40 – SVB & latest financial crisis

SVB goes down, and the Fed and Treasury react. The latest on the financial crisis: What actually happened? What was done to stave off the crisis? What are the next steps and what’s further on the horizon? As always, our “no bs” views and analysis. Navigation: Intro (01:34) Section 1: What happened? Section 2: What was done to stave off the crisis? Section 3: What are the next steps? Section 4: What’s on the horizon? Conclusion Our co-hosts: Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder of App Annie / Data.ai, business angel, advisor to startups and VC funds, @bschmitt Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news Subscribe To Our Podcast Intro (01:34) Bertrand Welcome to Episode 40 of Tech DECIPHERED. An episode, of course, focused on what happened this past week with Silicon Valley Bank and the overall financial crisis around it. We are recording this as of Wednesday, March 15, Pacific Time. Between the recording and the release of this episode, it might take a few days, so things might have changed. Bear with us. What a week in Silicon Valley. That was pretty insane. I think we have a black swan type of crisis every year now happening. Nuno If it's once a year, is it still a black swan? Bertrand Of course not. Sorry if my joke was not explicit enough. Nuno You're being facetious, understood. Okay, clear. Bertrand I'm definitely being facetious about this. Definitely, in the past, I don't know, three, four years have forced us to run businesses in a different way. We will try to do a short episode this time focusing on what happened, what was done to stave off this crisis, as well as what's the next steps, what's on the horizon. Nuno Let's start with the obvious big picture thing. Rate increases by the Fed is one of the engines of all the issue around SVB. We'll come back to what actually happened later on, but let's go through fundamentals first. The Fed has been increasing interest rates dramatically for the last less than a year. It's going to be a year, I think, this week, from starting at 0.25-0.5 range to now being at 4.5%-4.75% range, if I got that right, for the Fed rate in one year, less than a year, which is incredible. That has created, obviously, a situation where there's a lot of strain on various financial products that banks, for example, may be over exposed to. Nuno But it all started, in all honesty, for a valid reason, which was really containing and reducing inflation. If we remember, inflation started around the one point something percent mark, so well below the 2% magical number, which we're now questioning is 2% really the right number or not. But it went through the roof by 2021 into 2022 to 9%, and the Fed had to do something. They've been pushing it down. Obviously, I think the last number of inflation is around 6.0%, very close to 6.0%. Clearly, the interest rate increases have been working in really containing and reducing inflation, but this is the side effect. Bertrand Yes, it's definitely a side effect. Why is it a side effect? It's because when you increase rates, especially so fast as a bank, especially banks who have seen continuous increase in deposits, thanks to the monetary inflation over the past few years. If you have bought assets, long-term bonds at low rates, suddenly with the rate increase, the value of your bonds is decreasing. Bertrand For me, what's also interesting in all of this, and we keep learning more and more in the coming few days, but if I look at regulators, it looks like as well, they were asleep at the wheel. I was reading that a very recent FDIC stress test was not including any chance of rate increase in 2022. That proof for me is that banks officials were not doing what they were supposed to do in terms of diversifying risk, preparing to different situations. But the regulators were absolutely of the same mind. Apparently we talk more into the specifics of SVB, but several banks that went bankrupt actually just got their auditing released and done and stamped by KPMG in the past few days. We're talking about two weeks and everything was supposedly all right. Nuno Just to clarify, they went bankrupt or they went under this systemic approach, either at FDIC or the Janet Yellen announcement? Because formally, I don't think they're bankrupt. Bertrand FDIC took them over, but took SVB over Friday morning. Let's not forget we had another bank, Silvergate. The day before all this maelstrom on Wednesday I believe last week, didn't technically went bankrupt but was ceasing operation. We got another bank, Signature Bank, also that was taken over by the FDIC. I don't know if technically it was a bankruptcy, but I'm pretty sure it is because ultimately it's taken over by a new entity. Senior management was fired. Technically, you are not banking with the same entity. Nuno Yeah, you're banking with a bridge bank now. Bertrand I guess it's as close as you can be for bankruptcy for a bank. Let's put it that way. Banks have a special system in place to manage them when it is believed that it's not running well anymore. From what I'm reading about Signature Bank, there was a belief from officials, apparently, that they were not close enough to the action at this bank to know what's really going on, and that started to spook the FDIC officials. This one might be an even more different situation where technically they might have been in a better shape, but they were not able to share numbers at a fast enough pace with the regulators that the regulators believed that they have to take them over. Bertrand We talk about regulators and auditors, potentially a slip at the wheel. Maybe another piece, Jerome Powell was testifying last week in front of Congress that the banking system was all right. We are talking about days before all of this happened, and not just these guys went bankrupt, but we'll talk more about this, but that actually there was a significant change in regulation to stave off a bigger disaster. Nuno Yes. Obviously, there's a couple of other important elements here that we should maybe also talk about, the low returns on deposits that were around, the ability for people to move capital around and put their money into other accounts that obviously were giving them a lot better returns at that point in time. There was already some movements in terms of deposits in certain banks, in particular in SVB. Bertrand But to insist on this one, I have been following for a few weeks. There was definitely a lot of noise on this specific topic that not just SVB, but every bank in the US, because they have been so used to provide depositors with 0% interest rates on their savings account, didn't want to raise them when it should have been appropriate to raise them in order to match the treasury. Bertrand There is here a very clear greed on the part of the banks not to provide returns to their depositors, and in exchange, take a big risk that depositors are going to leave. If they are going to leave, you have to compensate by either cashing out your bonds or other assets as a bank or having to raise equity. They all took a big chance by not increasing savings rates that people would not leave even when they have the opportunity to have very safe risk-free higher return from treasuries. Nuno What we had effectively on Thursday was a bank run 42 billion in initiated transfers. I'm not sure if all of them were completed, but 42 billion in initiated transfers, which is a world record, I'm pretty sure. Bertrand It is. Nuno We're talking and discussing a lot of things around the bank that were very specific around this bank. A high concentration in some of the deposits, 42 billion would have been around 25%, very close to 25% of all the deposits in the bank. It would actually be 20% of all assets of the bank. A bank that had high concentration on certain accounts. From what I was told, there were certainly very large accounts with the bank, which is if one of those accounts got the money out, that significant hole immediately. All of this is true. I would go back a little bit because I actually disagree with all this discussion that's happening around, "Oh, no, it was FDIC's fault." Of course, it was in some ways the Fed's fault on increase of interest rates. Bertrand That I cannot fault the Fed to increase rates. I mean, that's their job. The rest of the institutions should know that they have to do something. Nuno But maybe they increased it too fast. Bertrand I think they started too slow. That's the issue. That's why they had to go too fast. Nuno Yeah, maybe they started too late, and that's the case, I don't know. Maybe it is that the FDIC stress tests weren't updated to include all these things. There may have been some regulatory mishaps that wouldn't have happened otherwise. There may have been some mishaps where the bank had some issue that came up. Nuno My ongoing theory, and I cannot say for a fact this is true, but I've now talked to enough people that seem to agree that this is likely what happened, was there were definitely some discussions with Moody's in the bank around their debt rate and a potential to actually downgrade them on their debt rating. Nuno There was actually a very quick knee jerk reaction to sell assets that they had at a loss. There was actually a push to recapitalize the bank, and we now know that magical number to be 2.25 billion, because it got announced in a press release on Thursday morning. In that recapitalization, it is clear that they started talking to a number of actors in the market, including General Atlantic,...