percent of venture bank startups. And I would say the majority of venture firms also have their money there. So this morning I ve got a note from, uh fundament P N.

They have millions of dollars that they can access to invest in start up. So to moh, there are many products and services that silicon value provides. One is uh you know banking services to start ups.

Another is the venture capitalist. They do the mortgage for banker, for venture capitalists and for founders as well. They provide those kind of White life services.

But you also mentioned our group chat. They also provide loans to GPS, general partner of people who run venture firm. So the impact could also hit there. Maybe you could explain what that is and then we will get into what happened here.

Well, I think it's important maybe actually just freeway to just explain what's happening. But okay, can be maybe let me just do the leading and then freedman can do the details.

But for for those that are far away and aren't even sure whats going on, the basic problem that we have right now is in the last thirty six hours, a key part of the financial plummet of silicon valley has basically been turned off and as a result, billions of dollars of deposits have basically um been frozen. IT means that people can't pay their bill. IT means that people can access their deposits IT means that credit lines could be in default.

IT means that payroll can be met. And so as a result, we have this potential condition 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 end up all the freebies we can talk about some of the implications of which .

many yeah before freeburg starts with the White, just the what that happened as well. This all started on wednesday evening when silicon valley bank CEO publish a 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, treasuries.

Then they announced they would raise some money and sell some shares in silicon valley bank. Then the shares in second value bankers are probably traded. Entity drops sixty percent on thursday than another sixty percent 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 majority of venture capitalist told their founders to get their money out of sb, that you had a classic run on the bank. A small number of veta capitals gave advice to say, hey, we should support silicon valley bank.

I understand that, but IT turned out to be really bad advice um and then training uh was halted on friday morning pending news and then finally the fd I C shut down so can valley bank at noon on friday and there's a lot of speculation of what will happen on the 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 if we spend the run of the bank, basically. But what LED up to this.

the irony is IT really was and is, prior to the quote, run a financially solving business. So I I have a few slides of 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 so about bank actual presentations.

But if you look at their baLance cheek, this is from the end of the year twenty twenty two. Um you can kind of look at the you know stuff that they owe their their liabilities, which is what they owe their customers, that its deposits because when customers give you cash in a deposit, you own them that money back. So that sits as a liability and then they have some other debt.

So in total, so will come valley back at the end of the year had about one hundred and ninety five billion dollars in liabilities, one hundred and seventy three billion of customer deposes that they owe to customers and twenty two billion of other debt. And then they take those customer deposits and they invested in, in a number of security. And the way that a baLance cha business like this bank would Operate is you know the customers have access to their cash um any time 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, uh, more than they're paying the customers for the deposit. If you look at their longer duration investment state, about two hundred and eight billion dollars of total assets sitting on the baLance sheet.

So compare that to the hundred and ninety five billion that they owe customers and and and other that holder. So you know the difference here between two hundred and eight and one ninety five is about thirteen billion dollars, that kind of the net where people would call books value of a silicon valley bank at the end of the year. And of the two hundred eight billion of assets that they had, nine, seventy four billion were loans, and they've got to break down on the long portfolio in a minute.

Ninety one billion with these hold to maturity security, where they don't actually adjust the value of these on a quarterly basis. And twenty six billion is what triggered this panic, which is available for sale security, mostly treasury's. And what happened is little valley banks deposits came in so quickly over the last couple of years that they went out and bought bunch treasuries, you with the cash of they got. And the problem is that, very quickly.

fever actually s they ought a bunch of s important .

to know of the two hundred billion that they the book value freeburg. There was a us whatever, ten percent of its in cash or something. So they do have some cash there.

That's right. Yeah, sorry, it's a good point if you go back. So like you know, let's say that of the hundred of the hundred and seventy three billion of customer deposits, you know, theyve got a fourteen billion of cash and then they've got all these treasury security they can sell call IT forty, forty billion.

So if twenty five percent of customers said tomorrow, hey, we want our cash back, theoretically, ally, they could just dump those treasury security, distribute the cash and give them all back to customers. The problem is, if suddenly more than twenty five percent want to get their cash back, or now they have a problem, and that is effectively what trigger 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 is A A statistics. I think in the nineteen and twenty years, there were several hundred banks that had runs every year for almost the entire decade. Um and this this was like a regular kind of occurrence that happened in the one thousand and twenty years that are in a lot of our modern security laws that are meant to kind of create the necessary liquidity provisions and how these banks are able to Operate to make cash available to customers. But what happened is so much .

the way for you that they made a movie. It's a wonderful life about, right?

So basically the one of the bigger problems that silicon valley bank they ran IT to, two big problems. Number one is deposit decline, where us. Vcs were not investing new money.

And when they were not investing new money and startups were burning more money, the silicon valley had modeled, they would be burning because they thought everyone na, reduce spend and reduce burn, and they didn't. So deposits were going down. All, all the starts were burning money.

No, vcs were investing. So total deposits on the decline. Meanwhile, they're bond portfolio. The assets that they hold on the baLances also declined in value. And I 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 two percent, uh, which is basically, you know where these treasury ies where you are going, you and you hold that for ten years, that ten year bond yields one hundred and twenty two dollars. If the interest rate goes up to five percent, then though that that that bond should eld one hundred sixty three dollars. So the value of the first bond actually goes down by twenty five percent because of the market conditions.

That's how significant value changes with just a three percent change in the interest rates. And that's effectively what happened with that available for security segment of the silicon valley bank portfolio, uh, baLance sheet. They have this bond portfolio that suddenly got devalued and they had declining deposits. So when deposit started to decline, you ve got to make sure you have enough asset sitting on the baLance eat. So they sold a bunch of them that we're going to raise more money at.

At that point, everyone kind of break your head up and said, oh my gosh h what's crazy in q four, by the way, seeking out for this website, you guys know they'd actually done an analysis and said as S V B about to blow up and they putting together a unch of slides that highlighted why this might be the case because they saw the deposit or declining that their um their assets that they hold were basically declining in value because of the massive and very quick rise in interest rates. And that S V B A bottle bunch of bone that were long, long grade bonds. So IT LED to you, obviously real short term problem.

If you look at the rest of S V B S long portfolio, there's also a question of how distress that all is. So ten percent of the seventy billion plus dollars of loans is in venture debt. And venture debt is very questionable in this market, right? Because historically, the wave venture debt makes money is that they assume that VC are going to keep funding the companies that they're providing debt.

And if the VC stop under the companies in the venture dead default. And so if you go to the last light in this deck, you'll to see S, V, B, S performance on their venture dead portfolio. yeah.

So look at this. This is the the performance results on just the warrants that they get on their venture death. When you when you issue venture det, you take a right down um or you get paid back and then you also get some warrants.

You get some right to buy shares. And in the winners, in the the startups at work. And so the way that S V B S made money on the venture, that 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 warrior or the companies going public. We're getting bought. And in q four, twenty twenty two just fall off a Cliff. And the venture that portfolio really started to show to stress the mats ten percent.

Are these realized gains or these are market to market gains?

This is the net gains on on their warrants and they don't mark to market warrant. I think this is what they actually exercise and got out. So there was there was obviously a hn of x and twenty twenty one.

So they made five hundred sixty million dollars in profit on their warrants that they had an adventure that portfolio, twenty twenty one, that number collapsed to one forty eight in twenty twenty two and you Better believe most of that was in the early part of twenty twenty two. Um so you know they didn't do a quarterly breakdown on this. This was like the full year numbers but the venture that portfolio, which is another seven billion dollars a capital also distressed um certainly wasn't going to perform as everybody model.

So when you can start to add this, sow up and remember you go back to the beginning, they only have fifteen billion dollars 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've ttl a sell them at a distress Price in order to give people their cash that they are own on deposit, that's when you have a classic run on the bank problem and then everyone tries to be the first of the door. And that's basically like.

what trigger 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 weak. The four of us are so truly sorry for what's going on and what you guys are going through. And then the founders that are trying to navigate this IT must be unbelievably tough.

There are a few hundreds 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 good, good will and kind of good judge in the world for the .

next difficult weekend for people who are .

trying to via get in really tough .

shaped and now trying to fig how make perl and is a big question.

okay. So just putting a pinon that is will come back to IT. I think that this whole tobacco, I guess, is that maybe the best word. There's a little bit of blame that you can put up the feet of three different groups of actors. And I just want to get your guys as reaction to this.

So group number one and freeburg just mention this, is we the four of us have been talking for the last eighteen months about the impact of rising rates. And you know we talked a lot about, for example, like in our portfolio, my partners and I walked into every company and made them have at least enough money to get through mid twenty twenty five, right? I've said this a bunch of times.

And so that was about having very difficult conversations about making sure that you are husband in 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 V S in companies that just didn't get that memo and just kept spending black. Nothing has changed.

But when other VS have stopped giving you money and you're continuing to spend like IT was twenty, twenty, that's what caused this mismatch. And IT was really the Spark that lit the views. So I think it's a really sad commentary or 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 c and some handful of founders just didn't get this memo and IT made what could have been a slower train act faster, unnecessarily. So I think that that's worth talking about then.

I think if you look at what I actually practically happened over the last year and a half, that as we be was that they were so desirous of profits that they basically had a duration this match. So what is that? Imagine you get a job and you know somebodies like, hey, freeburg up you one hundred thousand dollars monthly over some number of months, right in in pay every two weeks, or i'll pay you two hundred thousand, 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 the duration mismatch. You have to pay rent every month, you have to pay bills on a monthly basis, your 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 S. V B just made a really large miscalculation.

They basically went and bought ten year risk in order to pay back money that could be called on a daily or weekly basis that for a, obviously, hindsight was not a good idea, but more important than just faster. Well, they can't because they have these market, market assets that were just getting covered in the head as rates got raised. And then the third, the third thing is around regulators, you know, to the great financial crisis. We went through a period where there was .

hundreds of bank failures.

And then for the last decade, theyve been virtually not right. The'd been like a few here there. And the last one was just during covet.

And so the the regulators, I think, have done a really good job with dot, Frank and all of these other things to clean up the banking laws and the reporting requirements in the capital structures. So that runs on banks are more more frequent. But they kept this crazy loops around the accounting treatment of assets, and they allow these geraint 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 glaring and obvious now and screaming about how we need to tighten some more of the transparency that required IT shouldn't be a group of armchair salute on seeking alpha. 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, I think, need to figure out. But I think those of three actors that are in play, and they each share a bit of the blame here freeburg sex.

What do you think who who is to blame here most for this blow up? Or is this just the extraordinary ous event of the rate hikes happening in such a short compress period of time?

no. I mean, look, I think that S V, B S risk management was terrible. Obviously, they've signed up for these long data securities when the market they serve is incredible.

Votile like to mash. Duration is match. Really good point. I would also say that there's a weird regulatory treatment where apparently if you buy these ten year bonds, these ten your mortgage back securities or ten year treasury ies, you don't also recognize the loss until you sell them, which is are so in other words, that they should have been marking the the positions to market and instead they just were allowing these losses to a crew.

I don't understand the right leaders can allow that kind of system. I also don't understand how the regulators can allow a bank to take customer deposits and let them out to startups with his ventures. Debt that we've been talking about the show where ten percent of the portfolio is basically being loan debt to startups who have no credit. That's crazy. We talked on the show a few months.

We actually it's a good time to play the clip here because what we saw, a sax 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 ten. I get five invention dead. I can extend my runway, but that money comes due. And here's the clip for when sacks and I were talking about IT just a couple episodes ago.

What I don't trust is whether the the return models on venture debt that were created over the last five, ten years will be a good predictor of what the returns will be in the next five, ten 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 nail IT said, no, there's no security for that low. How does that make sense?

No, yes, I disagree with the point if you the slide that breaks down. So let's talk about adventure dead for a second because i've actually invested in a venture dead fund and i've seen the economics on IT. The way that the the venture debt model typically works is the lender loans money to the startup and what they underwrite is what the current VC in the startup say. They're gonna 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 with the assets to have, but it's underrated by the fact that the VC are committed to continuing to put money in and hope .

and there is no itt, I I IT, but no, let let me finish.

I I get IT the asset as a as an asset class. We can make fun of that. All we want is actually perform pretty well. These guys have generated typically .

eighteen percent as an industry kind .

of and the way that they generate those returns is that they're loaning money to the startups. A bunch of 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 start up. And that's the way the model works. We can make fun of that all we want IT actually .

worked as an industry. Tell you why that broke is IT goes back to the point you made earlier, the show, which is the lenders has this expectation that the VC is are going to keep investing, but what if they don't? We've been in a generally up into the right ball markets since the last crash to them, I believe .

the .

data for all these models is, is scuse because IT assumes, again, an environment in which companies keep up raising up rounds. Student, you get into a crisis in which that breaks, then the whole asset class breaks. 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 dead fund, go out and raise money from lps. Because what happens is when you raise IT with customer deposits.

you're creating systemic .

risk .

for the .

banking system of the regulation. And two, because you you're loaning IT to people who are deposited .

IT and in every other part of the private credit market, that is exactly what you do. What sax said, you can use customer customer deposits to do some C L O deal or to do like, you know, to back A P E play. These are L P capital that goes towards.

This is the only sliver, as far as I know, where you take customer deposits to create very risky loans rack with warm 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 beloved in the first place. So it's not even that valuable because if they give you eight million dollar, you have to have eight dollars always on deposit. Otherwise you violate the oil wise, you breach alone.

So there is no free lunch in venture that there has never been. And I still think venture det is very much like venture capital, which is most of these gains on paper. Most of these gains haven't really been realized. And now we're gna go through the sorting, processing, all of the stuff gets worked. I do want sexy. Your reaction to this though, which is the thing that started this was the fact that VS seeing the markets, including stopped giving company's money, but they didn't do enough work to help founders cut burn as we be set of themselves, the burn stayed the same. What is going on inside of these four?

I think that's crazy because listen, I mean, we started doing portfolio updates with our entire portfolio of founders in primary last year, this regime change gonna cost. 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 being the drum on this so hard. And in every board meeting and privately and I like, you know and IT takes multiple times, Frankly, to get through .

I think your point trim's about not wanting to be unpopular with the founder crowd. Uh LED some Young capital allocators to maybe say, okay, yeah, let's try this tich effort before we do you know another ref, lets try this new product. Let's change ourselves strategy.

I don't think it's Young verses old. I think it's experience versus unexpected. Now I think it's that's Better.

I think that I think experience, if you have never lived through a barrow market, you don't know how I can get. And tech is a big bus cycle. And the bus are really hard.

really hard.

really hard. And if you never lived through regime change before, like there was in two thousand, eight nine, or in two thousand, two thousand was the worst two thousand.

and you're told you .

have no idea and and anything experience does matter. And there there aren't that many VC around who lived through the dog on cry.

Probably eighty five percent of not. By the way, if you guys pull up just that slide on the loan portfolio, S B B, I just want to make the case a sex. I hear you it's a risky IT seems like a risky investment to make. But what don't you guys agree that a baLance cheap business like S V B or insurance company or any business that has, you know some amount of money coming in that sits on the baLanced and they invested for a period of time, there's a lattery of risk and there's a lattery of duration that you have.

And so if you look at silicon valley bank from from the update they did last week that figured all of this, if you look at S P P S loan portfolio, seventy percent are really asset back loans which are um fifty six percent of the portfolio is like you know prepayments on on L P commitments. And then fourteen percent is is private banking loans, which is loans against, you know, public security that people have. Only ten percent of the portfolio is ventured that which is seven billion.

And you know, look, if the asset historically is performed in an eighteen percent can to return, what is the adventure that portfolio you are going to look like in the distress environment is a negative hundred percent, is a negative fifty percent, negative forty percent and thirty percent? I mean, guys can never point of view on this, but you look, I mean, for any business that managing a large baLance sheet of assets against, you know a short uh, kind of liability tree, they're gone to have some risky assets. I think you know the question that was ten percent too much of the loan portfolio.

I think one percent too much.

Yeah I know you know one of the issues here that we saw qualitatively and sex and I both stock volatility is the standard for giving these and the size of them got lower and lower. In fact, the convenience went away. And this is what we kept having one hundred to us.

IT has no convenience, also be no convenience. I don't have to have a third of the cash. I don't have a half a third of of revenue.

Those convenience were there for a reason to filter throughout the people who can afford the house, right? And this is exactly what happened in two thousand and eight when people started giving those no recourse or no, uh, background check mortgage. 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 wall nearly. I beg founders to not take them, and I only won that discussion sex one out of five times because founders are like money.

We're having this debate, but there is no indication and there were no losses in portfolio today show the venture that under forming the I know what .

the past performance is no guarantee of future performance. Obvious to us on this podcast.

you guys are arguing about venture dead. The real is that have A S. V.

treasuries. It's one from two percent to five percent. Let me two things going .

on here or if I see your chart and talk about lattery this and lattery 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 anyone.

This is the two thousand eight bank failure. They think they can basically do financial engineering to make this work. Know I doesn't work is because, number one, they're not in fully liquid assets.

Number two, they are not marking to market every day. If you're a deposit, bk, you should be required to keep all of your assets in fully liquid securities that you marked market every day. It's that simple. And what do they do? They put IT in ten year duration, mortality, boys.

that going on where .

the value got devastated with the rise, interest strates did enough to mark that to market. And second, they put ten percent of the portfolio in basically loans to credit less startups. So when there is a run on the bank, you have a what like roughly thirty percent gap between deposits and their actual the value of their portfolio yeah and and .

listen doesn't .

be allowed and and the reason is allowed is, Frankly, I think regulators are completely asleep at the wheel. Wears power, wears yellow. Two days ago, two days ago, p is test fine in front of the banking committee. And they asked him, do you see any systemic risk in the banking system because of the rapid rise in instructions? He said, now no stomach c .

risk tax 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 longoria bond portfolios, which, by the way, is the main stand in the standard of how a lot of these businesses invest Operate.

And it's caused distress and stress on the system. My bigger concern is the consequent effect that arises is next, if you go in and you continue to assume interest to client, everyone's hold of these bonds and and written down, meanwhile you people money, cash. And the other thing that's happening, if you hold cash today, you're likely want to higher interest way to compete with treasuries so you can invest in treasury ies today. Make for or second here.

I just want to make sure that I understand out a statement today, jack. I'd just to finish the thought, the monitoring, the situation. Yes, she's sitting there like A A log. I mean, this is ridiculous.

They need to be in front of.

They don't understand like that. This is a cascine situation this weekend, either this weekend, they place sv b in the hands of A J P. Morgan.

They do basically at all, or a walk. They either do that this weekend, or this thing keeps cascine next week. And look, I could be wrong. Maybe they are working on that right now behind the scenes if they are created to them dolen announcement before the market opens on monday, but if they're not and the yEllen is like a monitoring the situation, while three days ago he was in ukraine. This is incompetence at work.

hold. I'll figure out a way for you to job this to generate six. Next, take a point.

He connected silicon valley bank to ukraine. I was.

yes, exactly beautiful. The .

piece here that .

here's what .

happened, just so people understand us treasury s were at one or two. You get like a two percent 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 ten years. And nobody anticipated on the silicon valley bank team that the RAID hike would happen so quickly. So violent.

Member, we saw the twenty five, twenty five, fifty, fifty, seventy five, seventy five increases. Now what happens to a two percent U S. Treasury when the interest way goes up? As they get d value, they're not worth as much.

So if you did to sell, 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 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 light. I should like the Price. I may understand if they had sold these earlier.

if they had to buy, why? Why in that meeting did they have to decide to emergency soul? It's because VS 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 yeah, in the last eighteen months, not enough folks.

Red the memo. yes. And by the way, the tragedy of that is not to say that you did get the memo and you did make the hard cuts right now.

Then 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 its climate change, but says breast cancer research, whatever is this has nothing to do with you.

Four days ago, you add your money in the bank. You did everything you needed to do to go and to 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 bankrupt in thirty six, forty eight hours.

That's crazy to me. This is the chAllenge, sax. I think you could speak to this as well as we did all this portfolio management over the last year.

These were the troubled companies and then yet the companies, a whole large portion who did the right thing. They had a big war chest and they had, uh, set the burn at the right pace. And now they the other portion or portfolio o that had big warchest there now at risk.

So if you're a capital allocators right now, you're looking at a group of companies is that you tried your best to save and their and they are ankle and their wounded, and now the strong ones are wounded, too. This is pata, classical c for silicon valley. If this does not stop this weekend, not only I don't want to be historical.

you right, this is the media heating the dinosaurs extinction level event you're right, jack. I listen. We have portfolio companies that had ten or your millions or more in yes to looking 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 black rock or Morgan stanly.

Okay, that's what their account show them. They had and then they're told all of a sudden, no, you're only protective to twenty fifty thousand dollars, everything above that, that your money market fund is just an asset of S. V.

B, which is in the receivership. You get a certificate. Yeah, you've got a certificate.

Do you see this announced that by the and the california regulator made things worse. The california regulators 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 request that would for the deadline. And for some reason.

we're in A Q they didn't get through .

and they didn't get out. Then they get through and then the california regulator steps in this morning and freezes everything. And what do they announce? He said, oh, you're good.

You're good for your insured amount. How much is that to forty thousand dollars for your uninsured amounts, which is everything above two fifty? You're going to get a certificate, a certificate.

What does that mean? That means you're creditor in bankrupcy. So the mutual fund that you thought you owned was actually not hypothecated in your name.

IT was in S, D, B, S. Name of black rock. And so our companies have been calling black rock and calling Morgan Stanley, hey, you have my money bucket fund. And they're like, no, sorry, that S, B, B. This is the crazy in a in a creal line in bankrupcy.

We ve got to see these are called sweep accounts. So what silicon valley bank did with a some of these large portfolio holders, let's say sax and a budgeter other VC gave you thirty million box, 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 and and distributed across two other accounts. So we got this black rock over here for your grade. We got this organ standing over.

Hear 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 too. So the only thing you can do that's logical. And I had a mentor thirty years. We go going to have the magazine, and we started hit millions of dollars in revenue.

And he said, I said, how much money we have in the bank? He said, which bank account? And he had four bank accounts and he would load baLance them.

And he did IT every friday. God bless ellia 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 on valley bank did IT through one interface.

I have multiple storms today who did this? Exactly, sex. And they couldn't even log in to silicon valley bank today to even see where they're at. I mean, I think you everything .

got frozen and the call for regulator frozen and they're ought in the fit. So there's a couple problems now with the working out of this is basically a bankrupcy process or receivership process. It's that we got all these companies make payroll in the next few weeks, right? And so these proceed don't work at time. If you could just figure out like over the weekend, OK sv b lost thirty six on the dollar and everyone has to be created and you get seven, six of the dollar and you get your money on monday, IT will be a hit to the starting ecosystem, a pula recovery and move on. But the fact the matter is, is not gna be on monday, I could take weeks or months to figure out how many sense of the dollar you have.

Are they liquidating silver ley bike? Are they selling the desk? Is everybody .

getting Better? everything?

What you have two parts here. path. Number one is you, if you actually try to solve these assets, but the allness, who do you think the buyers, the buyer are the sharpest, sharply on wall street, who will purposefully and beat these assets? And so that then takes you the 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 reality plan. IT was just a backstop and a mechanism so that these, at the time those talks, agrees, which were a bunch of mortgage backlogs, could be clear 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 tax IT could be fifty cents on the dollar IT could be sixty 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 one hundred million dollars inside of S. V. B was offered sixty cents on the dollar today for that claim.

Now that's really from a third party who said I will take you I will give you sixty million today in return for that certificate plus a two hundred and fifty thousand that says year old one hundred million because they're willing to take the risk that they'll get, you know eighty years right and then they take the difference. Now the point is that if you're if you're seeing today that a discount that's not a good sign, I think, 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, and listen to this, what this does is IT torches, years of U. S. 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 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 they 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. And again, your pay that should not be why we torch hundreds of startups and what they're working on.

this maybe thousands. Yeah, this this would be a lost decade.

a lost decade for you. First, want to talk about third, third order effects to have really understand us because I think it's important to highlight why it's not just about a couple hundred tech rows in silicon valley not being able to make payroll, but there is important downstream consequences.

For example, they are payment processing companies in silicon valley that use silicon valley back to store their capital and to to to move money around. There are payroll companies that do payroll for many businesses, not just tech businesses, but many businesses in different part of the economy that store their cash at silicon valley bank and process money to be silicon valley bank. Today was announced rippling.

One of those companies could not hit their payroll cycle today because they had money tied up at six and valley banford. Unaimed announced that they also have money and cheaply more than in other places. So they will be able to to get the the payroll processed early next weekend and get everyone back on track. But this is hundreds and potentially thousands of companies that use their payroll software to to process and and pay their employees um and then this 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 condition in company that using the the the tool in some you know in arizona and then you know the the stripe service is unable 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 effect. And more importantly, like we saw in a way perhaps to a different degree, but still a significant is the the the the content 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, sax said, to step in, show up the problem this weekend.

I don't think it's about bidding fifty cents or sixty cents on the dollar. Every depositor needs to get paid a hundred percent 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 IT within the first four, eight or seventy two hours of the end of this weekend, then we are 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 a hundred percent liquid like cash. And that's going to cause that's going to cause a massive run. And so what has to happen? The only way is going to happen is if someone takes over silicon valley bank this weekend and that the full government, unfortunately, as much as I hate to say, because I absolutely hate the federal government having a role in this stuff, has to say we will guarantee one hundred percent those deposits to the company that takes over the bank that takes over this portfolio and says that the portfolio of assets run its lifetime.

See what you get paid ever. The delta is will, 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. You have something want to say, if not, I have somebody I want to say.

The other big thing that S V B was was an on rap for a lot of investors, including many U. S. Investors, to get money into china.

And without commenting on rather 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 on 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 U. S.

Investors and abroad using these bank accounts. And so this issue now doesn't just touch the united states. innovation. Economy also touches china's innovation, which you know, creates actually a complicated set of tradeoffs for the U. S government and treasury as they think about what they want to do in this heightening great power conflict. That says.

talking about last week, and I wanted to make a very important new point here, I know is no bank that the public h specifically, you know, people who don't want to support, you know, rich people already like big tech or billionaires. The reason to back stop this with public money is because we have a road map for this. People don't know this, uh, widely.

But tarp was just over four hundred billion dollars. IT actually returned to fifteen billion doll profit to the american people. This would require maybe twenty five or fifty billion dollars, ten percent, maybe five, ten percent of the totality of talk would be enough to cover what's happening here with silicon value bank to work this out.

That's fifty billion dollars for the people listening in washington or for the people who will say, hey, why are we you know, belling out big tech. Your belling out small tech. As treats said, you're belling out innovation on breast cancer, on a renewable energy.

But most importantly, this can easily be structured so that the american people return twenty percent. Thirty percent may be 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 silk 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 unexpected that we won't back open. And the I guarantee you, the U. S.

Government could get some warrants on those companies or warrants and ownership and silk valley bank, and make at least fifty cents on the dollar, maybe even double. And that's the way this belt should be structured. And IT has to be done this weekend.

You bring up a great idea, I think. I think if the U. S.

BaLance cheap does step in over the weekend, i'm going to say, on behalf of the U. S. 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. And if you look inside of twitter as an example, there's a lot of negative sentiment around even the idea of a bail out happening.

And it's for this exact reason because I think people believe that IT will benefit just a small sliver of people, right? So to step in and to save these company's, Jason would still be in, you know, really only helping say if several hundred thousand or several, you know. And and and the thing that that gets wrong, in my opinion, is that these companies, if they, if they are allowed to germinate, should be building things that actually help everybody.

And so if you can view the taxes including .

and so if you can view IT that way and if you can view a share of IT, obviously, look 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 a bug. It's not well regulated.

You know you guys pushed the boundaries and get away with a lot and there haven't a lot of consequences. Not saying the tech industry, no, i'm saying the the average person 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 to step in. And I think that you have to give the U.

S. Taxpayer incentive if they are going to do IT. And I think the incentive should be that they should just get a share and all this innovation.

if they take over the venture debt portfolio, then they would have that right that the portfolio comes with warrants. So they would have that. I think there's a big rescue that precisely because tech is unpopular and people, I think, are confusing big tech with small tech, that the government doesn't step in here and the the domino start falling and we start getting all the systemic risk playing out.

Remember, the beneficiaries here aren't just these, the sort current generation of tech companies and everyone they do business with. It's also whatever the contagion goes. And we are already seeing, I think, multiple regional banks under pressure.

They are stock down, people asking questions. We know people in our check groups who are wiring money out as fast as they can. Just because why take a chance know you have to understand that the game theory around these bank ones, 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 what this is really highlighted is that what you said earlier at the beginning sex, 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 capacity and a lack of regulatory follow through that allows up to go to .

the general right now reporting that U. S. Banks have six hundred and twenty billion of unrealized losses on treasury ies. 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 are bonds at their books value instead of marking them to market every day. That's crazy.

And on on the equity side, you have to do IT buffer talks about this all the time. The equity side, you have market market the equity portfolio at the end of every quarter. And he sees these wild swings and he complaints about IT. But it's the right thing to do for exactly this reason.

right? Think about the game theory here. Okay, the banking system and the bank regulators, this opacity in the system, you've got all these assets are being held by these banks that are not marked to market. So nobody really knows what the true level of exposure is.

So what's the response why I take a chance to move your money to shaping mortal? So I think there's a chance that if the central government is a step in here, the whole regional banking is this could be destitute. And just me left with four too big to fail banks. How's that benefit anybody and fit little good guys.

a pretty good set of regulatory disclosures that happen. But I do think that the real question is, you know, are the race shows right? Do they should they really be allowed to invest in these types of assets with the positive capital? And if so, what percent of the depositor capital should maybe like to do IT? And maybe, you know, that seems to be where the biggest you know issue is have come a long way.

I mean, I just pulled up the statistic. It's insane. There were five hundred and five banks that failed in nineteen twenty one.

Failures continue to rise in the early twenty years, and average O H, six hundred and eighty banks per year failed between one thousand nine and twenty three and thousand, thousand and twenty nine. So obviously, you're coming out of a weight. Uh, there was a lot of controversy around hay.

Banks can 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 S, C side. You can get a very detailed schedule of every asset held by everyone of these banks. It's good transparency, I would argue, but should they be allowed to invest in security that are effectively not fully liquid, that are risky, that are long dated with a short dated deposits, right? IT seems it's a fundamental question about what banks are supposed to be .

doing in the 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 tractable in twenty twenty three. I mean, if people can make IT a version of the podcast, they could do that. yes.

I mean, freeburg also, like, take this, I think, venture, the most extreme example. How do you mark to market alone to a series, a startup? I mean that one hundred .

percent depends. You can underwrite anything I think you can under for the right interested for the right premium. You can underwrite insurance, you can underwrite loans. I mean.

there's a lot of ways that you can kind of body you mark that to market on a daily basis.

You right know that you cannot you your right absolutely yeah ah and so .

from a reporting prospect to solve problem.

they have different tears of real ital guys and rules around the you need to fall and so bucket the stuff up differently.

right? If you're a bank and you want to buy security, you want to invest in something that's not liquid and market 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, to a venture back, start up, package those up and syndicate that and sell IT as a security, if you can do that, you probably me investing in the last class anyway.

The same thing with like margins, these mortgages already get packaged up and sold, right? So I just doesn't make sense to me that like hummer deposit says we're talking about, which you assume should always be one hundred percent safe, right? This is not a source of capital or anyone's ever expecting to lose money. If you want to use risk capital to get some sort of outsized return, go raise that from lp s, but to like take oser deposits and use IT on on risky non liquid investments. We sense IT .

makes a sense. There's one thing that I could just help people frame this. The aggregate amount of dollars in these bank accounts, I would estimate he ten percent of the value of the startups they represent.

But we all agree on that. It's about ten percent of the value of the startups. Maybe if how do.

how do how do you do picking about .

the startups who recently did around the funding, they diluted ten percent that represents all of their treasury or half of their treasury. So if that cash for the start, a portion of this equals ten percent of value sorbs, I can guarantee you those startups with access to that capital again monday will be able to outperform the .

back stop that the government would provide. No.

okay, if you one of your startups to take any other startups.

they have thirty million, don't have time. Listen, we don't have time here for the government to figure out how to be a partner in or an investor in all these start up. I'm sorry, we don't don't step in or they don't they don't step in. You have systemic c failure.

No, what do the matter? Me here of one of the companies, pick one of the companies that has you have a companies that has twenty million there, thirty million there. What does that represent? If you were to take their values, you.

when they raise that money, couldn't have IT doesn't matter IT doesn't matter.

The matter 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 you're properly if allowed to deploy that, it's going to return of a multiple an adventure multiple two, three, four, five x. But if we destroyed that money, these companies are going out of business next month.

I agree with you. I'm trying to create a framing .

here for people to understand exactly how much value is going to think.

The Better framing is that when you put your money in a fdc insured bank and you put IT in a customer deposit that suppose be completely safe, that's paying you a couple of percent interest, and that is reflected even as a money market fun in new york count. You do not expect that money to be turned around by the bank .

and put in this no sense like being 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 banker decided to buy a ten year mortgage back. Security who doesn't understand interest rate risk?

That's not the way this is source to work. And you got all these people on twitter pushing back no bailouts and whatever. That's the deposit or money I agreed, no bail out S B.

They should lose everything. All those executives, their stock options are worthless. All the stock holders to that company that are shares are worthless. But the question is, should deposit or lose money in these banks. They just thought there saying for a checking account, I mean, are you kidding me? And if you let that happen, there will be a cascine here because there the logical consequence will be everybody's going to say perma I in gp Morgan or wealth forger of bank of america, it'll be four banks that's IT and all the regional banks are going to shut .

down that tens of thousands of highly paid workers and not just tech workers, are gonna out of, uh, jobs and they don't have jobs waiting for them and amazon or google to bail them out. And this is the start of a contingent if .

he doesn't get song, what do they do?

Wrong thing. They used what is considered one of the most reputable banks in the world.

They used the top twenty bank that the regular compliance. So did. They do wronger more the regulators to sleep .

at at the wheel of some way. I think it's, this is a fault. It's billikins vote.

What do you guys think this means for .

VC chilling effect? I I talk with some L. P, S.

In the last two days in the V C. world. I'll give you a couple. And ic dotes, I have a friend runs a fund. He looked at his portfolio. They have tune and seventy million dollars, or sorry, three and fifty million dollars tied up at siccan valid bank. They need twenty seven million dollars, uh, for cash for the next thirty days.

So he's called his L, P, S, and he's trying to get his L P S, uh, to front him money, to wire money so that he confront his companions money so they can actually pay their Operating expenses and and cover their payroll and then I spoke with a couple of L P S in last forty eight hours. Um they have ve gotten dozens of calls uh from uh 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 stock coming out of this. The the the the uncertainty that this creates in the investment environment, um I think is going to have a real chilling effect, not just with the GPS and there you know uh procope ity the same term sheet right now.

And why are new money over but also with the L P S as they're making capital commitments and actually following through with with capital commitments we've already been made um given uh you know where is the capital actually going to end up? That was never a question mark before. I was never anything that anyone even considered the capital could be disappeared to locked up or tied up. Um and the fact that this is adding this unique friction in the market um is is a layer on top of an already distressed and chAllenged uh environment are for fund raising for G P, for L P S H and IT seems to um be exactly the icing on the cake we did not need right now, no matter how this gets result, I I think private .

markets in VC could seize. I think you're going to see people pull term sheet, maybe half as many founders are going to occur. As people try to do .

trash another VC front of mind, just have the attacks. He can't make payroll next week. He is a fund for d his VC fund their employees.

He can pay his employees on monday. And so um yes, I do think funds could shut down uh coming out of this. I I think that companies that were call IT, you know seventy five percent distressed are done for now.

No one's gna step in and bridging m in funding. Uh it's going to accelerate uh, a lot of shutdown s because people are now cash is king. Now cash is king, right? It's like, uh, a big shift.

I think that was really well, sad. I think you you're write about all that, jack. You tweet that you think that cause of six freeze in domain activity, I think that's more or less right.

You're right. Because you know all all of these out there have to think about showing up their testing portfolios. exactly.

What if you got companies are now in distress. They are perfectly good companies. You got got to focus on.

Maybe you're going to making you a few winters, you're picking one, two winners and 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 going .

to be a tough decision. I have three open deals right now um 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 we're not personally affected by the silicon valley bank thing, thank god, but now we have to do trios the known winners in your portfolio that did nothing wrong? Or do you make the next three investments or four investments? And i'm GTA 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. Large, we're in trios mode now, full on tree oh, mode. If this doesn't get resolved, if they can get those.

what do you think this dark?

I had a meeting three weeks ago with A U. S, L. P. And you know you guys know how I run this business here, but is there 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 race management is worthwhile in venture. I didn't understand where that was coming from um 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 love 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 twenty nineteen, twenty twenty, twenty twenty one, really misallocate money, right, writing genome's 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 I gave them the money, or even more underwater. And that cycle, I think, is really terrible. That'll take. So maybe this is the wake up calls where now risk management is actually invoke in cool, and it's important to know this stuff. I don't know we have breaking .

news while tapping this. The department of financial protection of the state of california has published findings on S, V, B will pull IT up on the screen for the best days to respond to. On march s twenty twenty three, the bank announced a loss of approximate one billion from the cell of investments.

We've talked about that already um on march eth twenty twenty three, the bank's holding company announced IT was conducting a capital race despite the bank being in sound financial condition prior to march ninety, twenty and twenty three investors and deposits reacted by initiating withdrawls of forty two billion dollars in deposits so that would be over twenty percent, I think of the of the total deposits from the bank on march nth even more twenty twenty three causin a run on the bank as of the clothes of business are march night. The bank had a negative cash baLance of approximate hundred fifty eight million. Despite attempts t from the bank with the assistance of regulators to transfer cloud d from very sources, the bank did not meet it's cash letter with the federal reserve. The precise atis deposit withdrawal has caused the bank to be in capable of paying its obligations .

as they can do the the beginning forty two billion dollars, two years a is twenty five percent of total deposits, but forty two billion is greater than the fourteen billion a cash they head on hand and the twenty six billion of liquid security that they had. So you add those two up together, you're forty billion.

And then to get more cash, you're enough to sell a bunch of loan portfolios and selling one portfolios, you ve got a package up IT takes weeks or months to do that and they're 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, uh, and the assets of the room. Because if you have to go turn around and sell those assets in the market super fast, you're gonna take a huge loss.

You guys remember that movie margin call with demmy more and um what's his name? And they they make this plan to go and market. And like I got a no, not that the germin irons german iron's, he plays the best characteristic, the chairman of the bank.

And they're like we have to settle all this, but we're going to take a huge and make this big trade that happens at the begin in 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 the 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 to 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, whatever, to meet all of their obligations. But the rate at which acid started to get pulled out is what drove those 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 I heard mentality uh and and one of 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 relying the news about what they were going to do. And as soon as that happened, that's how enter twenty silver ley is. Within twenty four hours, every C.

E. O. And every venture capitalist was on a check 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.

And twenty first the being in a day yesterday, I was like, i'll get through. It'll be fine. They just little more on their portfolio.

They got plenty of assets. But then it's like, well, founders fun said we should probably get out. okay.

Well founders found is getting out. Maybe we should get up before everyone else does. We got to get up forever, or else that lets go now.

I'm getting out right now, telling my best friend and getting out right now. And then everyone tells their second best friend. And then all of us on the whole valley knows IT and then the whole valley running for the door.

And this is a really interesting and unique scenario. It's not like the classic consumer run on the bank where you trying to pull cash out. It's the silicon valley twenty four 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 can 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 White. It's not as much of a condition know as you might expect elsewhere because places other kind of regional banks don't have the same sort of intertwined endless as we saw with all the depositors here. And so look at valley bank.

I don't know.

I'm so just live.

This is where I think that describing what happens, a panic kind of misses the fundamental rationality of the response.

So yeah.

so IT doesn't like a panic, but that doesn't mean that each individual decision makers motivation is panic. I actually think it's a rational upside downside calculation. I mean, this is all game theory. So if you think that there's a risk of other people pulling out their assets, 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 upsides you might save on certain your money. So it's a rational decision when confidence is lost to take out your money.

And in fact, IT was rational. There are a bunch of vcs, not a lot, but something twenty yesterday that S, B, S. Been a great player in the custom for thirty 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 where you get pennies on the dollar or not, whether the people who rushed for the exit yesterday got the money out.

Prisoners to luma. IT is a prisoner to luma. But here's a thing, it's not even about anymore whether the institution is solved in. 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 aren't shore and there is already huge cash outlaws leaving these other banks because why take a chance? The game theory of IT is move your money out until this is. And if you're okay with you're moving IT back in a few weeks, if IT turns out not to be around the bank is fine.

So a lot of this can be self filling. You have to remember that runs on the bank figure. You said this is one hundred years ago were extremely common.

Every decade, there will be a giant financial panic, and they'll be a run on the bank, run on many banks. And the only way that the federal government stopped was by entrust ing. F, D, I, C.

And they said, to deposit your money is safe. And at that time, two, three thousand dollars was enough. The prom we have is that with these business banks, fifty thousand hours is not enough.

So all of the sun there is going to be a crisis of confidence. If you think a business bank can go under again, you're just gone to leave all these regional banks. You're to go to the top four that's going to be IT. So I think that, that the situation right now is really dynamic. And if the fed does nothing and this sets up, you know these deposits shouldn't know Better, you the loss is on them, then I think the rational reaction for depositors and all of these other banks would be just to leave because I don't think deposit or are a good position to assess the liquidity and credit worthiness of a bank. I just don't think they are I think stock holders are there are the people who should lose all their money if the bank is under.

but not depositors. Any advice or or take ways for founders and capital allocators going forward? Obviously have your money, multiple bank accounts.

I think you guys the list that was just published of all the funds that custody S V B, and it's unbelievable. The list, it's every single major V, C and silicon valley.

wa.

where do you get this? I have my ways .

tractive from S, C, C, violence. cot. OK, thank you. Yeah, this is amazing. wow. Holy.

should I mean everybodies there? Eight hundred square.

Pretty here. and.

We were out we few a few months ago, we were talking about venture debt on the pod. I didn't believe that S B should be in this business.

So I told I look, there's craft developed now.

Well, hold on, not. I'll tell you. Did you say how much money we've got? Ten there.

Yeah, go to the right.

I'll tell you. What happened is so after the conversation on the show about venture that like I do not really like that SBS in this business. So I told my guys step in account somewhere else.

So we did that. So we moved to our firm accounts over and we were just using sv b to make warehouse loans or whatever. So I thought they were just a lender toss.

So yesterday, when all the stuff went down, I said to our guys, like we're out of there, right? They're like, well, actually we had about forty five million dollars we are about to distribute, tell peace. And I like, oh, that's crazy.

So we able to sweep that to an account we used to make in kind distinctions. And then we got on the phone and we called as many portfolio commission we could to get them out. And we got a huge number of them out, but unfortunate some of them didn't get out.

Here's the thing that I think people wasn't don't understand. We're doing this with the next set of banks. The trios is still happening.

Guys, I will tell you, look, sex appreciate the the cyran call, but I think the only way that what you're saying because you're saying that trigger the the next siron call and the contingent spreads, i'm not blaming. I'm just saying it's a reality and you're you're right, the game theory optimal way to play this as a depositories to move your money out and get IT somewhere that is completely safe.

You know you have your cash secured or buy a security in a broken age account where it's totally safe and it's registered with the securities exchange with something. But um in the meantime, for this to get resolved, there has to be a bear hug gg solution offered up this weekend. I'll say IT again. Yes, in order to stop the next set of cyran calls to drive.

not a call. Listen, this is the thing I hate about um the run on the bank conversation 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 are warning them because our obligations to them, but we weren't I don't think we are putting out like a siren to the world. And by the afternoon, that was really clear that if they listen to get their money out, there are a much Better shape, the ones who didn't listen. So this is the personal thing, is that every individual actor has to do this in their best interest.

And we're not trying to start another run but that long. But we know things. We know that you will very close to us. Big players are withdrawing their money from other banks right now.

I have an under of caution. My point, my point is what you're saying makes a lot of sense, and it's gonna cause this, as you describe, kind of pernicious escalating problem. And the only way to stop IT is a bear hugg, which may not cost the taxpayer anything if the fed or some federal agency stepped in and said, we are gonna back.

Stop all of these banks with all of these deposits with cash, and we're going to guarantee IT today. And here's a five hundred billion dollar city. And just by saying that everyone stops trying to pull their money out and you don't actually need to back topic with any money.

it's already started. So neck, if you just the link that I sent you in the in the group chat and you just throw that link up there, I think this is the best proxy for what tax is talking about. So sort of, I think, very unemotionally.

How would we know that there is a contingent that's a foot you would look at the equity layer of all these regional banks. So what is this? This is the ice sheres 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 S, P, B, but forget the name for a second and take silicon valley out of IT. This is a top twenty 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 thirty five?

Let me again, if a federal agency comes in, if the feed comes in and says, you know what, we are gna backstop all of these banks and we are going to put five hundred billion dollars behind IT. 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 withdrawal, the whole market subsides. You are actually you on plot, and I think that's what need to happen this weekend. That's what I have today, is the number one need to go get silicon valley bank and over to a big baLance sheet and guarantee that baLance sheet they're going to make money by taking this thing on. And number two, they're to make a statement, we got another five hundred and where is the president?

Where's make a profit on? To do money in our system is that there's no fsc for twenty five million dollar counts. What like two fifty is not an effective amount for a business.

It's for a personal cause. The businesses need confidence in our economy and our banking system, or the whole thing starts to on school. So what the quid procope should be is you can get a twenty five million F D, I, C.

Business banking account. And the bank is highly restricted. And what I can do without money, you can put that money. And for gazi venture dead, you can put that money in ltte's. Ten year bonds that don't get mark to market is only highly liquid, secure market market assets. And the downside of that for the bank is to make less money in pass on less interest to the the business, the depositor but ah so what should work?

How are stable coins looking like a Better option right now, having the crypt of .

guys right now .

like what you are you today even in on on the bank, which is exactly what everybody afraid of in a bit going world, that thing is down ten percent.

So so .

what this reason for that month is just that. What we ve seen is that liquidity is 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 that is very liquid. So everyone is trying to free up cash right now.

I just want to be clear, as the end of 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 and I cannot be a can we have to stop IT?

That's fear. And I agree with I just to make sure people understand, we started this. We didn't want to go there. You know, I think we are a reticent to go there.

Let let's put in this way, if you, if anybody, if you have initiated wire in the last twenty four hours, you are worried .

about .

contain .

influence. We strongly advise on pleat. Someone comes in and dareus dds the market this weekend and says we will not let contains 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 condition will .

stop to get to know on monday whether these regulators ministration know what they are doing at all.

The other one problem is that this weekend we will find out what some of the unintended second, third or consequences are onna be of S V B 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 coming is that we don't know that trigger an effect that are unrelated to a banking problem, but could drive some more significant business and economic problems that we're gonna kind of probably end up talking about next week. So know this weekend, I think.

with payroll. But there are other things that this money go towards, you know, mortgage or rents. So the cascine effect of this, if people stop in their rents, if people stop in mortgage, I mean.

real and .

visited key instead of east palestine, yellow visited a key and set a silicated valley. Do these people know what's going on here? Come home. They promise more financial assistance for ukraine, and they're saying they are monitoring the situation here. We're in the process of what could be a running a business failure, get the ukraine .

the bill for ukraine this month versus this baLance out is yet don't probably the same. So I think we have to really think the three folks, yes, well, no.

on monday where these people have a clue or not.

no, they have to be on TV tonight or tomorrow. This, this has to be a pressor on sunday.

I I think a lot of these guys do know what they're doing. So let me just say IT to them in language. They 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 foul.

If banks going to receivership, please act accordingly. You can see IT in the etf. 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 jack out to use that were baila. I don't like that word .

because that acks up.

There were a big, you too big to fail banks in two thousand and eight 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 what we're talking about here. Bs wiped out already where we're time about us protecting depositors.

These are people who trusted that when they put their money in a top twenty bank, that our regulatory system is compliant, that they will not lose their money when he says on their computer screen that my money isn't a black rock or a Morgan sanely mutual fund. Or money market fund. Rather, the safest instrument there is that, that money is where is supposed to be. And if regulators allow that being to put their money in stupid assets that are not marked market and that's why they shut down, that is not a good reason for depositors to not get their money .

hundred percent.

We are take care depositions here are not bAiling out stocks.

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, right? This has been a great all in podcast.

Ast, sorry, we didn't have time to talk about the shaman. Q, in on shaman. I know that's a passion project for you sex, but you can announce your kick starter for him and you're .

go from shopping .

for the shopping. But I wears the bulldog dog more time.

The show, the shopping, the shaman is an intersection of three of a very interesting when diagram. He is very athletically fit, incredibly, Harry and all the atul, that's a that's a traffic to that. You merely see, you rarely see that also cultural appropriation.

So yeah, we have to keep that in mind. And conspiracy theory, I mean, this guy's got at all. Are we going to play poker? This we get IT.

just like as as the beat is kind of the thirsty, the shaman. What his name is a jack .

he doesn't seem .

like is no, he's he's a guy who has diagnosed mental illness, but he's completely non violent. He's completely non violent. He actually believes in the physical y of my hot magi of no violence towards any creatures.

He's a turn. No.

you know he's a bit of an hot duck .

and A G of unna .

and he didn't assault anyone. He what just wanted to the capital, apparently getting a tour a from police officers were just guiding .

him through and got .

four years I got four years in jail for that, because he became the face of an interaction, because he just look so wear with the viking orns and the face pain, whatever he made .

threads to the politicians. But I mean, IT does seem like IT might not be the appropriate sense. He wrote a not saying we're coming for you, I think on that you have to look into the case, but he was sentenced by a republican and 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 listening to act to the building .

if he didn't break a door down or didn't smash the window, if if he damaged property, that's one thing. If he assault is someone, that's one thing. But if just through the capital, I think four years is kind of excessive.

And I think the reason why the guy got four years is because of mental illness, he is not able to defend himself the way that he should be. This is just a final, simple, liberty's issue. If you have any compassion ate at all, you shouldn't let the guy like that get skip good.

There's four hundred people who of the thousands of people who broken, who were violent and who got sentences of some degree, they were all a settled like a plea bargained, including his, they didn't go to trial. And if you, I think we can all agree, the violence that occurred that day is should be punished, and the nonviolent stuff should be a speeding ticket.

We don't need to think categories. And I think violence, the assault on cops and so forth, punished, then damaged property and then but the people, just people who just trust passed or wandered through, who made not even have known they were trust passing through. That's not that's not jail time. That's not to fill me yeah.

I mean, we want to promote peaceful protests if they had come with guitars in san kumba, and we shall overcome, we will be having a different discussion here instead. They cops, you know, and you can't beat cops up.

Sorry, jail.

Yeah, peri full stop 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 reward are a big unpacking for the sult of science, the um dictator and the rain man. I M V, undisputed worldwide moderator will see next time 那个。

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