Morning Brew Daily - The Silicon Valley Bank implosion and what's next for you & investors

Episode Date: March 13, 2023

Episode 15: Neal and Toby take a deep dive into what happened with Silicon Valley Bank over the weekend. They dissect the timeline, the discourse around it and what this could mean for the future of the financial system and other Banks. Plus, Oscars recap and what we are watching for this week. Learn more about our sponsor, TaxAct: https://www.taxact.com Listen Here: https://www.mbdailyshow.com/ Watch Here: https://www.youtube.com/@MorningBrewDailyShow Learn more about your ad choices. Visit megaphone.fm/adchoices

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pwc.com slash U.S. slash brew AI. That's PwC.com slash us slash brew AI. Good morning brew daily show. I am Neil Fryman. And I am Toby Howell. And Neil, you were show right.

Daylight savings times might be the worst because waking up for this show at 6.30 in the morning and it being pitch blackout, not fun. It was tough. But also maybe because this was one of the crazier weekends I can remember. Sleepless.

Sleepless weekend. We'll talk all about what happened. And of course, I am referencing the Oscars. Just getting you know. We're talking about SVP Silicon Valley Banks collapse and the wider jitters around the banking sector. So in a little bit of a switch up from how we normally do things, we're going to spend a little more time talking about that because... There's a lot to talk about. There's a lot to talk about.

There's going to be a lot to talk about. The whole banking sector is at risk right now. Then, of course, we still will do a little talk about the Oscars and preview the week ahead, which should be a blast. But first, I want to talk about, yes, Silicon Valley Bank. After a really nervy weekend, there's a lot of anxiety. The U.S. government announced emergency measures last night to prevent a banking crisis after the collapse of Silicon Valley Bank. It allowed SVB deposit holders to access all of their funds today, including those that were uninsured above $250,000. So I guess they were insured.

Yeah. And then the Fed also announced a lending program to provide. to banks in the event of a liquidity crunch. And then there was something else that they kind of threw in at the end, but what was really interesting news, they announced the closure of a second bank in as many days. The government is taking control of signature bank, which is a New York-based bank that recently moved into crypto. So taken together, these moves by the Fed are the biggest thing they've done since early COVID.

Yeah, they actually jumped into the action. They were getting a lot of pats on the back over the weekend from certain people. Obviously, though, anytime like banks and bailouts kind of collide, there's going to be some strong feelings on either side. We'll get into all of that. But maybe just for our listeners who haven't been following this super closely, like they actually had lives and had a really fun weekend, maybe just walk us through Toby how we got here with Silicon Valley Bank. Yeah, for sure. So if I had to sum it up in kind of a few words, SVB essentially mismanaged its balance sheet. So they had this huge influx of deposits during the startup boom times of kind of 2020, 2021.

And so they had all this excess cash that they wanted to put to work. They decided to buy these mortgage-backed securities and treasury bonds that yielded on average 1.5%, which was good, because at the time, they were looking for pennies. It was a yield more. They wanted to get some money on that money. and that was all fine and good until interest rates started to rise. Once interest rates kind of skyrocketed up to four and a half percent, those bonds became less valuable and the yields became less valuable.

So seeing this, SBB decided to kind of shore up their balance sheet a little bit. They announced that they were going to do a quick little capital raise to like ease some of these liquidity fears. Unfortunately, that got taken the wrong way by a lot of investors who saw this and they're like, oh my gosh, SBBs has this liquidity issue. So they got scared and the stock started to tank. Simultaneously, some of the VCs that kind of advise these startups that have their money in SVB started to tell their startups, hey, we're thinking SBB is on rocky ground, maybe pull your

money out. And that snowballed very, very quickly. Part of the reason it snowballed so quickly is that many of the deposits in SVB are not FDIC insured. They're over $250,000. So that got a lot of startup founders really scared. They all started to pull their money out. And by Friday, SVB had gone from one of the more important banks in the startup sector to under receivership and kind of under the FDIC's control.

So really snowballed quickly. Great explanation. So maybe we should talk about how this bank for startups, I think more than half of all U.S. tech and life science startups, turned into a potentially wider banking crisis and why the Fed stepped in. Yeah, absolutely. It kind of showed the narrative was that there's two tiers of banks in this country for sure. So there's like the SIFI banks, which are significant financial institutions, which are the ones that systemically important financial institutions, which are like the JP Morgan Chases of the world. And then there's these smaller regional banks that are not necessarily considered systemically important. And so these regional banks were all, honestly, as we're saying this, are under the threat of a similar bank run happening from depositors.

Right. So this morning, I think, so one you're talking about is First Republic Bank. So the reason Fed took this action was to sort of shore up confidence in these regional banks like First Republic Bank. We were talking, but to prevent more bank runs cascading across the economy, we had investors like Bill Ackman over the weekend sort of screaming from the rafters and tweeting like crazy, being like, if the Fed doesn't stop this,

then there will be a cascading bank run and we will see a banking crisis similar to 2008 or the 1930s. I do think what this weekend showed is that in every finance story, there's also this distinctly human side to it where it's called like fear, uncertainty, and doubt. Once people get afraid

and once people see that other people are acting maybe a little irrationally, it just compounds from there. And one aspect of throughout this that is unavoidable to me is the social media aspect and also the digital banking aspect. Banks were not built to kind of withstand everyone on Twitter and everyone on social media basically saying like, hey, there's a bank run happening, the sky is falling, and also have the ability to withdraw their money digitally from an app with what. one click of a button. So those two things really showed how quickly something like this can destroy a bank within literally 24 or 48 hours. Yeah. And it's not over. So the Fed a lot of people's anxieties were soothed when the Fed protected these uninsured deposits from Silicon Valley Bank with the hope of that it wouldn't create a bank run today. They had a really

hard deadline by 9.30 a.m. Eastern because Bill Ackman, this billionaire investor, and others warned that if they didn't get a deal to buy Silicon Valley Bank or the Fed didn't backstop all depositors, then this would be utter chaos today. Like, we would not be here right now. We'd be going to the bank and we'd be like, get my money out right now. So it's still not quelled all fears because we were talking to some people at startups who bank with First Republic. And I was like, so if they backstop depositors at Silicon Valley Bank, are you still going

to keep your money in First Republic? And they were like, no. I'm still super spooked. They're yanking their money out of First Republic. Their shares are crashing this morning. So it's clear that there are still insane amount of jitters on the market. Yeah, absolutely. Yeah.

And even though that the Fed has said, yeah, we are here for your money, there's still, bank runs are not necessarily rational events. Like, even if you know that your money will be insured, there's still the feeling of if there's even a 0.1% chance that I could lose my money, why not move it into a more secure bank? And honestly, what it's really done is increase the dichotomy between these regional banks and these systemically important banks. Now, people are saying it's bad for competition because all this money is inflowing, all this startup money, too, is inflowing into banks like Chase. And so what it took Silicon Valley,

all these years to build up this goodwill within this specific crowd is evaporated over. the weekend, and now all that money has gone into these bigger banks. Right. So I would just say right now, as we're talking 9, 10 a.m. on Monday, there's still a lot of anxiety out there. These regional banks look like their stocks are plummeting this morning. People are taking their money out, and so we'll just have to monitor what happens over the next few days.

But I just want to kind of pivot to a different thing that kind of arose over the weekend in discussion of Silicon Valley banks collapsed. And this was this heated war between tech founders and tech investors and the media and other commentators. And Silicon Valley Bank's explosion and sort of the reactions to it only divided people even more from Silicon Valley to the media. I mean, they already did not like each other. We knew that. But this only increased the animosity.

Right. There was, again, if you had spent any time on Twitter, there was honestly like, three camps. There was the actual VCs kind of saying the sky is falling. Like Jason Calacanis was tweeting in all caps all weekend. Basically, like, who knows what he was getting at? Like, kind of almost inciting a bank run. It appeared like... He's like, you should be very afraid right now in all caps. And I thought that was a joke. Yeah, but... I was like, oh, this is satire. I have no idea what he was getting at. But then you also have kind of both sides of the political, like right and left ideology, kind of ganging up against these venture capital figures because,

yeah, on, I mean, do you want to break down, like, kind of where each side had their gripes with, like, this venture capital? Oh, you're asking me. Yeah. Yeah. Yeah, I mean, you have the right, the Donald Trumps of the world who are doing this populist thing, and they hate the tech Silicon Valley elites, right, who they view as liberal. And then you have the progressives who view the tech Silicon Valley.

elites as libertarian. So these guys are getting hammered on both sides, and they are not helping out their cause, that when all this was going down, they all tweeted, where's Powell? Where is Yellen? Like, please help me. Which people thought were very hypocritical of them. People thought that was so hypocrital, because if you spent any time online and followed these guys over the past couple years, their number one dunk session was on Powell and the government and stay out of my business. And so people thought it was really rich. that they were now asking for a bailout, which they eventually got. So expect sort of this heated culture war between Silicon Valley and everyone else to continue now that there's this bailout.

And we'll talk a little bit more about the bailout and even more about the SVB saga going forward. But before we jump into that, we're going to take a quick break. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting at $179, like the next green. grill three burner gas grill or get $50 off a select Weber Spirit grill and bring big flavor to your backyard. Then set the scene with Hampton Bay string lights that bring it all together. Shop spring backyard days for seven days at the Home Depot.

Now through May 6th. Exclusion supplies to home depot com slash price match for details. Okay, Neil, now let's kind of look to the future a little bit. What is going to happen with SVB? We don't know. the FDIC, which now controls SVB, what did I say, as VB? ZV. Gas, which now controls the Silicon Valley Bank, just held an auction, started an auction Saturday night.

This was the other option, actually, instead of the Fed backstopping. One of the cleanest options here would be if they could find a single buyer for the bank. But this bank is pretty big. And so there's not a whole lot of banks that could come in and buy SVB. It's also the banks kind of need the Fed's blessing in order to buy a bank in the post-2008 world. So it's a little more complicated than just someone snapping it up. Right. So there's only a few that could possibly make this work and have the back channels with J-Pow to do so.

Some names are obviously J.P. Morgan, Bank of America, Goldman. And we heard Scott Galloway on Friday talk about how Goldman might be an interesting buyer because CEO David Solomon had this huge flop in this consumer banking venture, and now he has the opportunity to buy SVB, which, you know, despite its collapse, still has a pretty beefy client roster of some really attractive tech, like, VC-backed tech startups. And so this could be his little redemption tour. So that might be something I'm curious about.

They really wanted to find a buyer by Sunday and to make the Fed not have to do all this bailout stuff. But that didn't happen. but we should expect to see one soon. So, yeah, so let's talk about the word bailout here real quick. Again, we already mentioned it's very polarizing word, but do you consider this an actual bailout because there is no taxpayer dollars immediately at risk, right?

Yeah, technically, I guess it's not a bailout because all the shareholders and the equity holders, the bondholders, execs, everyone who sort of had a stake in SVB, are getting wiped out, and you could say this is just a move to prop-up deposit holders. And you can bet the U.S. government, this is what they want to focus on. They do not want this scene as a bailout. They've been stressing the fact that taxpayers are not on the hook at all. Like, it was a weird, you know, in the FDIC or the Fed press release last night, you know, there was a statement. It was like, no taxpayers will be, you know, on the hook for this. And I was like,

whoa, that's weird, but like, very some interesting PR messaging there. No, and I think it's really smart by them to headline it with no taxpayer dollars are being used, although there are this second-order effects of people think that we're going to lay out all the cause and effects here, but basically now the Fed is saying maybe we won't raise interest rates as expected, and the second-order effects of that is that inflation might again kind of escape out of control once more, which could end up hurting the taxpayer. in the long run. So it's, again, an extremely rock in a hard place moment for the Fed right now, because if you raise interest rates, this might cause the banking sector to spiral even further.

But if you don't raise interest rates, it might cause costs and inflation to hit the everyman even more than they have. And that is the one thing that I want to talk about here was that you brought up the Fed. The Goldman Sachs last night came out with this report that kind of caught everyone by surprise, and they said that the Fed was, they didn't predict the Fed will raise interest rates next week at its next meeting, which they were expected to because inflation is still running rampant. It hasn't come down like they wanted to. So there was a discussion about how big the Fed would raise interest rates, whether it'd be

like a medium-sized hike or an even larger hike. And now Goldman Sachs came out when it's like due to jitters over the banking sector and the fact that the Fed's interest rate rates led to this. disaster that the Fed will hold off. But who knows what that means for inflation? For me, it seems that like inflation has become way less of a priority for the Fed and policymakers in general than this banking crisis. And stopping this banking crisis seems like, you know, immediately top of the to-do list, we won't hike interest rates, even though we've been doing it for forever. Yeah. All eyes are going to be on that, if they decide to do that or not. Okay, Neil, that was a lot

on Silicon Valley Bank, before we jump to our next topic, do you have just a one sentence takeaway? I know it's very hard to do that, but just sum it up. Like, what's your big takeaways? Maybe this is cheating, but my takeaway is this isn't over. Okay. Yeah, I think we're still going to be talking about this for the next days and weeks with all of the different regulation that might come out of it. So I guess my takeaway is that we've just started talking about it, and maybe I'll have

more takeaways down the road. Fair enough. That's a good takeaway. My takeaway is that, yeah, I mentioned it earlier in the show, but the current baking system is not designed to function in the age of social media, in the age of digital banking. This reminds me weirdly of the Robin Hood GameStop saga, where it shows when enough people are on the same page about a certain financial event. Like, crazy, crazy stuff can happen really fast. So that's my big takeaway is going forward. That's a much Gen Z answer.

I know. Hey, it's true, though. I feel like I'm being validated as Gen Z. No, actually, my big takeaway is bank like Janus. Yeah, oh yeah. We saw, for people not aware, we tweeted out that Janus has spread his money across 50 different banks. And so, yeah, maybe if SVB had been, or if startup founders had been a little bit more

like Janus, they wouldn't be as concentrated in one bank. So good takeaway. Be like Janus. Okay, let's jump to the Academy Awards. The Oscars were last night. And a big takeaway was everything everywhere all at once was, of course, everywhere all at once. They won seven awards. Also a huge night for South Asian artists and actors.

Of course, everything everywhere all at once stars. Kay Hui Kwan and Michelle Yo won awards for Best Supporting Actor and Best Actress. Also, Natu Natu from the Bollywood movie RRR won Best Original Soundtrack, which I was extremely happy about because I love that movie. But in order to kind of, as a vehicle for talking about the Oscars, I want to do some winners and losers. Okay. So, Neil, give me your winner and loser from last night. Winner is A-24, which is the studio. It swept all six major categories. Best director, best picture, best all the actors. And it was behind everything everywhere all at once and the whale.

They crushed Netflix, Searchlight, Warner Brothers. A-24 is an avidavit. absolute cultural force right now. And people who don't know about it should, which I didn't honestly know that much about it, except that it did everything everywhere all at once. But it is a force. Like I just looked up all of the movies. It's produced, Moonlight, which won the 2017 Best Picture Oscar.

Mid-Somar, Uncut Gems, Lady Bird, eighth grade. It even had a hand in euphoria. Murder's Row. Murder's row. And there's a million other ones that I haven't even talked about. So they become a force. in this kind of edgy youth culture sense, but every movie you see on TikTok is basically an A24 movie.

Damn good movies, honestly. So it's really cool to see this independent movie theater kind of burst out of nowhere and come to dominate the Oscars. Okay, my winner from the night, this is controversial, is actually Jimmy Kimmel, which you did not like his performance last night. It was fine. Yeah.

That is why he's a winner to me, because it was fine. I hate it when the host tries to make it too much about them or tries to make a statement or tries to, I don't know, roast the crowd like Ricky Jervase has done in the past. I just want my host to be kind of vanilla-e, make a couple jokes, push a little envelope here and there, but he did not try to steal the spotlight, even though he did come in on a parachute like Top Gun. So I think Jimmy Kimmel did okay. He's also his slap jokes because obviously he had a reference the Will Smith incident.

They're pretty good too. Like he didn't spend too much time on it. So Jimmy, I know you're listening to this. You did a great job yesterday. And then my loser is actually Puss and Boots a little bit because that movie was just incredibly awesome and had one of the best movie villains of the last few years. It did not win best animated feature film. Giermore De Toreos, Pinocchio did, which I'm sure was a great movie. But personally, I think Puss and Boots deserved better. Puss and Boots. Okay. Let's go to the week ahead. Obviously, some continued jitters over SVB. We'll pay attention to that.

But besides that, we will talk about March Madness. The brackets are out. Yes, it was Selection Sunday. It's so overshadowed. But my picks for the final four, I looked over the bracket a little bit, was Alabama, Marquette, Houston, and Yukon. Heck, yeah. So we'll see. I'm big on Yukon.

Yukon. All right, Big East, baby. I actually did go to Marquette for two years, so they are also a trendy pick of mine. So let's go Golden Eagles. I'm big into that. And then we also back into the banking finance world. We have inflation data coming for the Fed. So that is coming out tomorrow.

And obviously, we just talked about the fact that it's probably not going to be as important as it was before all this banking collapse happened for the interest rate rates. But it's still really important. inflation has not come down like we all expected it to. So we'll certainly be keeping a close eye on that. And then St. Patty's Day on Friday. I'm excited. So I was just thinking about bars.

Like the bar on Friday, you got St. Patty's Day and you got the second day of the basketball tournament. Yeah, it's going to be. So you might have to show up at like 7.30. It's a good weekend for sure. I always love to on St. Patrick's Day. There's always the memes that come out of the fish waking up in the Chicago River. to it all being green because they dye it green. And I just love that, the idea of these fish.

Like, what the heck? How does this keep happening? Like, why is everything green again? So St. Patrick's Day. I'm excited. And then tomorrow we have pie day. And I know you're a big pie day guy. So you better start preparing your digits.

3.14-1-5-9-2. Okay, I won't spoil it now. We're doing it tomorrow. Okay. I'm very curious how many digits you can do. We got the Iads of March, March 15. Let's go. And then Ted Lasso is also coming back for its third and final season.

if you're a big Ted Lasso Stan. Thanks so much. It's really interesting to dive into SVB. I'm sure this is not even close to the last time. We'll talk about it. Listeners, we hope you have a better understanding of this crisis now. Hopefully it's not a crisis, and things will be back to normal soon. Want to make sure that you should email us if you have any questions about anything at Morningbrewdaily at morningbrew.com.

A few shoutouts to our amazing crew. Our producer and editor is Emily Milliron. Our technical director is Joe Hampton. Supervising producer is Bryce Belloff. Oscar-worthy sound mixer is Dan Bousa. Hair and makeup forgot to change their clock. And Devin Emery is our chief content officer. Our show is a production of Morning Brew.

Good show, Neil. Let's run it back tomorrow. All. Pay off your home, travel for life. Drive a Ferrari. In celebration of the world premiere of the Monopoly Big Board Bucks slot machine by Aristocrat Gaming, Yamava Resort and Casino at San Manuel is giving one person a $1.6 million dream package.

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