Closing Bell - Closing Bell Overtime: Silicon Valley Bank Pain Hits Regional Banks Despite Rescue From Regulators; Venture Capitalist David Sacks on What’s Next 3/13/23

Episode Date: March 13, 2023

While the Dow and S&P 500 closed lower, Nasdaq ended higher despite a volatile session for stocks, coming after U.S. regulators unveiled a plan to backstop depositors in Silicon Valley Bank. Regional banks were hit especially hard with First Republic falling 60%. Fundstrat’s Tom Lee still sees the setup as constructive in the medium-term. Venture capitalist David Sacks, after a weekend on Twitter calling for government intervention, discusses what’s next for Silicon Valley, startups and the broader economy. Plus, one beneficiary of the situation: Brex, which has seen inflows since Friday. The CEO talks the impact on his business. And a lookahead to tomorrow’s critical inflation report.

Yes, that is the scorecard on Wall Street, but winners stay late. Welcome to Closing Bell Overtime. I am John Fort with Morgan Brennan. We're going to be all over the breaking news surrounding the failure of Silicon Valley Bank and the impact on the market and your money. Coming up this hour, we're going to talk with venture capitalist David Sachs, who says the problems in our banking system are just getting started, even after this weekend's government intervention.

Plus, we're going to look ahead to tomorrow's inflation print as the Fed's rate path gets murkier by the minute. We're going to discuss the outlook with Wells Fargo's chief economist. Now let's get straight to the market and the fallout from the collapse of Silicon Valley Bank. Joining us now is Fundstrat's Tom Lee. Tom, I guess, I mean, the Nasdaq ended higher in all of this, as some believe the Fed is not going to raise in March. Crypto rallied. What does that tell you? Well, you know, the last couple of days have been really tough for the markets, but I think this credit shock that's reverberating from the Silicon Valley bank failure is the first signs that the Fed's monetary policy is finally biting. I mean, and I think, you know, one of the takeaways we have when we look at what Fed Fund Futures have done, which is now price and cuts by year end,

and the drop in yields is that there are some deflationary forces being unleashed because of both the shock to the startup community and, you know, the regional banks having some tightening of lending standards that's surely to follow. And I think, you know, I think it does mean disinflation maybe finally happened. We may have sort of broken the back of inflation. All right. We have some breaking news right now from the Fed. Steve Leisman has the details. Steve. Thank you very much, Morgan. The Federal Reserve at this hour is announcing a review of Silicon Valley Bank and its supervision of Silicon Valley Bank in light of its failure. We have a quote here from excuse me, one second. We have a quote here from Michael Barr, the Vice Chair of Supervision, who will lead this.

He says we need to have humility and conduct a careful, thorough review. Fed Chair Powell saying the events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve. They are promising to make that review public as of May 1st. So fairly quick timeline for the Federal Reserve. They are promising to make that review public as of May 1st. So fairly quick timeline for the Federal Reserve. Morgan. Steve Leisman. Thank you, Tom. I want to get your reaction to that because you just mentioned the federal fund, the Fed funds futures market and just the dramatic repricing we've seen there in the last couple of days. Scott, at the end of the three o'clock hour, noted that the two-year Treasury note has slipped below 4 percent. We've seen the de-inversion pretty dramatically. It's still inverted, but not

nearly as much of the two to 10-year spread as well. What is the bond market signaling here? And what does it tell us about the Fed next week and that weighing by Federal Reserve officials of inflation that's still high versus now the possibility of risk and something potentially being broken within the banking industry? Yeah, I mean, there's a couple of reasons that yield curve is de-inverting because, you know, the curve that people are referring to is the 10-year versus the 2-year, it could be de-inverting because financial conditions in terms of Fed policy is starting to ease, and that's why the 2-year is dropping. You know, the 10-year never really responded. It could also be de-inverting because you're breaking inflation. If inflation is no longer going to be running at 5% the next

two years, and, you know, the 10-year was always forecasting roughly two. You're going to de-invert as inflation's breaking. So I think it means something definitely broke. I don't know if it's the economy or if it's inflation. Steve Leisman, I want to go back to you for a moment on that breaking news that you just brought us about the Fed conducting a review regarding Silicon Valley Bank. Now, I wonder if this is in part, Steve, a review of the Fed's own, I guess, action or lack thereof. One of the things that the Fed is supposed to do, right, is promote the safety and soundness of individual financial institutions, monitor their impact on the financial system as a whole. I guess ideally that happens before something like a Silicon Valley Bank collapse happens. So what are they perhaps investigating?

No, it is precisely a review of that. The release, John, says that they are reviewing a review of the supervision and regulation of the bank. That's what they're reviewing in light of its failure. And I think, John, you put your finger's what they're reviewing in light of its failure. And I think, John, you put your finger on what they're after. They're after, how did this thing fail? Why were there no red flags or apparent red flags raised ahead of time? You know, it's even unclear, by the way, what the Fed knew and when it knew it. Some of the tale of the tape that I've heard is that it was really the rating agencies that flagged investors and others that there was a problem there, not the regulators. I don't know what happened behind the scenes if the regulators were on Silicon Valley Bank, if somehow they missed something that was key in the books or whatever. But what underlies this, Jonathan, is that the safety and soundness of the financial system is entirely about confidence. And if there is no confidence

that the regulators are not on the ball, then you have a big problem with confidence in the system itself. Because frankly, average depositors, even sophisticated depositors, do not have the tools or the ability to evaluate the safety and soundness of banks. So the Fed does need to do this. And in fact, it does need to move quickly because it's going to be a critical pillar of restoring confidence to the system. OK, Tom, you were bullish even before we saw all of this fallout. And let's be clear, three banks now failing in the past week. Why do you continue to be bullish here, especially if we are talking about confidence and that being something that is going to

essentially decide or determine whether we see more potential? And hopefully we don't, but more potential runs on banks. Well, in the near term, I don't think it's bullish. You know, we notified our clients Friday and reiterated this morning that there is going to be sort of lingering and ping pong and second order effects. So I do think it's tough and it's a tough time for investors to be adding risk here. But to me, the reasons I can still state constructive intermediate term is, number one, I think the biggest risk has been not only inflationary pressures, which look like they could be broken, but it's also that the Fed's policy was actually creating a lot of the strains in the banking system. I mean, as it's being pointed out, deposits were shrinking as excess savings is disappearing. And at the same time, the securities portfolios, which these banks hold, which is a function of prevailing rates, was taking losses because of higher rates.

So as the Fed's pausing, that's helping to stabilize that situation. So I think a lot of this is it's tough right now because the dust hasn't settled. But I think the key to watch now is the resilience. I think the market has shown pretty impressive resilience. And I think that's a good sign. But longer term, 10 years down, VIX is falling and we're finally getting softening the jobs market. But we're expecting to. And that should help break the back of inflation. Steve Leisman, I want to ask you a question. I know you've got something to add as well, but it occurred to me, I was wondering, why do people

think that the Fed might not hike in March just because there's a bank that bought long dated bonds, you know, more than a year ago. But what you mentioned about what the Fed is looking into sort of shifts my thinking on that. If the Fed feels some culpability that it did these rapid, you know, hikes, 75 basis points and perhaps wasn't looking as closely at the impact as the Fed should have been, could that not be a rationale for the Fed to say, hey, look, maybe this is on us. We don't know. Let's pause for a moment while we take a look at what happened here. Yeah, John, I'm not sure they're investigating this really interesting area that you just raised, which is the cross section or the intersection, sorry, of monetary policy and supervision. Right now, this says supervision. Maybe the monetary policy aspect is part of it. But the reason why people think the Fed might stop here is a couple. First

of all, they could stop as a matter of prudence, as a matter of giving the banking system a little bit of time to catch its breath. An example of that, John, you remember back the pension problem that they had over in England. Bank of England stopped for a month its quantitative tightening and then resumed it. Of course, that was a limited problem. This is a broader banking confidence issue we have here. Another reason, John, for the Fed to stop or the reasoning behind this is that this event is a broader banking confidence issue we have here. Another reason, John, for the Fed to stop or the reasoning behind this is that this event is a massive disinflationary event that has the effect of tightening lending policy, tightening monetary policy throughout the system. If indeed banks do pull back, have to pay more in interest, tighten their lending standards, then that is the same effect as the Fed tightening interest rates. Yeah, it goes back to the point I think you were just making as well, Tom Lee. Thank you both for kicking off the hour with us. Steve Leisman with Breaking News and Tom Lee with Market

Insight. Well, let's bring in Mike Santoli at the New York Stock Exchange. Mike, what is on your radar this Monday? Well, Morgan, what seems like a pretty measured response on the whole, you know, from from open to close in the S&P 500, it pretty much was. We have minimal movement, but really it was flattered by some real outperformance of the big growth stocks in there. The equal weighted S&P was down close to one percent on the day. I think one of the answers for why the market more or less just went down to the lower end of its year toto-date range, was that we were actually kind of leaning lower coming into this week, right? S&P down 4.5% last week, also down 8% from its high. So it wasn't as if everybody was assuming, you know, puppies and rainbows heading into today. What has happened is really you've lost that uptrend that you had from October.

So everybody who was taking heart in the fact that we had been this kind of building upside move since October, you have to rethink that a little bit. It starts to look a little more at least like a kind of a messy trading range there. Take a look here at some of the, I guess, collateral damage to the regional bank fears, which would be some of the huge brokerage firms out there. So we have Interactive Brokers and Charles Schwab. Schwab, of course, kind of at the center and has a very bank-like aspect to it. A lot of their investment brokerage accounts also have lots of bank deposits. They sweep cash balances into there. And that was one of the reasons, by the way, Schwab shares did so well as the market anticipated rate hikes to come, because they were going to be able to kind of realize the benefit of the firm earning yield off of those cash balances without really paying it out to customers.

They have really assured folks, though, that it's not a similar issue where the cash is leaving the firm itself. It's actually much more just moving within it. And they have the assets to cover 80 percent of their cash. Their deposits are insured. So it's not a real spiral situation. It's much more investors saying, what am I going to pay in terms of valuation for a firm that looks a little more like a bank, whereas we used to value it a little more like this great diversified financial services firm at 16 times earnings. So interactive brokerage is a little bit less of a bank-like aspect to it. So it didn't get the benefit on the upside, sort of starting to catch down on the downside here. Mike, is part of what you're saying the margin squeeze that this is? And you and I, I guess we're talking a little bit about this last week as well. You know, depositors are waking up to the idea, maybe I should be getting

paid more. Well, that's what it is. So it's really the cost of funding for these banks, for these financial services firms that is going up. The other piece of it is money is moving from perhaps smaller less well positioned less well capitalized banks to larger ones and for the economy what that means is that the capital is going from smaller banks that are going to kind of lend it right away and they're going to accumulate assets quickly to the big banks that don't really need the deposits as much. And therefore, they're not going to move them as quickly. So it's less economic dynamism. There's less credit provision out there.

But, yeah, in terms of these banks themselves, most immediately, higher cost of capital, higher cost of funding. And, of course, it raises questions about further bifurcation within the banking industry writ large. Mike Santoli, thank you. Don't miss Interactive Brokers founder and chairman Thomas Pederphy on Last Call Tonight. That starts at 7 p.m. Eastern. The Wall Street Journal, Meantime, reporting this hour that the FDIC is planning to attempt another auction of Silicon Valley Bank. We'll talk about who could buy it with Wedbush's head of investment banking. That's coming up next. Welcome back to Overtime. The Wall Street Journal reporting this hour that the FDIC is planning another auction of Silicon Valley Bank, citing people familiar with the matter. The journal

reporting that none of the largest U.S. banks bid on SVB over the weekend, but at least one other offer was rejected. The journal adding, on SVB over the weekend, but at least one other offer was rejected. The Journal adding, quote, by declaring the firm systemic, regulators have more flexibility to offer would-be buyers deal sweeteners, such as law-sharing agreements, according to former regulators. Let's bring in Bert Dempsey, head of investment banking at Wedbush. He specializes in investment banking for financial institutions and fintech companies, and joins us here on set. It's great to have you back on the show. It's great to be back.

I'm assuming you had a very busy weekend. We did. What is your sense of it? Non-stop. And I did manage to watch the Oscars, too. Okay. So you just basically didn't sleep this weekend. What is your sense about how this is going to play out in real time when we're talking about the possibility of another auction?

Well, it's a monumental auction. So when it happens so quickly, the FDIC knows what it's doing. Bankers know what to do when they have an asset, but it's complicated. So you couldn't do it really in a day. The real thing that's going on here is that most loan officers love their loans and they think they're above average. And then the buyer comes in and they don't think so. So I think there's a massive gap of expectations. So that has to be be settled maybe they have to give them more information it'll take some more time it's a very interesting bank i know there's some really good buyers looking at it and if not it will be broken into pieces because it's got like i said some very

good assets does this put mark to market accounting does that just thrust it into the forefront now where banking is concerned and if so what does that mean in terms of how other companies would be valuing the assets here? And I guess just as importantly, what are the lessons learned from 2008 when we saw big banks swoop in and buy other banks and then take on all those liabilities and maybe pay the price later? Gosh, there's a lot in that question. But, you know, there's $300 billion of mark to market and held to maturity that's like tucked away. And the problem is it's going to have to be resolved. We haven't even hit a credit crisis. So the carrot of the Fed coming in and saying all the CDs are covered above $250,000 and they have a $25 billion stabilization fund they can use, that's all great.

But the stick is that it's only one year. So that's a lot of work to do or we're going to be sitting right back here again. So you're going to see a lot of offers, a lot of restructurings, a lot of asset liability rearrangement. It means a lot of different trading. You'll see a lot of trading action in the markets as people move these securities around. And then you might see some stuff that bankers are doing like risk transfer deals where specialists who maybe know a particular kind of portfolio come in and work with the bank and then say, we'll share some of this risk. A lot better than a panic sale, like we saw the other day. Okay, Burke, I got a non-bank M&A question for you, but it's adjacent

to this story. Is the collapse of SVB going to force a repricing of Silicon Valley startups? Oh, well, at some point, I've had some talks with VCs over the weekend. You know, they're thinking about how hard they need to be on their portfolio companies. You know, is it whose I guess you could say whose fault was this? And so but they need another round of capital. So they're deciding on valuation. So, yes, they could have down rounds, but they're trying to be as fair as they can. So that's, I think, going on. The second thing that we saw over the weekend is one of our dealmakers was doing a deal. And in the midst of it, there is a tens of millions of dollars difference in valuation because one side was saying, well, that that money is at Silicon Valley Bank.

It's zero. And the other side was saying, oh, it's full. It's par on Saturday. It was a zero. And on Sunday it was par. So you can imagine the fun and games over the weekend in terms of the in terms of the banks, the regional banks sector more broadly. I mean, the KRE hit its lowest level since November of 2020. The financial sector in general taking another drubbing today. Is the expectation that we're going to see more M&A activity across the board in light of what we've just seen take place with not one but three banks failing over the past week? Yes, we have to first get out of this situation where there's no confidence whatsoever. So you're going to have some intrepid people. And

I think the government may have to do something. I'm not asking them to because I like the fact that it's going to try to be privately solved. We don't need a TARP. We can do this. The question will be, you know, how that occurs. So I think some M&A, some people just throw the towel in. I mean, even before this, a lot of banks were saying, you know, I can't keep up with the technology investment. There's a whole bunch of things they have to do to now have to deal with deposit runoffs and what it's going to do to margins, because if they try to keep the deposits,

they've got to raise the rates. That means it will cut their margins right down to practically nil. So what do you do? Maybe you just sell. So it sounds like we're in the early innings in terms of what's going on in the sector more broadly. We hope you will come back and keep us updated as all of this plays out. Burke Dempsey, thanks for joining us. Yeah, great to have you. Now, coming up, Y Combinator President Gary Tan had a stern warning Friday about what would happen if Silicon Valley Bank customers weren't made whole. And this will hurt all of American innovation and our competitiveness in the world if we allow these startups to go under in the next 30 to 60 days. Up next, we're going to talk with venture capitalist David Sachs, who is also calling loudly for regulators to step in ahead of last night's intervention. He's going to tell us why he says the problems in America's banking system

are just beginning. Breaking news on No Not a Bank. United Airlines, Phil LeBeau, has details. Phil? John, take a look at shares of United Airlines moving lower after the company putting out an 8K where it has adjusted what it expects for the first quarter due to the pilot contract that it believes that it will be able to lock in relatively soon. They haven't got a time on that, but they have moved the expected cost of that contract from the second quarter, which was their previous guidance, to the first quarter. So they are now expecting

an adjusted diluted loss of between 60 cents and a dollar per share in the first quarter. The consensus on the street, I think, was 64 cents. But again, remember, this is simply a timing issue, moving it from the second quarter to the first quarter. In terms of its full year guidance, that has not changed. And in terms of the potential for a new contract, they believe they are making progress on it. So they wanted to move up the impact, the cost impact to the first quarter as opposed to the second quarter. And again, no timing on when they expect to lock in that pilot contract. But they wouldn't have done this, guys, if they were not optimistic that they're close to finally getting that locked in place. Back to you.

Okay. And yet the shares are down 8% right now after hours trading. Go figure. Phil LeBeau, thank you. You bet. Time for a CNBC News Update with Seema Modi. Hi, Seema. Hey, Morgan. Here's what's happening at this hour. This is not a bailout. This is not 2008.

That is the message this afternoon from the White House Press Secretary, Karine Jean-Pierre, speaking on board Air Force One as President Biden traveled to San Diego. She stressed that the FDIC money that's backstopping deposits at the two failed banks is coming from fees on other banks, not taxpayers. As some customers line up outside Silicon Valley bank branch, we're seeing the first in what could be a long line of shareholder lawsuits accusing the bank's management of failing to disclose that rising interest rates would make it, quote, particularly susceptible to a bank run. And now is not a good time for Fannie Mae. The government-sponsored mortgage financier has postponed its scheduled sale of more than

$500 million in credit risk transfer bonds due to unsettled market conditions. Investors who buy CRT bonds are taking on most of the default risk of the mortgages linked to those bonds. John, I'll send it back to you. Seema, thanks. They still call them CRT bonds, huh? Yeah. Well, all right. One of the most vocal proponents over the weekend for the government to intervene in Silicon Valley Bank was venture capitalist David Sachs, tweeting that blaming depositors for a bank failure is like blaming patients

for medical malpractice because they didn't do a good job shopping for doctors. Sachs tweeted last night the final decision from regulators was good news, but the problems in the banking system aren't over. David Sachs joins us now. Kraft Ventures co-founder. David, great to have you. You also said Treasury Secretary Yellen and others moved too slowly. You should have said on Friday that there will be no bailout for the banks themselves, but that depositors wouldn't be left short here. Did last night's statement move beyond half measures or is it still not enough? Well, I think last night's statement was quite good. I was actually very concerned yesterday morning after Yellen went on the Sunday shows and she sort of said some of the right sentiments, but it was very vague and

unclear and it didn't inspire confidence. And then last night when they said that they were going to protect depositors at SVB and they're going to create this new facility for all these regional banks that might have basically unrealized losses on bonds, I think that was a very strong step. So I think that you can say that maybe it took them a day or two too long. I think Friday would have been better. The sooner you nip a banking crisis in the bud, the cheaper and easier it's going to be. But I think they did get to a's going to be. But I think they did get to a good answer last night. And I think now the question is, is it enough? And, you know, it was still, I think, pretty disturbing this morning that you saw about half a dozen of

these regional banks get clobbered, including fantastic companies like Schwab just get clobbered and they had to halt the trading of them. So that tells me that maybe it's not enough. And I'm sure you saw Bill Ackman had a proposal this morning where he just said, listen, we've got to just come right out and say that all of these deposits and all these regional banks are protected. We can basically figure out the regulations and the FDIC later, but we need to basically go ahead and let depositors know their money is safe. I tend to agree with that. OK, OK. Well, let's talk for a moment about how we got here. Lots of fingers being pointed, including at you and your friends.

I spoke to David Friedberg from the production board. One of your besties in the all in pod today about the accusations out there that investors like you guys actually fed this problem early on by raising the alarm on social media and in private channels. Here's what he said. Listening to people on Twitter from Silicon Valley telling them what to do, they saw what happened with this balance sheet and they went out and they moved their money out of their smaller banks into big banks. That's it. That's what happened last week. And it was the beginning of what I think we're now seeing with First Republic today. And I can tell you, I got a list of other names that I've had friends say, this is what I'm doing, this is what I'm doing. And they're all going to B of A, JP Morgan, Citi, and Wells. And they're coming out of somewhere else. And where they're coming out of already has typically 10% margin

of equity to assets. That's a very narrow margin for decline in asset values, particularly when you have to get liquid really fast to fund those withdrawals. So it could very quickly get to be a cascading problem. And that's why I think there was so much vocalness last week. I made a bet with a friend of mine on where the 10-year would end up at the end of this week. I think it's three and a half, but I think we'll end up below 335 by the end of the week. Folks who blame VCs, investors for sparking a run. No, this is shooting the messenger. Listen, I didn't tweet about SVB or talk about on my pod until SVB was already in receivership. And the runs had already begun on the next set of banks. The run had already begun on Signature.

The runs are already begun on a number of these banks that are now being shored up by the Fed. So the bank run had already started. I mean, we were just reacting to it. We were reporting what we were seeing. And we were disturbed by the fact that the regulatory authorities in the government hadn't spoken out yet. I mean, again, I tweeted on Friday afternoon, where's Yellen? Where's Powell? Why aren't they talking about it? I think we were drawing attention to a problem that needs to be solved immediately. And I think that was constructive. Maybe nobody was listening. Maybe their actions were taken regardless. But I don't see how you can blame us for drawing attention to a problem that, frankly, the government caused. You know, this is a classic, I think, kind of CYA tactic where they try to blame the person who's noticing the problem

instead of the people who are actually causing the problem. So how are you counseling founders on a day like today? Have you been telling them to go into so-called SIFIs, the systemically important financial institutions, the biggest banks that are too big to fail? Are you telling them to bank elsewhere in light of this failure on a more local or regional level? What are you saying to folks? Because, I mean, you can argue that the government has now created a backstop, at least for depositors. Right. Yeah. So I think, like I said, I think the actions they took last night were welcome and definitely take the pressure off.

So I don't think people need to be in a panic mode. I think in terms of best practices, these are not financial recommendations, but just some of the things that we discussed with our startups are that they need to have multiple relationships with financial institutions, that they need to think about their treasury differently than their working capital. It may be okay to have your working capital, which might be one or two months of payroll, at a startup bank or something they find more convenient. But our recommendation for treasury management is to have it at a top financial institution. And you'd have to say now that the SIBs are, they are safer. And part of why I've been speaking out is I would like the United States to have a

very strong, vibrant regional banking community. And the problem is that if the SIBs are basically too big to fail and the regional banks aren't protected, then everyone's going to move their money to the SIBs. I think Ackman's made this point. So I think part of what the Fed needs to be doing now is letting depositors know that these regional banks are totally safe. If they don't do that, then the incentive is going to be for depositors to move their money to, you know, four of these systemically important banks. That would be a real shame in my view. Yeah. And certainly we've had lawmakers already come out, including on our air earlier today, and basically say, we're taking a closer look at the regional banks. More regulation is coming.

The ripple effects, repricing or cuts to valuations within the startup landscape, is that now coming home to roost? And has that process been accelerated because of everything we've seen play out in recent days? Well, I think this has been a shock to the system. But I think what happens in startup land now really just depends on what happens in the economy as a whole. I think that the problem in startup land now is pretty much the same as the problem in the rest of the economy, which is we have this potential banking crisis. It's not completely solved yet. And we need to know what that does to the economy. So I think that there's already been a huge valuation adjustment over the past year because of the new interest rate levels and what they've done to public

market comps. But I think now we're looking at potentially an economic problem. I hope not. But and then that would have that would have fall on consequences. Does this deepen what we've already been going through over the past couple of quarters? I mean, first, it was growth at all costs a couple of years ago. Then it's like, oh, cash generation, cash preservation. Now, even if you've got cash preserved, you've got to be really careful about where you put it. How much of your time with these founders, with management teams is

going to be spent focusing on those pieces of just how careful they're being? Well, a huge amount. That's a huge amount of what we talk to founders about is how to maintain the right burden levels and how to have the right operating efficiency and discipline. But frankly, we've been having that conversation for a year. We noticed in January or February of last year that there was a regime change underway in the markets because of this rapid rise in interest rates. Gross stock valuations were in the process of coming down. And we did actually a call with our entire portfolio in February and May last year. And the message was, you've got to cut costs. So we've been doing this for a year and we're going to keep doing it. Does any of this change the way you invest or the

types of companies or industries you're now going to target? Well, you know, what I've always said about the boom-bust cycle, and clearly tech has by its very nature a bit of a boom-bust cycle, is that during the boom times, the only three things that seem to matter to investors are growth, growth, and growth. But during a bust or during the downturns, the three things that matter to investors are growth, burn, and margins. It's not that growth stops mattering. It's just that people get much more focused on your burn and your margins. It's not that growth stops mattering. It's just that people get much more focused on your burn and your margins. They want to know that your growth is efficient. So that is something that we have always focused on and will continue to focus on. David Sachs, thanks for joining us

today. Thank you. Coming up, fintech company Brex reportedly saw billions of dollars in deposits over the weekend as customers fled Silicon Valley Bank. We're going to talk to the company's co-founder and co-CEO about the impact on his company from the turmoil and more important, what's next? We saw SVB as a strategic partner. They were always there for the company at different phases. So as soon as, you know, we had made the move out of SVB, you know, it certainly felt like something foundationally had changed in Silicon Valley. And I think that's where the follow-on effect over the weekend, you know, all founders, you know, our venture capitalists, you know, people were calling emergency meetings just to wrap their head around what were the options and what was the best path forward for any company that was affected by this.

That's Dr. Michelle Longmire, co-founder and CEO of Medible, which has raised half a billion dollars in funding to bring cloud technology to clinical trials. Now, fintech firm Brex reportedly saw billions of dollars in deposits from SVB customers over the weekend, was prepared to offer emergency payroll loans. Joining us now is Brex co-CEO and co-founder Henrique Dubugras. Henrique, welcome. Is Michelle on to something? Has something foundationally changed in Silicon Valley finance? I would say that these next couple of weeks are definitely going to be pivotal for our industry. I think that founders don't know what to do and what to trust anymore. And I think that the next couple of weeks will inform how we should manage our money.

And I think that the answer of, hey, we should all just move our money to big banks is pretty bad for our society, for our industry, and even for our customers. Because, you know, if big banks, they don't have to provide amazing service, people just go to them because they're the biggest and too big to fail. That delivers poor service instead of like amazing service when there's competition and you fight for the customer trip and and I think there are other ways to keep your money safe so one of the things that we're trying to educate customers is in the distinction between bank accounts and like brokerage accounts because bank accounts any bank that you're giving your money to you're giving them the the rights to lend your money out and buy securities.

And a lot of the things that made both the 2008 crisis and now the Silicon Valley bank issue happen. It was mismanagement of deposits versus on brokerage accounts, which is they're just getting paid to allow you to buy the underlying treasuries. You're the one that's deciding how to take the risk. You want to buy money market funds, which, you know, are very safe, right, or whatever you want to do. And I think that's an important distinction we need to teach people. Yeah, Dr. Lallemeyer was saying exactly that to me in the longer conversation. I also want to ask you about what changes and regulation might be necessary to insure deposits. I spoke yesterday with Adrian Aoun, who's a founder and CEO of Forward, trying to rethink the doctor's office. He's got doctors and health care workers across 25 cities on his payroll.

Here's what he said about spreading operating funds potentially across multiple banks. So one thing a lot of people say is, hey, just go split it up amongst a lot of banks. Well, can you imagine going up to your payroll provider and being like, so here's the deal. I'm going to send you money from these seven banks today and these eight banks next week. It's just not practical and it's not reasonable. And so certainly it would be beneficial for society to come up, whether it's government or the banking system, to come up with kind of an alternative way of protecting assets. Enrique, what needs to happen here? Yeah, so I would say that there actually already exists a solution to this.

So, for example, at Brex, right, like we offer up to $2.25 million in fdic insurance and going up and the way we do that is by automatically placing your money into increments of 250 000 across nine banks and we're working to expand that to as many banks as possible so you don't have the issue of the payroll provider you can just debit your brexit account and we'll manage um putting all the fdic funds across the multiple banks so i think this is a solved problem. And our regulatory system for customers already has systems such as the brokerage accounts I was explaining with the money market funds and this way of distributing deposits across many banks is just not common, right?

Customers just don't know. There was like blank trust into the banks. And I think like more education on what customers are doing with this money is very positive. And that's what we need. Enrique, how much money has actually come into your company since everything has gone down in recent days with Silicon Valley Bank? And just as importantly, walk me through the financial health of your company since it is a six-year-old startup. Yeah, for sure.

So, Brex, we've raised over a billion and a half dollars. You know, we still have the majority of that capital in our balance sheet. But most important in that, again, we don't use customer deposits to lend, right, because we are not a bank. And so, therefore, as a bank, you can't have any of the issues that banks have. We're a brokerage account, and we just make payments and invest on behalf of our customers. And so for us, we did have a lot of inflows in the order of billions of dollars on Thursday, on Friday. The wires were blocked from Silicon Valley Bank. And today, I don't have yet the final numbers of what are the amount that came in today. So I'm not able to comment on that. But we opened around 3,000 accounts over the weekend because we were trying to provide these emergency loans. We lined up around a billion and a half dollars in emergency loans.

We didn't have to use them, thank God. I was so happy to throw that work away when the government stepped in to save customers. But in the process, we opened a lot of accounts. And I think a lot of customers came to us because of the speed, right? Like no one was able to open accounts that fast in order to support the needs of our customers. Yeah. 3,000 accounts. I hadn't seen that number yet. So significant that you were able to do that. Enrique, thank you. Thank you so much for having me. After the break, we're looking for safety in this volatility. Mike Santoli breaks down the charts and one part of the market that's looking defensive.

That's not necessarily defensive. We're going to break that down when Overtime returns. Welcome back to Overtime. Let's get back to Mike Santoli at the New York Stock Exchange with a look at how mega cap growth is holding up amid this volatility. Mike. Yeah, well, is the way it's holding up, Morgan, at least so far. This is year to date, outperforming the S&P 500 by more than seven percentage points. Now, over the past two years, it's totally flipped. Mega cap growth is underperforming the broad

benchmark by seven percentage points. So clearly there's been a little bit of a return to this stability, the good balance sheets of mega cap growth. Yes, yields are down in the last little bit, but not really that much on a year to date basis. So to me, it's much more about going to these strong kind of capital secure companies today. Microsoft and Apple together added 70 billion in market cap. That's more than was lost in the small cap Brussels 2000 with its 1.6% decline. So my standing assumption is that an overall market is not going to be very rewarding in these days if, in fact, it's an Apple and Microsoft market

because it is really all about defense and not about the excitement of the growth those companies represent, Morgan. Yeah, the small caps are down 10% over the past month. It's been an incredible move, but to your point, to see the big cap tech outperforming today as well. Mike Santoli, thank you. Tomorrow, do not miss a special pro talks event that Mike will be hosting at 11 a.m. Eastern with a special guest, Dan Niles.

We know him. And coming up, we are looking ahead to tomorrow's CPI inflation report and the shifting odds around the Fed's rate hike path. We'll be right back. Welcome back. Some big moves to tell you about in the after-hour session. Take a look at shares of GitLab getting absolutely crushed right now after the software company reported weak first quarter and full year revenue outlook. That's outweighing a beat on revenue for the previous quarter and a lighter than expected loss per share. Shares are down 38 percent right now. And here's a look at the airlines as well, moving lower across the board after United gave updated first quarter guidance, now expecting an adjusted loss of 60 cents to one dollar per share with expenses related to

its potential pilots deal, though full year adjusted EPS guidance does remain the same. But you can see shares of United are down 6.5%, and Delta and American are falling in sympathy right now as well, John. Yeah, wow. GitLab, after 68% annual growth guiding to closer to 25. Maybe that's why folks are upset. Tomorrow's inflation report, meanwhile, could inject even more uncertainty into the market. We're going to preview what to look out for and what it means for the Fed's rate decision when overtime comes right back. Tomorrow, we'll get a critical look at inflation when CPI comes out at 830 a.m. Eastern time. Economists expect it will show prices rose by half a percent

in February, 0.5 percent versus January, and up 6.1 percent year over year. A hot read could put the Fed in a tricky situation for its March rate decision, which is next week. And in fact, Goldman's Jan Hatzius says his expectation is now that there's going to be no rate hike from the Fed later this month after previously forecasting a 25 basis point raise. Joining us now is Wells Fargo chief economist Jay Bryson. Jay, good to have you on. Do you see it the same way as Goldman Sachs? Jay? Hey, I'm sorry. I missed you there. I was saying we've got Goldman this morning saying that taking a 25 basis point hike next week off the table from the Fed, given everything we've seen play out in the banking system in recent days. Do you see it the same way? Yeah, I think so. I mean, I think the only way that would change is if tomorrow you just get a really, really hot CPI print there.

But just everything that's going on in markets right now, it just seems to us that the best course of action for the Fed right now is just to pause, to wait and see how things go. And if things start to settle down in financial markets in the next few weeks, you can only start back up again in May. But, you know, given all the uncertainty right now, we just think that, you know, going ahead and raising rates next week just doesn't seem to be the way to go. And you think the Fed is willing to, I mean, the kind of risk on rally that might happen if that occurs, does that start to cause more risk that actually throws the Fed off of the path that they were on? Potentially. But, you know, I just would think everything that's happening in markets right

now, I would expect to see over the next few weeks, you're going to see a lot of banks raising their lending standards or tightening their lending standards. You know, maybe corporate bond issuance starts to come back a little bit. But as I said before, I mean, you could always go back into come May. You can always go back into tightening mode if you need to. And, you know, if everything is back to, quote, normal in mid-April, the Fed could always start to jawbone the market as well as about saying, you know, we need to continue to raise rates here and everything. So it just seems like the more cautious point of view at this point would be to wait. It's incredible. It hasn't even been a week since Jay Powell testified to the Senate on the Hill last Tuesday and said this.

We've taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do. Are we starting to see the tightening effects be felt? And if so, is this just round one in what could be a cascade of other issues and other risks that are coming to the surface now? And just as in light of that, does it pull forward the possibility of recession? Our view is I think it does pull forward the possibility of recession. I mean, we've been in the recession camp now for a number of months. And I think given the tightening that we're seeing in financial markets right now, I think it does pull forward a recession. And, you know, to paraphrase, you know, Warren Buffett, it's, you know, when the tide goes out, that's when you find out who's been swimming naked.

And we have one here or at least, you know, two banks right now. And there's probably clearly other sorts of institutions, whether they're actual banks or not, but lending institutions that could be in some issues as well. And that's what you end up getting with a very high interest rate sort of environment. So quickly, very quickly, we get CPI reading tomorrow, but is this entire event disinflationary?

It is disinflationary. This event right now, we won't see it tomorrow, right? But as we go forward, if it slows down the economy, it's disinflationary. Okay. Jay, thank you for joining us. We'll be keeping an eye on that report tomorrow, John. And in the meantime, a mixed picture for the major averages and the NASDAQ hanging on to gains. It's been pretty contained, some of the pain we've seen to the financials and to the bank specifically. Yeah. I mean, Jay brought up that

tide going out metaphor. I think this might be a case over the past few days of the tide going out and there's sharks. Forget about whether you were swimming naked or not. It's like everybody out of the ocean, perhaps. But that CPI number going to be so important. I guess people could probably hope for something like the jobs number, which is kind of like, eh, well, on the other hand, right? You kind of want that as opposed to something on fire. Yeah, I see what you did there. Meantime, keep an eye on the bond market because we have seen voracious moves in the bond market.

And we know that that has tended to be a leading indicator for then where equities go from here. So that's going to do it for overtime. Fast money starts right now.