Money Rehab with Nicole Lapin - This Founder's Funds are Frozen at Silicon Valley Bank. Here's Her Crisis Management 101.

Episode Date: March 14, 2023

Today, Nicole is looking at SVB through two lenses: a historical perspective that explores how similar SVB's story really is to the '08 crash and the painfully immediate perspective from someone who's still in the trenches of the battle of the banks, trying to extract her businesses' funds. To read more about obé Fitness, click here: https://obefitness.com/

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Yesterday, I gave you some background on the rise and fall of Silicon Valley Bank. If you haven't checked that out yet, I would say give that a listen next. Today, we're going to give more texture and context to the headlines with two special guests. I wanted to give perspective from someone who is still in the trenches dealing with this,

because even though there is some resolution from the FDIC, there are some people who are still very much in the throes of an unresolved, unexpected financial conundrum. These people are mostly founders. For example, founders who have all the monies from their recent fundraising round tied up in SVB, or founders who use SVB for their primary bank account to pay out payroll. So today you'll hear from Ashley Mills, co-founder and co-CEO of Obey Fitness. And then next, I wanted to zoom out and give you some broader perspective from someone who has been in the trenches before in similar macroeconomic conditions. So second, you'll hear from Gary Kaminsky. Gary is a veteran

finance guy, formerly the vice chairman of Morgan Stanley Global Wealth Management. He's looked death in the eye during the financial crisis of 08. He's got a lot of perspective and a lot to say. So let's start with Ashley. Here she is. Ashley Mills. I was going to say Ashley Davis because I know you for that long. Welcome to Money Rehab. Thank you so much for having me, Nicole. It's been like a minute since I've seen you and congratulations on the network. Thank you and congratulations on Obey. And I want to get to all of that. But should we tell our listeners how we know each other? Sure. It goes all the way back to your maiden name and also a decade ago? More than a decade ago. I think it was more than a decade ago.

We were babies. So I was your agent at CAA and doing lots of different deals for you in the news space and sort of non-scripted television. And it's so nice to see where you are today and the incredible platform that you've built. Well, back at you. For those who don't know about your amazing company that you started with another agent from CAA, you guys burned your corporate bras and you went into entrepreneurialism. You started Obey. If anyone doesn't know what that is, can you explain? Sure.

So we are a digital fitness solution. So think like Jane Fonda of the modern age. So workouts that you can do from home in the gym, you know, whether they're audio only or video, we have this really incredible platform. And we also do like 12 live classes a day. So it really is meant to be a platform that anyone can use anywhere to get a really, really great workout. You've built this company into a venture-backed company. Yes. How many employees? Yeah, we are about 50 full-time employees. And we started five years ago and we did a seed, a pre-seed in the Series A. The Series A was in the summer of 21. So it's

been quite an adventure getting here, for sure. We actually just celebrated our fifth birthday on Thursday. Congratulations. Thank you. Well, I want to get back to that day, actually. So SVB was Obey's bank. And that is the primary reason we're chatting today, not just to catch up. So I want to build a timeline for what things look like on your end, starting with, you know, when exactly did you feel like something was off or fishy? Sure. So on Thursday evening, we were getting a flurry of calls and texts from investors and lawyers who were like, hey, have you seen this? You should probably take your money. And so followed all of that, we needed to get board approval in order to do so because in SBB's agreements, they require that you do all of your banking there as well as any debt facilities.

Everything is at this bank. And so yeah, in order to reach that contract, we needed to get that approval. And unfortunately, we didn't get the approval until a little too late. So like six o'clock was the deadline to send a wire. We did not get it in on time. And so the next day on the SVB site, it said it was processing, put another, try to do another wire transfer, still processing. And then Friday evening or midday, I guess, is when the bank was taken over by the FDIC. And then the site went down completely and said it was sort of like closed for maintenance throughout the weekend. So it's been a harrowing,

you know, last 72 hours kind of like getting through this. And, you know, I think no one knows kind of what to do in this situation because it's not something that any of us have experience with in our lifetimes. We're figuring it out as we go and trying to manage the best that we can. It's so insane. I can't imagine the anxiety that you're going through. When your investors called you or your advisors, what were they telling you? And what made you feel like you needed to take action immediately? They were telling us, hey, this is happening, trying to explain the alchemy of why the situation is this situation. And that a lot of other companies that are similar size and stage and much larger are taking their money out and moving it.

And so that was the headline. And, you know, people were really concerned and scared. And obviously, like, you know, in hindsight, everyone was sort of having those conversations, which in part sort of caused all of this. And, yeah, it's going to be it's going to be really interesting to see what we write about this in history books in years to come. I mean, I can, I wish I knew. When did you actually find out that the bank collapsed? Yeah, I found out the bank collapsed when everyone else did. So I just got like a New York Times alert and was like, okay, I guess here we are. And not really knowing what that meant. Obviously, I'm an entrepreneur and I bank accounts, but I'm texting my banking friend,

like, what does it mean to close? What does it mean to be seized? What happens with my money? There's just so many unanswered questions. And still, there are many unanswered questions, you know, 72 hours later, but this is a it's a wild, wild ride for sure. So you posted something on social that I'd love to read. Actually, I have it in front of me. This all happened the day after Obey's fifth birthday. So you said on Friday, March 10th, the morning after we celebrated Obey's fifth birthday, we learned that Silicon Valley Bank collapsed, which is where we held a majority of the cash we use to run our company. We know we'll be able to make our next payroll, but we didn't know. There's a time. You guys are getting it out really fast. Okay. But we didn't know when we'd be able to access the majority of the money we use to operate our business.

So why did you decide to give your community a peek into what was going on? Yeah, I think in these moments, and certainly what we learned from COVID, which in some ways feels very similar, when you rally your community, because that's at the end of the day what we are we have a really incredible technical platform and you know we produce content all day every day but the heart of what we are is community and you know we are of the belief that like if you show up for people they will show up for you and we have always shown up for people in a very in a very meaningful way when they needed it the most and And it felt appropriate. I think in this moment of just feeling deeply unsettled and really unclear about what happens next, we thought it would be

appropriate to let people in on it because we knew that they would support us. And the level of overwhelm, I honestly can't even explain. We told people like, hey, here's a discount to go buy something in our shop or upgrade your membership. If there is something that you can do for us, or even just like share this post, like let other people know who we are and that we're going through this. And if they're interested in our platform. And so it was, it was really incredible to see the way that like people, you know, they, they did whatever they could. And even just like, you know, to have people checking in on us and it. And it's not just about

me or about Mark. It really is about our team because we're all sort of dealing with this in real time. And we've built an incredible community. And I know that they would want to know what was going on with us. So we're talking on Monday, March 13th. Your account is still frozen. The FDIC hasn't sent you any money yet or what's going on? No, we have not heard. We've not heard from anyone. And when we go, you know, it was a frenzy, I'm sure, on the SVB website today. So we weren't able to get access to any of our capital. It would just there was a loading screen and then an error. Yeah. So a 404. So we'll we're just going to keep trying to keep refreshing and we'll get there when we get there. You seem so incredibly calm and composed, by the way, and I've known you forever and you are so calm under pressure. But I got to say,

like talking to other founders, they are far from the vibe you are giving off right now. Like what is keeping you going? Faith, hope, just taking it day by day? Yeah, I actually so I don't think I have been as calm as perhaps I am portending, but I actually did a restorative yoga class before we got on the phone. I have not really moved my body. And that is like my thing that I do every single day to make sure that like my mind is right. And so while I couldn't do a workout, I chose to do a restorative yoga class and I think it calmed my nervous system. So I think that's what you're getting. You're getting the obey afterglow of restorative yoga for sure. You're not only the founder, but you're also a customer.

Yes. Yes, yes, yes. All day long. So what is the mood amongst your investors right now? Yeah. I think everyone is just sort of trying to keep it together and wait. That's what this is. It's a waiting game. I hope there is some grand plan and this is all going to sort itself out in a short amount of time. But yeah, I think everyone is just sort of waiting and trying to figure out what information they can get from other people to understand the experience. Are they getting wires? Are they not? Is the site still down? What are the covenants of our agreements? What do they mean and how do they hold up in this post-FDIC seizure world? I want to double click on just a little bit more about how you're feeling when the news was coming out this weekend.

You know, is this like a massive sigh of relief on Sunday night when you found out that, you know, things were going to be OK? Yeah. So we what I how I read that was, you know, obviously it's really it's really wonderful really wonderful. Thank God the government stepped in. Certainly for us, I can't even imagine it if that weren't the case. But there are still so many open questions. There was three paragraphs of text in this joint statement by the Fed, Treasury and FDIC. And it doesn't answer all of our questions. It was very broad because what I am trepidatious of as a leader is the trust that I have with my team and the trust of our community. And so I don't want to, I don't think that we can claim victory on this yet because I still don't have any answers. So I know part of what the money is that we have there will be released to us, but I was supposed to have it today and we don't. And so I am trying to just be really cognizant of how I communicate what I communicate, keeping people, keeping people informed without, you know, creating the sense of like, it's over, it's done.

Let's move on with our lives because we're not there yet. Those were the things that were running through my mind of like, how do we get these questions answered on a Sunday night? And even today, obviously there's, there's no, there's still no answers. Yeah. I just, you know, take it one day at a time or whatever. I'm trying. You're doing great. More restorative yoga will be needed. What do you think makes for good communication to employees during a time like this? Like, obviously it was a masterclass on what not to do from the CEO of SVB. We got some communications from inside the company actually. And I was reading the internal emails and I was like what the actual f like this is what not to do I think tell people don't panic with

exactly what they're going to do is panic exactly I think that you know obviously we don't have any control in this situation we're not in the driver's seat here all week all I can do as a leader is just be very honest and not to make something sound better than it is. I think that just the transparency is how you build and maintain trust and just trying to like read everything I can, be connected a place always of like authenticity and to make sure that everyone, you know, on our team understands what's going on and understands it like in the same way that I understand it. And so if any, yeah, I think if we learned anything from COVID, it's just like that radical transparency is really important, even when it's tough news. So what is happening with your employees right now? Do you feel like people are calm? They have a sense that they're going to get paid and all of that?

Yeah. So we assured them from, you know, as soon as we knew that they would be paid, that they would be. And so, yeah, they're aware. We had a nice meeting today. There was no meaningful update other than just to hold space for people and sort of letting them know the latest that we know, which is not a whole lot. And then we were in touch at the end of last week and then over the weekend. So again, you can't sugarcoat this stuff. We just have to sort of tell people what's going on and be as transparent as you can and let them know that you know that it's a really not great situation. And that again, we'll all sort of band together and figure out how to make it out on the other end.

Have you been talking to other founders? I have lots of, lots of amazing text messages and WhatsApp threads. There was actually another female founder, God bless her, who was not with SVB, who reached out to me and said, like, if you need a personal, or if you need a loan from my company, we weren't there. So like, happy to do it for you. It's just like, it's been absolutely incredible the way that people have really shown up for that for each other, even competitors, like, you know, we're all kind of we're all in this in boat together and need to figure out how we push forward. Are there any resources that you picked up or pieces of advice from the WhatsApp

threads or or text with other founders to figure this out? Sure. I think that the like the next step, there's a lot, I'm sure many next steps for me, but one of the biggest learnings and next steps for me is figuring out how we should set up these accounts in the future so that all of it is insured. I think we did what traditional founders do is you go raise money and then you do a facility with them, you do your banking with them and everything is together. And that's just really not a great recipe for making sure that things are safe in a situation like this. So I look forward to, again, in the days to come, just figuring out our banking relationship

and making sure that we're always safe and we're diversified and that something like this couldn't hurt us again. Yeah, like the financial engineering component. The stuff that you know so well that I don't know. Those are the things that I'm learning. Hardly. like this couldn't hurt us again. Yeah, like the financial engineering component. The stuff that you know so well that I don't know. Those are the things that I'm learning. Hardly. I mean, honestly, I went into my bank account and I don't bank with SVB. But this weekend, I was like, I'm going to take anything over the insured amount and I'm going to put it somewhere else because I didn't even think. And that's a lot of money for an individual. I didn't even think. And, you know, that's a lot of money for an individual. But for a business like that's, you know, 250 grand is is not a lot of operating capital for for a long time,

depending on how many employees you have. No, that's exactly right. So, yeah, I think I'm going to I'm going to look a little harder on my personal as well, just to make sure that I'm really protected for whatever, you know, whatever the world has in store for us. Beyond this specific story, founders deal with all sorts of crisis. It's like crisis whack-a-mole, I'm sure. What advice would you give other founders on how to prepare for Black Swan events? Because I'm assuming beyond all modeling and like your SWOT analysis, there were no threats that like the bank would close. Right. Yeah. This is not something that I ever planned for. Yeah. We've, we've been through some crazy things, like even you know, obviously during COVID when, you know, there was the stay at home order and

we had to close our studio and also like, was there a way that we could be able to reopen and start creating content again? And so there's, yeah, there's so many things that we have, we have had to face in the last five years, but I will say my advice for entrepreneurs is like, don't do it unless it is like the only thing that you can do. Like the only thing you can imagine pouring your life into because it is so all consuming and it's, you know, the highs are high, the lows are low, but it is not for the faint of heart. So I know everyone says like, go be a girl boss and go be an entrepreneur. And while I certainly am that way, and that fits

for me from wanting to be an entrepreneur and wanting to serve my community with a very, very specific product, I don't know that entrepreneurship is for everyone. You have to have a really thick skin and be able to deal with things that are not easy. Well, you're amazing. I'm so proud of you. I'm so impressed by all of the things. I will let you go and deal with like a major banking crisis right now. But thanks for taking the time to talk. That was my conversation with Ashley that honestly, I kind of can't believe even happened. Because again, reminder, she is in the thick of the most tense situation some founders will ever have to face, most likely at least since 2008.

And speaking of 08, here's Gary to give his macro perspective on how we got here, where we've been, and where we're going. So we're going to dive into the ins and outs of SVB. I can't talk about anything else right now. It was nonstop over the weekend. Do you agree that this is the most tense week since COVID or maybe even since the financial crisis? Well, I'm not going to compare it to COVID. I'm going to compare it much more to the financial crisis in 2008 in the sense that the type of calls I got were much more focused on things like liquidity, access to capital, very similar. It was a tremendous flashback to me

personally to 2008, 2009. Yeah. The threads that I was on and the calls that I had were similarly wild. I could not believe some of the doomsday stuff that different founders or CEOs were talking about with where to put their money and they weren't even in SVB. I mean, it was it felt like really touch and go. So let's talk about that deja vu mortgage backed securities, bank failures. I mean, let's do some time traveling, go back to 08. Can you remind listeners of the big issues that led to the 08 crisis and compare some of the similarities and some of the differences to this current situation? Well, let's just start with how are

their similarities? Similarities are, that's the easiest thing to approach, which is that the banking system globally is based on confidence. I was at the Lakers' Knick game last night. globally, is based on confidence. I was at the Lakers' Knick game last night. And in addition to enjoying a great basketball game, everybody seemed to be on their phones and talking about what was happening and talking to each other. And I just struck up a conversation with somebody in the payments business who had mentioned to me, what did I think the actual amount of money in the system that actually floats on any given day. And what I mean by that and why this is very important for the listeners to understand is that the analysis that was presented to me yesterday, and I'm not exactly sure,

although I think it is probably close to right, it's not right. It said only probably about 1% of the actual money that exists between credit, between savings, deposits, securitized products that are linked to money, only about maybe 1% of the money actually floats in the system. That means you go to the bank, hey, I want $500 in cash, and you go to a store. So let's say it's between 1% and percent. But that other 95 percent, based on the confidence that when you put your money in a bank or when you borrow money from a bank or when a bank lends out that money, that that the transaction is going to getting access to my money, people going to local bank branches and taking money out was the fear of I'm going to go to an ATM machine and I'm going to want to get my money, but having nothing to do with anything I did, I'm not going to have access to that money

because that bank is frozen. So there's where the similarities lie. The difference from without getting too inside baseball here, the difference is in 2008, 2009, there was a lot of Wall Street money that was given to businesses that lent that money out to people that were not going to be able to repay that money. That's not what happened here. Hold on to your wallets. Money Rehab will be right back. not what happened here. Hold on to your wallets. Money Rehab will be right back. And now for some more Money Rehab. What happened here is that money, in fact, money flooded into banks in COVID.

And at the time there was zero percent interest rates. When there was zero percent interest rates, people were comfortable putting money in banks and just accepting the fact that they weren't going to get anything in return. It was the safety and security of having your money in the bank. You know, if you were lucky, maybe you got 10 basis points. Well, in the last several months, that has changed dramatically. And as a result of that, banks have been under tremendous pressure to maintain deposits, which they use to fund the other side of the bank. People put money in, they lend money out. And so there's been this tremendous pressure to maintain a deposit base. And in the case of Silicon Valley Bank, which, you know, for years and years was one of the at least perceived best managed banks in terms of

risk management. They took this tremendous amount of inflow of money that was raised by many of their clients. And then they went out and they took tremendous risk by buying longer duration paper, assuming that their clients were not going to be asking for that cash. Let's go back to what I said. 95% of the money that floats in the system is based on the belief that when I need it, I can get it. Okay, wait, hold on. You're doing a couple of jargony things that I'm just going to stop you on for a sec so we could decode them. So longer duration paper, that just means longer term bonds. So can you explain how that works? Yes.

So the client goes into Silicon Valley Bank and they deposit $5,000 into their account. And for years, they were happy with no interest on that deposit. As the Fed started raising rates and taking interest rates from 0% to where they are now, depositors want return on their money. In the case of Silicon Valley Bank, they went and they bought mortgage-backed securities, close to $80 billion in mortgage-backed securities on a $200 billion base. And they put that money into interest rate-bearing securities that were going to pay them more than 0% because they wanted to create a return on that money.

As the customers started to need that money, the price of those bonds, the 10-year bonds that they had purchased, went down in value because those bonds went down in value when interest rates were going up. Because the same 10-year duration, bonds that are going to mature at par in 10 years have gone up.

The ones that they bought were down in value. The ones that are in the marketplace now have gone up in value. Therefore, there's a loss. In order for them to raise the money. To sell it early. Correct. To sell before the 10-year period. They picked up not even 1% by going that far out under the belief

that their customers, they weren't going to have a massive need for this tremendous liquidity before the 10-year period. In hindsight, looking at this as somebody who has been in the industry for many decades, they were under pressure, much like many of the financial banks, that they had to try to keep the deposits in-house. So this is like a masterclass in bonds. Bonds are really confusing to understand the mechanics of, because when the interest rate goes up, the price falls. And then if you sell it, you get this discount thing. So essentially what Silicon Valley Bank did was a great explainer, although it wasn't a great move. It was a great explainer

to folks to understand how bonds work. So they buy this 10-year bond and the interest rate goes up. And if you want to sell that now, you have to sell that at a loss in the price. So the price goes down, the interest rate goes up. It's like saying, hey, I have $100 bond that I want to sell you at 3% or $100 bond that I want to sell you at 1.8%. Obviously, this is not a trick question. You're going to take the one with the higher interest rate. So because they had to sell it, they had to take less money than they paid for it by selling it early. And they had to sell it, they had to take less money than they paid for it by selling it early. And they had to recognize the loss. And because they are a financial institution that is regulated and have to have a certain amount of capital,

when they took the $1.8 billion loss on selling the bonds in order to have the money so that their customers could get their withdrawals, selling the bonds in order to have the money so that their customers could get their withdrawals, that loss, you or I personally, if we had to sell those bonds, we take the loss, we've lost the money, but there's not an offset to that. In the case of a financial institution, they've got to go out and raise additional capital because they have to have a certain amount of capital on their balance sheet as a regulated entity. I think also let's point out, you gave the example of the bond prices going down because yields have gone up. We opened the conversation talking about in COVID. If you remember in COVID, bond prices shot up dramatically because yields plummeted with the idea that the Fed was going to basically pump so much money into the system to

save the economy. So it works both ways. You can have a gain in a bond price, as well as a loss. In the last year and a half, most bonds that were purchased prior had been losses. But for almost a 20-year period, when you bought a bond, if you sold it before maturity, you actually had a gain. Now, if you buy a bond at par, at $100, and you hold it to maturity, and you don't have to worry about marking it to market as an individual, as opposed to a financial institution, you're going to get your money back, plus your interest payments. So, you know, for a lot of the viewers, it's important to remember that if you buy a bond, and you have a 3% interest yield or a coupon on that bond and you don't have to sell it before maturity, you will get your money back assuming the credit is good.

It's the interim movements based on where other prevailing financial instruments are trading based on interest rates. Yeah, they sold it because they had to and that's never a great time to sell stuff in a fire sale or out of desperation. Well, of course, that gets really back to the importance of on an individual basis. You have to know your asset allocation. In a sense, this is no different than what you and I have talked about many times, making sure that you have your financial investments lined up properly. We end the episodes with a tip listeners can take straight to the bank. So for listeners who are anxious right now about the safety of their money, they are stressed out. What would your tip be?

The greatest thing you can do right now with this uncertainty, because you'll actually get paid, is you get paid to buy short term treasury bills that are backed by the U.S. government. that are backed by the U.S. government. And so I will tell you what I've told my children, what I do with my own money, and what I've actually done with the cash that my mother-in-law asked me about this morning. I buy six-month T-bills, maybe one-year T-bills if you know for certain you don't need to access the money. And guess what? It's a great time to get paid and watch and not have to worry about it. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie.

Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you.

No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make. Thank you.