What Really Happened To Silicon Valley Bank | Ken Wilcox (SVB CEO 2001 - 2011) on SVB’s Collapse and How China Took Over Shanghai SVB
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We've got a very special conversation today. I'm joined by Ken Wilcox, former CEO of Silicon Valley Bank from 2001 to 2011, CEO of a joint venture, Shanghai Silicon Valley Bank, and author of the China Business Conundrum, Ensure That Win-Win Doesn't Mean Western Companies Lose Twice. This conversation is going to be about China, of course, about Silicon Valley Bank. But let's start off, Ken,

How did you get started? What was your first job at Silicon Valley Bank? And then take us your journey into being CEO. All right. Very quickly, I started out in a different kind of career altogether. I was a professor at the University of North Carolina in Chapel Hill.

At a point in time when inflation was 12% and raises in the humanities, and I was in the humanities, were about 2%, I couldn't afford to stay there, so I quit. I went to Harvard Business School in order to cleanse my resume. And my first job was at an old and venerable bank in Boston called Shawmut in the technology lending group. And that set me off on a career of about 30 years

primarily focused on early stage venture backed technology companies, but as a commercial banker.

And so you were I didn't know this you you were a professor. Was it of German Studies? That's right Wow, yeah Yeah, and you may ask what that has to do with banking and the answer is of course nothing And so what was your first job at Silicon Valley Bank and were you in the credit department? Were you making loans or were you in a more management role? I was always on the customer facing side so my first job at Silicon Valley Bank was as a so-called regional VP of

I think it was a made-up term, but it was in Boston in 1990. Actually, in 1989, the Federal Reserve came to Boston in order to prevent a potential meltdown in the real estate sector. And in effect, they caused a meltdown in the real estate sector.

with the result being that almost every bank in Boston ended up being put under an order and ultimately ended up getting sold to the Bank of America. My bank was in the same boat with everybody else. Note it was the meltdown was caused by real estate, not by technology lending. In any case, when it looked like there was no future,

I and a handful of my colleagues called up this tiny little bank in California. At the time, it had fewer than 100 people working at it and asked them if they would be interested in an outpost in Boston. And being adventuresome people, they jumped on it.

So you started in Boston. Tell us your journey from working at Silicon Valley Bank. I assume that SVB was the bank you called the small little bank. Exactly. Yeah. What was your journey from there to becoming the CEO? And tell us about the business model of SVB and chart its growth. It's a good question. I'm glad you asked that. When I joined Silicon Valley Bank in 1980, and as I said, there were fewer than 100 people, we had what was called the three-legged stool.

business model. The idea was that we would present ourselves to the public in general as a bank for early stage venture backed technology companies. But because it's really hard to make money at that.

as a banker, it comprised only one third of our portfolio. The other two thirds were real estate and small business lending. So when I got to Silicon Valley Bank in 1990,

Because the Federal Reserve was so actively placing all the banks in Boston under orders, cease and desist orders, it turned out that our tiny little outpost with four or five people on Route 128 was the only bank that was active for a couple of years. So we were, in effect, winning every deal that we competed on.

without really realizing that we were the only game in town. We weren't as smart as we thought we were, but there were no competitors. However, our success record impressed the folks in California to the extent that when the next CEO in line decided that he wanted to ultimately retire himself, he asked me to come out to California.

Okay. So there's the three-legged stool, small business lending, real estate lending, and technology lending. The first two businesses are common with nearly every bank in the world. The latter was not at all common. You made the switch to just say, get rid of out of small business, get out of real estate. We're going to become a technology-only bank. So that means only the loans, all the loans were to the technology sector? And what did that look like?

Yes, that's exactly right. So first of all, I got there in 1997, but I had to wait until 2001 to become CEO because it turned out that my predecessor didn't really want to retire. He only wanted to have somebody there so he could tell the board there was a successor.

Finally, he moved on. In 2001, I became CEO and I made in rapid succession two or three decisions that were pretty big ones. Fundamentally, I believe in delegating, so they're almost the only decisions I ever made. My first big decision was that we would get rid of the two-thirds of the bank involving

real estate and small business lending because we were just a me-too player. Every bank in the world does that and it's almost impossible to compete as a small guy.

So we did, we asked everybody to leave. It took them a couple of years and we then filled up the gap, the two-thirds of the bank gap with technology companies. That was number one. And number two was instead of just working with early stage venture-backed technology companies, we would work with technology companies of all sizes because you make money in banking with the big ones.

The only reason that we kept on working with the small ones was because it gave us, first of all, access to all the venture capitalists in the country. And secondly, because if you wait until the little ones have grown up,

You have to compete against huge competitors. But if you start with them when they're just tiny, they'll typically stay with you out of loyalty. So that was the second big decision. Third one was to go overseas. So we, in rapid succession, went first to Israel. I think that was number one. I think India was second. I think London, serving all of Europe, was third. And then ultimately, we addressed Israel.

And Ken, so just map out Silicon Valley Bank's assets. What were its assets? What were its liabilities? And when you say you wanted to bank those small companies because you made the money from the big companies, but you wanted to bank those small companies because those small companies would turn into the big companies. And then also you get access to the venture capitalists. Explain, were you making money on the deposit side or on the loan side? The loan side, you make money because you get interest income and they pay back their loans.

And then the deposit side, you bank money because you pay way less in deposits than the loan. So which side of it were you talking about when you said that you wanted to bank the small people? All right, let me address that in a slightly different way. By the time we reached what I think of as maturity, maybe around 2005, 2006, maturity in terms of implementing the business model that I wanted us to have,

By that point in time, the portfolio looked like this. We banked about two-thirds of all of the venture-backed companies in the United States. We banked maybe half of all of the technology companies as a whole, meaning to include the big ones. And then we banked about 70% of all the venture capital firms. Now, if you look at only the companies and leave out the venture capital firms,

about 80% of our clients were early stage venture-backed companies by maybe 2006, 2007, 2008. And only about 20% were actually bigger technology corporations. They follow two totally different dynamics. With the 80%, you're going to have

the 80% of early stage companies, you're going to have so many losses that the only way you can either break even or make money is by taking warrants. So we had a warrants in every deal and the warrants covered our losses and gave us a small profit. In the other part of the portfolio, the 20% that were bigger companies, we made money on everything.

And in addition to that, we made a lot of money serving the venture capital market. And this is the way I would explain that very briefly. We assembled in a wide array of financial services oriented companies that were all directed toward either technology companies or venture capital firms. And all of them were immensely profitable.

So that worked out fabulously for us. And as we, one of the big ones that I should mention to you is we became a fund of funds because the venture, because we banked all these portfolio companies of the venture capitalists, they knew us and trusted us. And they gave us access when they raised funds so that we could invest too.

And because we banked all their companies and because we knew virtually all of the partners in all of the funds individually, we could do a great job of predicting which fund was going to do well and which one was not apt to do well. And the result was we were able to create a marvelous fund of funds that did extremely well.

Then initially, we were investing our own money, meaning the bank's capital, but as the regulations tightened in the course of the first decade of the 21st century,

We began to change that slightly. Instead of investing our own money, we raised money from endowments and foundations, and we put it into the best venture capital funds in the U.S. and in some cases overseas. So that was one of the many businesses that we assembled.

And the question that I suspect you're leading me to is how did the bank disappear in March of 2023? Yes. The bank disappeared mysteriously from my point of view because I was no longer active. My 30 years at SVB ended at the end of 2019. So I was utterly amazed when I woke up one morning

We were visiting our son in the Marine Corps in North Carolina. I looked at the New York Times and the Wall Street Journal online and found out that the bank was in deep sneakers. Three days later, it disappeared.

It took three days. So what happened? It was not the business model. I know that sounds a little offensive, but it was not the business model. It was a giant mistake made on the part of fundamentally the finance team, but then supported by all of the various lines of defense in the bank. A big mistake. Here's what that mistake was. It's very simple. When the COVID set in,

the Federal Reserve, in effect, flooded the market with liquidity. That liquidity found its way into many banks. Many banks couldn't figure out what to do with all these excess deposits because banks typically target an 80% loan-to-deposit ratio. And if suddenly they're flooded with liquidity, that loan-to-deposit ratio goes from 80 down to 30 or 40.

Not because the loans went away, but because the deposits went up. CFOs look at that and say, that's horrible. What are we going to do with all those? And they start devising schemes. So they put them into interest-bearing securities. And some CFOs, like ours, I guess, chose longer-term interest-bearing securities because they paid better.

But as you know better than most, if interest rates go up, the value of your interest-bearing security goes down. And that's what happened. And they got caught announcing a substantial loss, not the kind of loss that would bring a bank down, but a substantial loss. That fateful day in March of 2020,

2023. And because we had social media at that point in time, depositors were not that they intended to, but they were able to actually create a run on the bank. Within a day and a half, the bank lost about half of its deposits. And that was just out of fear, nothing more than fear.

So that is the story. Can you say that the business model of Silicon Valley Bank isn't what brought it down? I might disagree with that. Wasn't it the business model to get tons of non-interest bearing deposits from venture capitalists? And what I totally grant to you, Ken, it was not, let's call them Silicon Valley Bank assets, the assets that you

you and Silicon Valley Bank were known for in building your franchise of the loans to the wine companies, the loans to the technology companies where you get warrants, the capital call loan business. It was in terms of on the asset side, it was all interest rate risk, not credit risk. Two ways for our audience that you can lose money investing in loans or fixed income instruments is credit risk, you don't get paid back,

or interest rate risk, interest rates go up and you will get paid back. It's just worth less because you invested in a 10-year note at 2% and now the 10-year treasury note is at 5%. And those numbers are actually pretty accurate as to what Silicon Valley Bank did. I think in their 2022 annual report, their fixed agency mortgage backed securities, which are very similar to treasuries, the weighted yield was 1.5% and the yield

now is 5% or even higher. So it was all of the excess deposits that flooded into the system that are so valuable. And Ken, isn't it the case that it's tragic but somewhat ironic of why Silicon Valley Bank failed because it had all the things that you want as a banker. Banks fail because their loan to deposit ratio is too high, not too low, right? And what you want as a banker is tons of non-interest bearing deposits.

And that's what Silicon Valley Bank had did. And then poof, they were gone. Exactly. And I'll give you your point, but I'm going to counteract it. And that is that in my years as CEO, we had the practice of doing the following. An entrepreneur with a technology company comes to us one day and says, I'd like my company to bank with you.

And by the way, we just raised $100 million in venture capital money, and we want to place that with you. In my era, we would have said to that CEO or CFO, we would have said, great, thank you. We'd love to have you with us, but let's do it this way.

You take that $100 million and put maybe 20 million of it on our balance sheet. And just the non-interest bearing, you know, the checking account, we'll just handle your checking account. But you don't want to put $100 million into a checking account.

Take the other 80 million, we'll help you and put it into money market mutual fund accounts and particularly those that reprice every single day. And we will connect you with good ones at Federated or at Fidelity because we didn't want to have all that cash on our balance sheet.

Because, first of all, it's conceptually a drag on equity, on return on equity. And there's an inherent danger there. And that's the way we handle it. I understand, although I don't know because I wasn't there, I understand that we dropped that practice after I left the bank and moved to China.

And I think that the bank ran into an objection on the part of customers. Customers began saying, at least this is the way it's been explained to me, customers began saying, well, we want one-stop shopping. We want to do everything with you. And the bank felt that there was some danger that they would lose some of those customers if they...

I took the approach that I said we used to take when I was CEO, and that is, we'll take some but put the interest-bearing deposits someplace else. And our argument was very simple: we're not experts at this.

But Federated and Fidelity have money market mutual fund accounts that are run by experts, and you're better off with them. But in effect, we were, we thought, helping the customer, but also protecting ourselves from fraud.

Ken, there were three times where Silicon Valley Bank's deposits grew at, I'll call a tremendous rate, year over year, greater than 50%. One was 2009, one was 2015, and one was 2021, 2022. Tell us what was the saying of your bankers?

business school professor that about when banks grow, why, what did it keep you up at night? Why is banks growing so risky? What did Silicon Valley Bank do during your tenure and after your tenure in 2009 and 2015 to manage that huge growth of deposits without there being a large risk generated? And what didn't it do in 2021?

Right. So let me just tell you that I was the beneficiary of the wisdom of a fellow named Charlie Williams. Charlie was the elder statesman, the smart man who garnered a lot of experience over his lifetime. He was so much fun in class, but he was also so terrifying because he told entertaining stories

But periodically, in almost every class, he would stop on a dime, almost pirouette, and point at somebody. And half the time you felt he was pointing at you. He probably wasn't, but you felt like it. And he would scream something like, "Whatever happens, never grow your bank more than 10% per year, because you'll be in trouble." Or,

Whatever happens, don't accumulate too many deposits because your CFO will be tempted to put them into interest-bearing securities that will ultimately get you into trouble.

I don't know if you have this problem, but for years I would once or twice a year wake up in the middle of the night in a cold sweat feeling that Charlie Williams had just pointed his finger at me. But I think he was totally right. In 2009, when I was still CEO, I don't remember specifically what that year was like, but I know we struggled to get deposits off the balance sheet.

Just strongly encouraging people to put them with a money market mutual fund account, not on our balance sheet. We only wanted the DDA. And for the most part, if we got everybody's DDA, which you have a non-interest bearing, we had plenty of deposits.

Whatever happened in 2015, if I looked at the, obviously I looked at the financial results when they were published and they just kept adding deposits. I think in 2019, correct me if I'm wrong, but I believe that my recollection is in 2019, we had roughly 40 billion in loans and 50 billion in deposits. And by 2020,

Two, I think we had almost $250 billion in deposits, and we still only had maybe $40, $50, maybe $60 billion in loans. So it was way out of whack.

And it's a little unfair for me of me to second guess the management team because I wasn't part of it. But I think as the guy who was chairman when I was CEO was a very sophisticated and very nice guy named Pete Hart, who had been involved with a number of Fortune 500 companies. And when the bank went down and I called up Pete in order to commiserate, he just said,

How did they flunk Banking 101? You can't do what they did. That was his viewpoint. And so DDA is demand deposits, so non-interest-bearing deposits. So interesting that you, even with the huge growth in deposits, that you had to put a lot of off-balance sheet deposits. So the growth was even more, you just had laid off some of the risk to

to other banks and presumably you would get maybe some kind of fee there. Right.

That's exactly right. I thought it was a pretty good methodology. And why it went by the wayside after I left, I can only guess. And I base that guess on what people have told me, that customers became more and more resistant to splitting their relationship. And they didn't want to lose those customers. On the other hand, isn't it better to lose 10% of your customers who are angry because you can't do everything for them than it is to lose the whole bank? Right.

Why is it that the Silicon Valley bank deposits grew so much more than their loans? The flip way of asking that question is, why is that that the venture capital community and the technology VC backed companies, why is it that they had so much more money in deposits than they could borrow in terms of loans? That's a good question. I'm not 100% certain that I understand all of the dynamics, but I do think that

As I said before, once the COVID set in, the central banks, actually in more than one country, were busy pumping liquidity into markets in order to buoy them up. And a lot of money found itself into venture capital funds. And of course, when that happens, the prices of assets go up because

because the level of liquidity in the market has an influence on how much money venture capital funds can raise and are encouraged to raise, and that raises the price of

assets that they choose because they have that much more money to so venture cap excuse me technology companies are asking for bigger and bigger amounts it was a it was a kind of a liquidity Fest and it in my estimation it wasn't a healthy liquidity Fest but then the liquidity Fest drove up inflation

in a general sense. And when inflation goes up, obviously the Fed then starts raising rates in order to fight inflation. And that created the perfect storm.

because the banks, and it wasn't just SVB by the way, but many banks, many banks were taking excess deposits and putting them into interest bearing securities. And so many banks were at least theoretically subject to the same problem that SVB had or that First Republic had.

Yes. I think Bank of America owns half a trillion dollars worth of the same agency mortgage-backed securities, low-yielding, that lost so much in value that Silicon Valley Bank owned. But their deposit base, their liability base is a lot of individuals as opposed to venture capital funds and advanced high-ticket depositors who can withdraw their money at a moment's notice. Right. Right. And I also think that

And this may be the one weakness that I see in the business model, and that is that having so many depositors who knew each other probably exacerbated the run on the bank.

Meaning that venture capital funds all tend to know each other and it's fairly easy for a partner in a venture capital fund to inform his hundred best friends in other venture capital funds that he's worried about the stability of a bank. So that is one weakness.

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Thanks for listening. Let's get back to the interview.

All right. So let's say it's January 1st, 2023. The annual report from Silicon Valley Bank is about to come out and it's going to reveal that there's lots of losses on the securities book. Some of those losses are going to be realized on March 8th when Silicon Valley Bank does a capital raise. A lot of those losses are still in the held maturity book. So they're on paper, they don't exist, even though they actually do exist.

March 8th, Silicon Valley Bank comes out and says, we're going to raise money from a private equity firm. And then also we're going to do a share issuance. The stock collapses. People start pulling their money.

Thursday comes, Friday comes, the bank fails on Friday. And I think I had done the math. I think that the actual amount of withdrawals was higher than a million dollars a second. I think I did the math close to it. I think you're probably right. Yeah, yeah. So what would you have done? What mistakes did management make? Like, let's say, Kent, you're in the seat.

Already the mistakes are made. You have all of this money that's going down in terms of people are pulling deposits. This is before the bank run, but there's a lot of cash burn. These venture capital backed companies are losing money. The inflows are no longer there. So deposits are going down and there are tons of unrealized losses on securities. The rest of the bank is doing well, but you have those two huge, huge problems. What does Ken Wilcox, renewed CEO, do on January 1st?

that was different than and how might it have played out differently? Well, I think that that question is a little bit beyond my pay grade, given that I haven't been paid by Silicon Valley Bank for a number of years. I don't know for sure, but I can give you some potential ideas. It's my understanding that we had a hedge that we purchased

hedges and that for some inexplicable reason, nobody's ever explained it to me, we sold those prematurely.

And so number one is it would have been better to have hedges and have kept them. That would be one thing. Another thing would be, and I don't know if this would have been legally possible, but it would be better to raise additional equity before you announce a giant loss than after.

Of course, you have to inform the people that would be providing you the equity because that would be not just unethical but illegal, I'm sure. But if we could have raised equity before the announcement rather than making the announcement and saying we're in the process of raising equity, that might have worked better.

But I actually don't know and I would hate to find myself in that situation to be again with It might have been far better to have steered excess deposits in other directions Prior to the onset of the debacle. I'm guessing that that would have been very difficult if it was even possible Mm-hmm, but I'm saying that it stands to reason that you you can't really I

announce a big loss and say we're going to fill the hole next week because people are less inclined to believe that. If it were possible to do so, it would be better to say we've already piled up a huge mountain of cash to fill the hole. So there's nothing to worry about. Yes. But I don't know if that's possible. Yeah. I mean, I think you just would have raised all the money in private equity before. So General Atlantic...

had a half billion dollar restricted common stock offering. I think the answer is just have that be way, way bigger because they needed a lot more money to fill the hole. Oh yeah, that wouldn't have been enough anyway. Yeah. No, that would not have been enough anyway. Maybe the die was already cast by January 1st of 2023. Maybe we were on a course that was ultimately going to lead to the disintegration of

And there was no stopping it. I don't know. Ken, back of the envelope math, just to give people a little bit of sense of the scale, the retained earnings of Silicon Valley Bank. So all of the earnings before you were the CEO, while you were CEO and after your CEO, retained earnings was about $8 or $9 billion.

and that's money that the bank has made. I'm just looking at my rough guess of the securities losses. I'm guessing that they were declined 15% in value and on roughly $110 billion of securities. That's $18 billion of losses. So the losses on the securities were more than double the combined earnings of the bank going all the way back to its founding, the retained earnings. What's your reaction to that?

It's a dire situation. Yeah, it is. Okay, so Ken, let's now talk about China. When did you, while you're CEO, when did you want to get involved in China? How did you get involved in China? And then how did you become involved with Shanghai Silicon Valley Bank? And what is its fate today? All right. And I believe the year 2000, I started going to China for a couple of weeks every year.

with a team because we were interested in doing business in China. I very definitely had the sense that the innovation space in China was on the verge of becoming much, much larger. And I also felt that because technology is fundamentally a global industry,

that it was important to be in all of the innovation centers around the world. And certainly we'd done very well in Israel. We did very well in Europe, ultimately went to Canada. So I do remember that in 2000, I think four,

we put together a trip for the best venture capitalists that we knew in Silicon Valley to take them to China and show them what we'd been observing already for about four or five years at that point in time. And that is innovation spaces that were exploding. And then in 2005, we opened up our first office in Shanghai.

And we didn't have a license to do anything, so all we could do is introduce ourselves to people. And we just kept introducing ourselves to people until we found people who took a great interest in us. And that was around 2008. Around 2008, I met a man, Party Secretary Chun, who was the party secretary of the Yangpu District.

which was one of the 19 districts in Shanghai, and it was somewhat of a Rust Belt district. He wanted to transform his district into a knowledge-based industries district.

And he wanted us to be a part of that because he felt that having a bank that understood how to make loans to technology companies would be quite beneficial to him. And ultimately, he introduced us then to a number of people in higher level positions in Beijing. And by 2010, it was pretty clear

that Beijing, high-level people in Beijing wanted us to come to China. And then, at the end of 2010, I retired and our board of directors decided that they really wanted us to open a bank in China. They looked around and they couldn't find anybody in the bank who they either thought was appropriate or who wanted to go.

And they asked me, I talked to my wife about it. She was very enthusiastic. So at the beginning of 2011, we moved to China and we were there for four years. And at the end of 2019, I had to step down from the board. I was actually vice chairman of the board, but the Chinese regulators had

in effect, rules. I'm not sure they were hard and fast regulations, but rules about how long you could be on a bank board. And they told me that it was time for me to retire. So at the end of 2019, I quit going to China. And then when our bank, in effect, disappeared in March of 2023,

The regulators on that fateful weekend, by Saturday we were already goners. We had been dissolved. And over the weekend, the regulators put all of the various parts on the auction block. The biggest part, which was the domestic loan portfolio, sold almost instantaneously to First Citizens.

But I think First Citizens had a game plan that they'd already applied in other similar such situations. And so they knew exactly how to do it. And they bid and got and won the bid. So that was the biggest part of the bank, actually. But there were numerous other parts because we'd accumulated either through acquisition or through our own creation a number of

non-bank entities, all financial services companies, all oriented towards serving the innovation space. And over time, all of those got sold off. It took at least a year in my recollection, but by five, six months ago, there was still one part remaining, and that was our 50% interest in the joint venture in China.

And nobody bet on that. And the reason nobody bet on it, in my estimation, is very simply that the relationship between our respective governments had deteriorated to the extent that it would have been, I think, unnecessarily risky for somebody to have attempted or to have not just attempted but engineered a purchase of that

50% interest in the joint venture. So sometime around five, I think five months ago, I'm not quite sure, the Chinese Communist Party simply one day dissolved it. So it was something that takes place in a moment of time. And afterwards, the residue was absorbed by our erstwhile joint venture partner, Shanghai Pudong Development Bank.

So it's no longer exists. Although some of the business activities still exist, but under the umbrella of Shanghai Putong Development Bank. So I'm not a bankruptcy expert, Ken, but Silicon Valley Bank, I believe it was the parent company that declared bankruptcy. That's what the stockholders own. They had the Silicon Valley Bank, the actual bank, which with all the assets, first citizens bought that. Then there are many other subsidiaries, Moffett Nathanson, Boston First,

Lee Ring Partners, and others. You're saying all of those got bought, but one. And the one thing that didn't get bought was Shanghai Silicon Valley Bank, which is joint owned by Silicon Valley Bank Financial Group, as well as Shanghai Pudong Development Bank. So did SVB own 50% of... Did the bankrupt stock own 50% of that thing? And then...

Why didn't people get paid off? I mean, you said politically, but we live in a world of laws. You can't just say, oh, I used to own 50% and now I own 100%, right? Or did the entity get itself devolved? Isn't there theoretically an entity, whether it's the FDIC or the bankrupt company of Silicon Valley Group, S&P Financial Group, that owns 50% stake in this joint venture?

Well, first of all, you begin your question by saying we live in a world of law. And I'm not sure there is a universal law that governs this particular situation. But if nobody was willing to stand up and say, nobody anywhere, it could have been somebody in France, it could have been somebody in Germany, it could have been somebody in who knows where, if nobody in the world is willing to stand up and say, I'm going to bid on that 50% interest,

What are they supposed to do? So it simply disappeared. Poof. Poof. Yeah, I mean, but theoretically it still exists, I guess. Okay, so tell us about founding the... You're there in 2011, 2012. You're founding a joint venture. You want to have a partner. Your partner is Shanghai Pudong Development Bank.

You were very excited. You're giving awards, they're getting drunk with you, the Chinese officials, the Chinese bankers. At what point did you realize that maybe it wasn't going to be that easy of a journey and that basically you were being played and maybe even being screwed?

Well, truth be told, yes, that is a realization that we came to very slowly in the fullness of time. And by the way, I want to correct one thing you said. We weren't all getting drunk together because I don't like to get drunk, but they did. Yes.

And the alcohol that they try to insist that you consume, meetings of the sort that you're describing, which is called Baijiu, which is an extremely strong form of alcoholic beverage. I've actually seen people collapse and go unconscious in sessions of that sort, drinking Baijiu.

So, but I don't, I wouldn't, I wouldn't do what I thought against it. So, but anyway, let me describe to you two or three high points in the course of our relationship with the Chinese Communist Party that will cast some light on the what's ultimately the answer to your question.

So I want to start by saying that when we went to China, I think on the one hand, I was ill-prepared and naive. On the other hand, I had what I would call an open heart and an open mind. It's my belief that China is more different from the U.S. than almost any other country that I visited, and I visited a fair number of them.

But going back to the high points of the story, I'm going to give you three or four high points that will give you a sense of how things evolved. The first high point would be sometime in 2009 when Party Secretary Chun of the Yangpu District, in an effort to help me get a license for our bank, introduced me

to a gentleman named Yu Zhengsheng. Now, Yu Zhengsheng has since passed away. At the time, in 2009, he was party secretary of all of Shanghai, which as you know is a city province. Shanghai at the time had 25, 26, 27, 28, 20 million people somewhere in that neighborhood. Yu Zhengsheng was important enough that when Xi Jinping came to power in

the fall of 2012, Yu Zhengcheng was elevated from Party Secretary of Shanghai to a member of the Standing Committee, meaning conceptually he's one of the most, seven or so most powerful people in China. So this was not a, your average fellow here. So in course of a handful of meetings that took place in 2009 and 2010, Yu Zhengcheng

told me that he and his team had scoured the earth looking for the best bank to help China, especially to help China develop its innovation space. And he was very explicit. He said the best bank in the whole world to help us develop our innovation space is Silicon Valley Bank.

And then he, I'll take it one step further, he actually said, "It's not Morgan Stanley and it's not Goldman Sachs. They're great, but your bank is the one." And then he took it even one step further. He said,

And Ken, you are one of the smartest people I have ever met. You understand China to a far greater extent than other Americans that I have spent time with. So I knew, Jack, that I was being played, but I will admit that it was encouraging because it gave me the sense that we were on the road to getting the license.

that it was my job to get. So that would be, oh, and oh, by the way, in the course of time, he also added that you will need a joint venture partner.

I would, in my naivete, I would have gladly attempted to establish a bank without a joint venture partner. But his reasoning was you need one because China is so different and it's very difficult to understand how China works. Your joint venture partner will guide you. But not to worry, we've found one that we think is appropriate and will introduce you.

So that's kind of an early phase. Of course, I knew I was being played, but I also felt that I was on the road to where we wanted to go. Then let's fast forward a couple of years. Everything takes time in China, mostly because they have a long-term plan. They know where they want to take you. They know where they want to go. You may feel the pressure.

that you put on yourself or that your board puts on you or that you believe the world is putting on you to do things faster, they know exactly how fast they want you to get there. And they are in a position to control that because the Chinese Communist Party can control anything it wants to in China.

And I would go so far as to say if they're not controlling aspects of what you're doing in China, you're probably doing something that's fairly unimportant. Or you're being controlled and you don't know it because you're lacking self-awareness or because you're being flattered to the extent that you tend not even to think about it.

But a couple of years later, we finally get the license. That would have been in fall of 2011 after my wife and I had been there almost a year full time. They come to us with a license and they present us with the license. And they, of course, tell us that it's a very happy day for them because this is something we both want. At the same time, however, they make it clear to you that there are extenuating circumstances beyond their control.

Which of course is somewhat of a prevarication because the Chinese Communist Party can control anything it wants to. And to hide behind rules and regulations and laws is somewhat disingenuous because they make them up as they go.

And even if they've been around for a while, they can change them on a dime. They can also arrest people for violation of laws that don't yet exist and keep them in prison until they decide to actually formalize the creation of a law.

So in any case, when we got the license, we learned two things that we had some knowledge of, but we didn't really believe that they would be operative for the simple reason that after all, the Chinese Communist Party owned half of this joint venture. Why would they shoot themselves in the foot with regulations that are totally arbitrary?

Yes. And sorry, Kane. So the Shanghai Pudong Development Bank, that is what owned half of the joint venture. It is a state-owned bank, but it does have a publicly, it is publicly traded. I don't know. It's possible that only 1% of the shares are owned by the public, but it is a publicly traded company. So it's not technically the CCP, but one point you make in the book is that the companies and the Communist Chinese Party are the same thing. Functionally, they're the same thing.

Obviously, paper, they're not the same thing. But functionally, they're the same thing. Very definitely. And that's a point that I make in the book. And that is that one of the things that makes it so difficult, there are a couple of things that make it so difficult for us to understand China before we get there without experiencing it firsthand over an extended period of time. The first thing is that we, like human beings everywhere, have mental models that

enable us to interpret what's happening around us. So we have mental models about how business works, how government works, how parties work, meaning political parties, and we take them with us wherever we go and we observe what happens and we try to interpret what happens, but it's through the lens of our mental models.

And if you take those mental models to the UK, you'll get most everything right. Not everything, but most things. But if you take them to China, you'll get most things wrong. I know American business people who spend five years in China and come home after five years interpreting, misinterpreting what they see to the same extent that they did on day one.

what's an example of that i'll give you a couple of examples one of them is the distinction between government party and business so i had a conversation partner my

the person who is the highest ranking person on the other side of the table at Shanghai Pudong Development Bank. And I remember initially, sometimes when I had conversations with him wondering, now, is he thinking, what hat is he wearing today? Is he wearing his Chinese Communist Party hat? Or is he wearing his banker hat? Or is he wearing his government hat? And it took me

a long time before I realized he's wearing all three hats at once. And it took me an even longer time before I realized that he doesn't even think about it that way. He's not aware of the fact that these are three different hats. In his mind, that's all the same thing. But in my mind, at least initially, they were three different things. But the truth is all the banks in China are owned by the government.

And the government is 100% controlled by the Chinese Communist Party. So there's really no meaningful distinction to be drawn between these three. And it's not like one can take the other to court if they disagree with them. There is no recourse.

So that would be an example in my mind of what I'm talking about. And the other thing is that you'll notice there are plenty of books coming out, more and more, and there have been books coming out for a couple of decades anyway, three, four decades, about China, but they're invariably written by policy people, think tank people,

academicians. And I'm not saying they're not good books. They are good books. But most of them, most of the authors of those books have never done business in China. And people that do business in China don't typically write about their experience for, I think, a couple of different reasons. Either they didn't understand it themselves totally,

Or another reason would be that they don't want to invite retribution from the party because the party will punish people who criticize it. And another reason could be embarrassment. They don't want to admit that they were hosed. In some cases, they're not even aware of the fact that they were hosed or are being hosed.

or played or taken advantage of. So how are companies in China, Western companies that go into China, how are they hosed, screwed, taken advantage of? How was Silicon Valley Bank hosed, screwed and taken advantage of? All right, let's go to that then. Let's go back to the day we got the license. At the same time that we got the license,

We learned that two different things that we didn't realize before. And you can fault us for not realizing these things, but I will tell you that it's hard to understand things that aren't made clear and that others can't really advise you on because they don't understand them either. But one thing we learned almost on the same day we got the license was that there was a law in China

to the effect that any new bank with any foreign ownership, even 5%, could not use Ribbon B for its first three years. The currency of the country. Right. So go figure. That's the big deal. There's nothing you can really do because our would-be customers, technology companies of various sorts, which are chartered in China,

only use renminbi. They have no use for other things because they pay their employees in renminbi. And if they need to buy components from other places or technology from other places, they can't actually do it on their own. They have to go to a trading company, most of which are government affiliated,

They describe what they want. The trading company goes and buys it for them. They pay the trading company in renminbi. The trading company receives hard currency, which it turns over to the central government, to the central bank. And that way, the central bank accumulates massive amounts of hard currency. But the technology companies themselves have no use for

any currency other than renminbi. So, in effect, we couldn't do anything for three years. But not to worry, they said that they're perfectly willing to help us. The regulators required some 60-some employees, not that they were fixated on that number, but they had a number of positions that they wanted filled before we could get the license, and it was about 60 people. The government said, well, we...

We recognize that that's, you know, an expensive nut to crack, but we'll give you some subsidy every year so it's not a complete loss to you. And by the way, we would very much appreciate it if you would act like good citizens here because we want you to do what good citizens do and good citizens help each other. And we have a number of banks that we would like you to teach your business model to.

The three years where you can't use Chinese currency. And then the other thing we learned more or less simultaneously was that the license they gave us didn't permit us to do anything other than call ourselves a bank. It turns out that China works differently than most other countries. In most countries, if you get a banking license, that license enables you to do what any other bank would do. In China, each

discrete individual activity requires a separate license. So you want to take a deposit, you need a deposit taking license. Oh, by the way, you need different kinds of deposit taking licenses for different kinds of deposits. Interest bearing, non-interest bearing or high interest bearing is a different license.

And loans, you want to make a loan, you need a loan making license, but not just one that covers all loans. You need one for making working capital loans and one for making term loans. And so the story goes, you want to exchange money for people, you need an exchange license. You want to have a website for your customers, you need a website license. And by the way, you can't even apply for the website license until you've been in business for a year.

So, you can see a bank like ours would have needed 15, 20 different licenses at a minimum. We never got all the licenses we needed in the course of our, well, if we got our initial license to be a bank in 2011 and we disappeared in 2023, that's 12 years. We never got all the licenses we needed.

That would be a second high point. Let me get to a third high point. There were scores of high points in between, but I don't want to describe them all to you. But I can assure you that each high point revealed to us another aspect of the way China works, which slowly, in the fullness of time, led us to the conclusion that this was an impossible undertaking.

or in other words, that we were being taken advantage of. Totally inconsistent with the spirit of the WTO, by the way. Maybe not in all cases forbidden by the terms of the WTO, but certainly in all cases inconsistent with the spirit of the WTO accession. So the third high point I'll mention to you was after three years, I spent most of the three years

working on getting an exception, but I failed. And at some point, I did such a good job of working on getting an exception that people began telling me I was annoying the Chinese Communist Party all the way to the top and would I please quit it because it wasn't going to get me what I wanted. And I was just annoying people. At what point did you start to be able to do the things that banks do? Take deposits, make loans,

Do you invest in banking? Approximately three years after we got the license. Okay, so you did start doing it. You were an actual bank and the bank was, you achieved liftoff. Oh, well, first of all, we got the license in the fall of 2011 and it wasn't until 2011, 12, 13, 14, until the end of 14 when we were actually able to do things. And I spent that time

as I say, working on getting an exception. Ultimately, the day came when they told us we could use Remen B. And of course, they described it in much the same way they described giving us the license in the first place. This is a glorious day. We're so happy. This is exactly what we wanted for you and for us. And it is just wonderful.

And by the way, we want you to know that we so admire your business model that we have decided to open a bank of our own using your business model. And because the management team we've selected doesn't understand every aspect of your business model at this point in time, we would like you to spend some time with them explaining to them how your business model works. Some of the unanswered questions.

And when I pointed out to them, look, what do you mean a bank of your own? This is a bank of your own. You own 50% of it.

The only answer that they could give was, yes, I know, but we want one of our own, of our own. So that tells you something. I'm not sure what it tells you, but it does tell you something. Furthermore, I am absolutely convinced, notwithstanding anything anybody tells me, that allowing us to negotiate 50%,

was just another part of being played because the rules or the laws precluded any foreigner from owning more than 20% of a bank, any foreign entity from owning more than 20% of a bank. But you can see they were able to

ignore that rule in the interest of making us feel like special people and extremely smart people. So, you know, the day we found out that we had been successful in negotiating 20%, we thought that we were, you know, pretty good. It took me a couple of years before I realized that the percentage ownership is almost meaningless.

at least in terms of control. And tell us about the bank that China started on its own, that it owned 100% of it, that basically wanted to copy you. They're not doing that well. They're not doing that well because that's another high point in the evolution of the relationship. Some point, even before we got the license, there was a day when my conversation partner on the other side came to me and said,

I can. I'm very upset with you. Well, why? I thought we were working well together. Well, I'm upset with you because I believe that you have been acted disingenuously with me. Well, what do you mean? He says, we know that you have an algorithm that enables you to differentiate between companies that are going to be successful and companies that aren't.

And you have not shared that algorithm with us. And I didn't know whether to laugh or cry because the whole idea that we developed an algorithm that would enable us to differentiate between early-stage venture-backed companies that were going to succeed and those that weren't was, in my mind, ludicrous. And in fact, I would say that the methodology employed by Silicon Valley Bank over the decades was as old-fashioned as ever.

a methodology could be. It was purely relationship banking and it involved, if you want to try to state it pseudoscientifically, pattern recognition. But pattern recognition over an extended period of time. We really didn't let junior lenders make decisions until they've been doing it for almost 10 years.

Because they needed to see hundreds of situations before their mind was schooled in the kind of pattern recognition that would help them to predict the future. And we got good at it, but not because we understood the underlying technologies, and not because we had an algorithm, but just because people had developed an understanding of what

success looks like in its early stages. I consider that highly manipulative, that day that he accused me of acting disingenuously. But it's not surprising for two reasons. Number one is China, as you know, has more engineers than any country on earth. There is a kind of an engineering mentality.

in China. So they seek to find algorithms that will explain things. That's number one. And number two is there is a deliberate tendency on the part of the Chinese Communist Party to use various things that most of us would consider a little bit

unsavory in negotiations and manipulation is one of them. Okay. Yeah. The seat manipulation. So I got to tell you, I read a book that I would recommend to everybody. It was one of the few books I read that was actually helpful. And I've read, uh,

a lot of books about China. But one of the books that I read before I even got there was a book that was written, I think in 1982 by a well-known at the time, well-known sinologist at MIT called Lucian Pye.

and Lucian Pai, it's a very thin book, it's like 100 pages, it's called something like Chinese Commercial Negotiation Techniques. You read this book and he basically says, "This isn't getting to yes. This is not an offshoot of the Harvard negotiation project that resulted in that book getting to yes.

The techniques that you will find when you go to China include deceit and manipulation and subterfuge and on and on and on like that. When I read this book, I remember saying to myself, this Lucian Pye character must have been an extremely jaded person.

I can't imagine that they work that way. I'm sure that they work like everybody else. If you treat people well and you work on getting to yes, so to speak, you'll be rewarded. And I met a number of people, Americans, who claimed that that was the case.

But as soon as I got there, I began to see evidence of the truthfulness of Lucian Pye's descriptions. And over time, I experienced everything that Lucian Pye had written in his book.

So how else were you deceived? So you didn't have the licenses to do a lot of things. Three years in, you finally can take deposits and make loans. Did Shanghai Silicon Valley Bank, did you achieve any success in terms of scale, in terms of getting to...

hundreds of millions or billions of dollars worth of deposits, what was your peak in terms of assets and loans and profitability? Was there ever a point where you made money? And how did the Chinese Communist Party kind of hamper you if they did? Let me see, probably fifth or sixth year we started to make some money, not huge amounts of money. And our growth wasn't as high as it could have been or as they wanted it to be. But I'll tell you what held us back. Part of it was our business model

we should never have gone to China in the first place. If we had understand the way that the China banking system works and the Chinese economy works, we never would have taken our business model to China. Because think about this,

One of the things that has been a tremendous advantage to us in Western countries, including the US, is that bankers fear bankruptcy. They avoid making loans that are dangerous in terms of their profitability because they know that regulators can close them, can issue cease and desist

orders and can close them down. And so when I started in banking in 1983, there were some 18,000 banks. Today, there are, I think, around five, maybe 6,000. Where'd they all go? Well, a lot of them got acquired because that's been typical. Smaller banks get acquired by larger banks. A lot of them have gone under because the Fed is trying to avoid moral hazard. And I think rightfully so.

How many banks have disappeared in China since the banking system was reestablished, subsequent to Mao's death in 1976? None. I don't believe there's a single bank that has gone under. By the way, bankers in China are rewarded for volumes, and a larger percentage of their pay is in the form of bonus based on volume.

than would be true in the US. Because when the banking system is a tool of the Chinese Communist Party in accomplishing its goals, in other words, the Chinese Communist Party identifies a series of verticals or industrial sectors where it wants to be successful and ultimately dominate those industries globally. And they encourage the banks

to make loans into those sectors. And when the banks, if the banks have too many failures, the regulators come in quietly in the dead of night and arrest a couple of people. And then they take all the bad loans and conceptually they put them in a landfill somewhere. And then they quietly recapitalize those banks. And maybe some people know about it. Most people don't even know about it. It's not

advertised in the newspapers. Silicon Valley Bank, when it went down, practically everybody that I encounter on a daily basis was aware that Silicon Valley Bank had gone down. The guy who came to cut my tree down at our house in the country told me all about Silicon Valley Bank. That kind of thing, that's just virtually unknown in China.

So our business model won't work in China because we were able to, by simply existing and without even making loans during that period when we weren't allowed to make loans, we engendered the creation of a wide array of competitors. They didn't know what they were doing. Most of them generated losses.

in their technology loan portfolio. So the whole idea of taking our business model there is something that won't work because the Chinese Communist Party ultimately chooses the winners and losers. It's not a market economy in the way that people generally think of a market economy. And a lot of companies in China don't really make money

but they achieve the goals that the party sets for them in terms of technological advancement and bringing China closer to dominating industries globally. China slowly over time has become dominant in a handful of industries and is now generating a $1 trillion trade surplus

collectively, not with the US in particular, but collectively. And what that means is that other countries collectively are selling $1 trillion less than they might otherwise. But this is a crowning achievement from the point of view of the party.

And it's clear that they subsidize companies in various ways. There are a hundred different ways to subsidize a company. And I think they found all of them and they they're subsidizing those companies in order to achieve their goal of becoming a dominant player in a given vertical and it's being achieved.

But what's the cost? Entire industries in some countries are slowly disappearing. I predict that the automobile industry in our country here, and I know something about the automobile industry. I grew up in a town that was 100% dominated by the auto industry. I predict that

Our auto industry will slowly evaporate in the course of the next couple of decades because China now has reached the point where it exports more autos than any other country. Right. Yeah. And U.S. auto manufacturing in terms of employment, it peaked well over 20 years ago.

First, from competition from Japan and now from China. Ken, I totally grant your point that in the Chinese banking system, Chinese banks make loans because they have what's called window guidance, or they are told how much loans to make and to whom, to what industries to make those loans. For a while, they just flooded the real estate market with tons of loans, tons of credit,

billions, trillions of dollars worth of credit into the real estate industry. You'll say four or five years ago, they were instructed to pull it out of real estate. So stop lending to real estate or slow it down drastically and then lend to industry. So now banks are the ones who are getting tons of cheap credit. Excuse me, in manufacturers and industries are the ones that get getting cheap credit, not real estate. But Ken, your point about moral hazard

Wouldn't you say that the bankers and the corporate executives who were the CEOs of banks during the great financial crisis, wouldn't you say that their lack of criminal culpability, as well as, for example, Silicon Valley Bank, the then CEO Becker, he has never been in any criminal cases at all. Whereas in China,

It actually is somewhat routine, or at least heard of, that bankers go to jail. I mean, I just pulled up a story. The former chairman of China Life Insurance, Wang Bin, was sentenced to life in prison. The former...

CEO of the Bank of China chairman, which is a huge bank, one of the big four, the big five in China, he was suspended to death and then he has granted a reprieve. So these people in China, they send the bankers who do bad stuff to death row. Wouldn't you say that in China, they do have a stronger punishment for banks who make mistakes, bankers who make mistakes? Yes and no.

I would say I don't know of any banker here who has been executed. If there are some, I'm not aware of them. On the other hand, I know of plenty of banks as institutions that have disappeared. So you make a strong point, but I think you're mixing apples and oranges.

a little bit and there are people then who are perhaps not jailed in some cases actually bankers have been jailed as you know but they at the very least there are plenty of people who aren't allowed to occupy high positions management positions in banks in the future so

I understand what you're saying, but those two systems, they work differently. And for a bank like ours to be successful, we have to be in a system that is more similar to what we have here in the U.S., where for the most part,

People, bankers, have avoided over the 40 years that I've been involved here, the technology space because they view it as risky. And they view it as risky, in my opinion, because they aren't willing to devote the amount of resources to it that our bank was able to. Meaning everybody in the bank was focused on technology.

That's number one. Number two is we made a special point of understanding the personality and the track record of virtually every venture capitalist out there.

And your point of Silicon Valley Bank is to make loans that make money and, oh, we're going to make this. We have a very good chance of being paid back. Oh, and by the way, with this loan, we can get extra deposits in that will be non-interest bearing deposits. Your goal is to make money. Yeah, that point I grant you that the Chinese banking culture is just not a

profit. It's not a return on equity culture. It is a, the Chinese Communist Party told me to make loans. I'm going to make loans. And I'm really good at making loans. But I'm not going to make them in a risk-adjusted capitalistic way. That's right. It's totally correct what you're saying. Okay. So how did you- Go ahead. Think about it. It seems to be working, doesn't it? In China? Yeah. Yeah.

Yeah. In terms of the growth, yeah, definitely. Definitely. And also the dominance of certain industries. So who, Ken, is the Silicon Valley Bank of China now where it is a big lender, the biggest lender to venture capital and venture capital-backed firms? To the best of my knowledge, there is no single such bank. There are several.

But many banks, even if they wanted to, are precluded from doing it because they haven't been given the licenses that would enable them to offer the products that the venture capital firms would want.

So how was your growth hindered once you got the licenses? I understand that there are several licenses that you didn't get, but you got to a specific size, you got to take loans, take deposits. I feel like, yeah, what happened next in this chapter?

Well, a lot of what you're asking me to describe is subtle and not easily provable. But I'll give you an example of what I'm referring to. In the 2009-2010 timeframe, we spent months and months and months negotiating a shareholder agreement, the SVB and Shanghai Pudong Development Bank. Part of that shareholder agreement was that

Neither of the two parent companies would make loans to technology companies. In other words, we're like two parents creating a child and we didn't want to compete with this child. So working with technology companies from a commercial banking perspective was the sole right of the child, neither parent. And we had made...

Prior to the shareholder agreement over the course of several years, I don't know, five, six, seven years, we'd made a number of loans to Chinese technology companies, but all offshore. In other words, those technology companies would establish entities in the Cayman Islands. We would lend to the Cayman Island company. So it was perfectly legal. We weren't violating any rules or regulations on either side.

But we promised to, to the extent possible, transform those relationships into ones that would fit under the rubric of the joint venture. And we actually did that in the fullness of time. So in other words, we gave the joint venture a number of relationships. And conceptually, we're giving half of them for free to...

Shanghai Pudong Development Bank. We found out after we got started that Shanghai Pudong Development Bank paid virtually no attention to the prohibition that they had agreed to in the shareholder agreement. So naturally, I confronted them on it. And when I confronted them on it, they said, "Oh, no, no, no, you're just not understanding. We're not soliciting those companies."

We're letting the customers decide. So if you can explain what that means to me, I'd be grateful. But I think that there was a de facto violation of the shareholder agreement. And in time, they became unabashed in their description of what their activities were. I think by 2016 or 17, they would tell me in board meetings that they were banking on

40,000 technology companies or some number, some wildly exaggerated number. I think they were defining technology companies slightly differently. But whether they were or whether they weren't, their statement was a bold-faced violation of what they'd agreed to. So that, I think, would be another example of what I'm referring to.

And Ken, are there any other ways that you feel like the Chinese Communist Party screwed Silicon Valley Bank and Shanghai Silicon Valley Bank? Or do you think we've covered them all? And if the number that I've described to you isn't sufficient for you to come to the conclusion that we were played, I'm a little confused. Yeah. So they let the parent company grow and they broke those agreements. They didn't give you the licensees.

What else? Have we already talked about this? Well, I could give you smaller examples that would be indicative of the larger trends, but suffice it to say, I think the situations that I've already described to you are pretty significant.

I don't believe that there has ever been a case where a Chinese bank has been given a license by either the controller of the currency or the Federal Reserve with any limitations placed on it. When I found out that we were not going to be allowed to use Chinese currency for the first three years

I went to the Fed here in San Francisco and I talked to them about it because I'd been on the San Francisco Fed board for seven years in the past and I knew a lot of people. And their response, I said to them, you should...

"You should ensure that Chinese banks that get licenses to do business in the United States aren't allowed to use dollars." And they just laughed at me. They said, "You know, you're the one who decided to go to China. We didn't send you. And our job is to ensure the safety and soundness of the US system and to treat all of the license holders equitably."

So, no, we can't do that. So at the end of your book, I think it's the epilogue, you've got four years of lessons and you've got close to 32 lessons about what Chinese business, excuse me, American Western business people should understand about China. So tell us what you think are the most important as well as how you kind of realized that in China. Well, I think the two most important probably are

I'd have to review that list in order to prioritize it for you. But I think that the two most important are understanding that this is not a country with rule of law. When the Chinese Communist Party talks about rule of law, they mean that they use laws to get their way, but they can change the laws anytime they want to, and they can make them up as they go. The point is the Chinese Communist Party will have its way.

and there is no recourse. So that would be a very important one. Another very important one is what I have described as or called sometimes, I'm not sure I call it that in the book, the arc. In other words, what is the typical evolution of a relationship? And the typical evolution of a relationship is very simply this: entice a company to come,

to China, usually using flattery lavishly, but also promises of other things, subsidies of various sorts, special

deals and that's number one. Number two is once they arrive, tying them up in sometimes arbitrary and capricious regulation to make sure that on the one hand, they can do enough that it's possible to observe and learn. But on the other hand, not so much that they can become too dominant.

And then the number three would be to figure out how to appropriate their technology or their knowledge base, whatever it is that attracted the Chinese Communist Party to that company in the first place. That was knowledge, it wasn't profit. And the party needs to appropriate that knowledge. And there are various ways that that can be done.

It can include things like forced technology transfer, and in other words, that's the quid pro quo for access to the market. It could also include things like a requirement that 80% of their suppliers have to be Chinese suppliers. So you have to teach the Chinese suppliers how to produce what it is that you need from them.

And then ultimately those Chinese suppliers will come together and form a competitor. And that competitor will go after you in China itself. And if they're successful, then they'll take their competition globally. And you may end up losing out altogether in the fullness of time.

And that that has been a very conscious practice for the past 25, 30 years, to the extent that it's really no longer an important part of the playbook because China has, for the most part, caught up in the places where they wanted to catch up.

One lesson that took me by surprise at the end is that the Chinese, you say the Chinese don't distinguish between debt and equity, nor are they focused on ROE, return on equity. Okay, we understand they're not focused on ROE, but how do you not distinguish between debt and equity? And what does that mean in practice? What does that mean in practice? It means that

If you were to look at, compare our respective economies, adjusting for size, so you're looking at proportionality, not at absolute numbers, you would find that a certain percentage of what transpires in the U.S. is fueled by equity and a certain percentage is fueled by debt.

Having said that, if you were to do the same kind of analysis in China, you'd find out that the percentages fueled by debt is much, much larger proportionately speaking. So in other words, the banks collectively do a disproportionate percentage of the financing of activities.

And because they're not concerned about a return on equity, it doesn't make any difference. Money is money. And Ken, would you be an investor? Are you an investor in any Chinese companies or Chinese stocks? Because if let's say, and I'm just naming one company, let's say JD.com, a retailer. Your average Chinese company, if...

Credit is immense, and the Chinese government is telling banks to make tons of non-profitable loans, and they're making those at very low interest rates. That's a pretty good environment to be a company. It's horrible for banks. So with your banker hat on, it's horrible, I understand. But in terms of being a customer of a bank, it must be pretty good. Yeah, that's true. That's true. And so what do you think about investing in Chinese stocks and

Well, first of all, I've never done it directly. I have done it indirectly by putting money, my own personal money, into funds. There are various purveyors of funds out there in the US that invest in Chinese stocks, increasingly fewer though.

They've come to realize that the dynamics of the Chinese stock market are different, that it's a different framework, a different set of rules, and a different set of causes and outcomes.

So many of them have withdrawn. But I've never really made any money in those funds. I've made money one year and lost it the next. And I finally quit doing it a couple of years ago. And by the way, obviously I'm not going to mention any names, but I got a letter literally two weeks ago from a person who had been...

at a major institution investing in Chinese stocks for a long time who has read my book and he said not because of your book but because of my own personal experience I've come to the same conclusions that you've come to and I'm no longer investing other people's money in Chinese stocks

And so, Ken, your book is kind of a warning to business people doing business in China, foreign business people. It's also, what do you say, a warning to investors in China, foreign investors in China? Yeah, I think so. I think so. For sure. I think so. I think, though, that we've reached a tipping point in the U.S. There's absolutely no doubt about it. And the tipping point has more or less corresponded with the... Just more or less corresponded with the...

the publication of my book, meaning my book didn't cause the tipping point, but I think it ultimately, and somewhat coincidentally, reflects the tipping point. And I say somewhat coincidentally because I could have written this book 10 years ago and it would have been almost identical to what I wrote because my experience was so intense in that four years that I made a

an evolution from being extremely optimistic and I think extremely naive to becoming, I don't want to say jaded, but I think much more realistic about the ultimate outcome. But I just didn't write it right away. I let it ferment on my desk for a few years and then I started writing when the COVID started. How do you think the US is going to get along with China going forward?

Not well. Not well. I fundamentally, at a personal level, disagree with many things that Mr. Trump has done, nor did I vote for him. But at the same time, I think his tariff war is absolutely necessary. It's going to cause a tremendous amount of pain.

I'm not saying it's going to cause pain for China, although it probably will, but it's going to cause a tremendous amount of pain for Americans because they're used to getting Chinese goods cheaper and the tariff war will slow that down. But if we don't resuscitate the industries that have been hollowed out,

by China, we're not going to achieve success as an economy going forward, in my opinion. Think about the auto industry. If my prediction that it's going to disappear is correct, that doesn't just affect people that work in the auto industry. That affects all kinds of ancillary industries as well. And I think that tariffs

I'm not a huge fan of tariffs, but I think that you can't live in a relationship, a trade relationship, where you always have the deficit and the other party always has the surplus. It just won't work over time.

Yeah, I mean, you can pave over the cracks. That's what the US and China have been doing for 40 years. But yeah, maybe long term, you're right that it's unsustainable. I don't know. But Ken, I mean, surely you know that you used to be a PhD professor, not of economics, but the economists absolutely hate tariffs. I have just, just for the sake of conversation, I've proposed to a few economists that tariffs may be there. They're only 1% good and they're 99% bad. And I get looked at like the moon. I'm saying the moon is made of cheese.

I think that they're bright people and they're sincere people. It doesn't mean they're always right. I think that what stands in the way of being right in so many areas of thought is principles and dogma. Well, Ken, the title of your book is The China Business Conundrum: Ensure that Win-Win Doesn't Mean Western Companies Lose Twice. We'll include a link to the description. I really enjoyed it. I think people should check it out.

Ken Wilcox, thank you for coming on. Thank you very much, Jack. Thanks for watching. Remember to check out vanEck.com/NLRJack to learn more about the VanEck Uranium and Nuclear ETF. Thank you. Just close this door.