Sharp Tech with Ben Thompson - The SVB Collapse, How the Government Responded, and the Era in Tech that Ended This Weekend

Episode Date: March 13, 2023

Revisiting the decisions that led to the collapse of Silicon Valley Bank and talking through the implications of the government's solution, the behavior of various tech personalities on Twitter, and why the past several days signal the end of an environment that defined Silicon Valley throughout its rise.

Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing? Good, good, quiet weekend. You know, tech news continues to be slow. So just relaxing, chilling out. You're going to have to log into Twitter a little bit see if anything happens. So all good.

Yeah, there you go. I mean, last Thursday we were talking about what a slow time it was in tech news. I just spent the last 48 hours reading about banking regulations. contagion risk and all sorts of fun stuff. So I'm excited to dive in. I will say this is not my area of expertise. So you're going to have to cook throughout most of this episode. Are you prepared for that?

I know you woke up like two hours ago. I am definitely a well-known banking expert, so I'm ready to go. Okay, great. I'm going to defer to your banking expertise. We'll begin with a Sunday evening press release from the Department of the Treasury. Today, we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth. After receiving a recommendation from the boards of the FDIC and the Federal Reserve and consulting with the president,

President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13th. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. So, Ben, we're going to cover a bunch of different angles to what happened with SVB over the last 96 hours or so. But first and foremost, what's your reaction to the resolution here? I'm not surprised that depositors are made whole. Well, even before we then, there's sort of an important caveat, which is, number one,

contrary to what we said at the top of the episode, we are not banking experts. So that that's an important thing to establish. Number two, this is a story that is sort of obviously developing and moving fast, although this does seem to be a resolution point, which I am grateful happen before we podcasted. So we're going on very fresh information. So that sort of caveat out of the way. I'm not surprised the depositors were made whole.

I think that you sort of step back big picture and, you know, the history of insured deposits in FDIC, like the creation of the FDIC in general goes back to the Great Depression and the overall general run on banks. And it's just really bad for the economy if people don't trust that their money is safe in banks. And so back then, I think it was 2,500 or some very small number. It's been increased over time. It has not kept pace with inflation.

It has to sort of be increased discreetly. But from an individual perspective, that limit is probably fine. I mean, unless you're an ultra wealthy individual and you live an ultra wealthy lifestyle, at which point you probably have the capacity to sort of do risk management on your own, you don't need more than $203,000 in cash at any one time to sort of like live your life. I think the problem here is that's just not the reality for business. You like if you even have just a few employees, just for things like making payroll or paying your bills,

your AWS bills or whatever might be, like you need to have some amount of money freely available. And that money is almost certainly more than $250,000. And so basically the reality is everyone has just sort of ignored this risk factor. Because you go to the way a bank works. At the end of the day, people who put money in a bank, it's not a, like they are creditors to the bank. They are basically lending the bank their money.

And then the bank is using that money to do other stuff. So theoretically, you should be doing a credit check on your bank. And you got some like just wild takes on Twitter that were technically correct. Like, oh, well, these employees of these companies that are banking with Silicon Valley Bank, they should have known their employer was with Silicon Valley Bank. And Silicon Valley Bank had these problems, which we can maybe get to in a little bit. But in practicality, that's just a ridiculous assertion. Like, like, you can't have a functioning economy if the expectation is not just that a business spreads its money out a bunch across different bank.

or, you know, it has a particularly like a small business, but that employees themselves have to actually verify who they're, like, can you imagine trying to join a job and say, okay, before I sign the dotted line, can you let me know who your banking provider is? Because I need to go do due diligence that my payroll will not be interrupted because the bank went sideways because I'm taking on risk here because you are ultimately a credit to this bank and I need to understand your credit profile. Like, that's insane, right? And so at the end of the day, there was a real disconnect between the theory of banking and sort of the reality, which is the complexity of our modern society is such that it was unreasonable for people like this to take risk.

And I think a lot of the rhetoric around Silicon Valley Bank, frankly, was driven by the name Silicon Valley Bank was unfortunate. But the real risk factor that I think the Fed was concerned about was not VCs, was not even necessarily like, like, even the companies themselves. Yeah, it was the employees of the companies, like things like payroll not being run on March 15th, like that's just a unacceptable sort of risk where it's a total destruction of sort of all faith in the banking system. So for that reason, I am not surprised that it was basically the deposits were effectively guaranteed. Now, this is a problem broadly, though, because what is basically happened now is the, I'm going to use the Fed for shorthand, but obviously speaking in terms of FDIC and Treasury.

So just sort of like with that caveat, the Fed has basically said that all deposits are guaranteed, right? It's not that $250,000 limit does now effectively does no longer exist. And all deposits everywhere. Right. Yeah, exactly. That's what caught me off guard. I saw the first press release and thought, okay, well, that's where I thought things should end up, in part because of the employees and the payroll considerations, but also because

the contagion risk seemed pretty real. And so trying to sort of limit the fallout from this SVB disaster seemed like the most reasonable course of action, but now we're just backstopping everyone, it seems like. Yeah. So we can get into the specifics of why this happened, but we can start. Yeah, that is the correct takeaway, which is all deposits in the United States are guaranteed. Now, you may sit back and say, okay, that makes sense. Deposits should be guaranteed.

But again, this is sort of the rub of the issue. We are talking about creditors. We are talking about loanmakers and we've basically guaranteed all. all these loans in the sort of trillions of dollars. And so the inevitable outcome and appropriate outcome is a huge increase in regulation on all these regional banks in particular. Now, a lot of this increase in regulation, whether that be much more strict capital requirements and asset controls or what sort of payouts you can have as a bank generally,

all these were applied by and large to the big banks, the systemically important banks after the financial crisis. So there's always been an opportunity for regional banks for a couple reasons. Number one is just sort of the local aspect. That will, like, if I'm in Madison, Wisconsin, like, I bank with city for chatechoree, but one of the annoying bits is there's no city branch. Like, I think there's like maybe one in Chicago. Like, it's actually really hard to go into a branch to, like, open a new account and stuff like that.

So usually whenever I do a Bay Area trip, like my actual banker is in the Bay Area. And I go there and I open accounts. and I do X, Y, Z, whenever I have to do that. And so that's actually like my personal accounting. It'd be nice to do that in Madison. Yeah, my personal accounting is with a regional bank in Wisconsin. Right. Just because like for, that will sort of continue to be the case.

But there was also, because they had fewer regulatory requirements, had more sort of loose capital controls, they also could compete financially in that they could offer slightly better yield on your deposits. But that, that's sort of the tell. if you're offering a yield on deposits, it's not a magic thing. It's interest for a loan. That's what yield on deposits is. So the reality and what will need to happen now going forward is if that's basically

risk-free money, there really ought not be any sort of interest attached to this. So the fundamental model of the way banking works was broken over the weekend. Like the model of banking does not work if there's no risk for depositors. Now, again, I think that was probably the right thing to do. And just broadly, the overall complexity of our financial system has perhaps moved beyond the need for, you know, interest paying deposit accounts. We actually need certainty and assurity more. But like this will not work in the long run without sort of a real crackdown on that aspect.

Okay, so speaking of the models for some of these regional banks, let's focus on SVB specifically. It was conceived over a poker game by Bill Biggerstaff and Robert Medeiros, and the bank opened its first office in Santa Clara in 1983. So fast forwarding 40 years, can you explain what this bank was and how we got to a point where 50% of the tech industry startups were working with one bank? Well, I mean, one of the challenges, like a startup is a very sort of weird business, right? You get $10 million or $50 million or whatever it is. And then you're busy sort of like, built, like running your company. And so you get this big infusion of cash that's just being drawn down. And you have issues like credit risk, for example, right?

Like say you want to get a credit card as a startup, you have no revenue. So how are you paying that off? well, it's because I have all these assets in the bank. It's just a bunch of weirdness with the fundamental model of a startup that most banks are not sort of equipped. Comfortable with. Yeah, yeah. Because they're used to normal people that have normal jobs that when they go out, take out a loan, they can do it again. They can turn into W2.

There's collateral. Yeah. Right. Exactly. So it's a very different sort of environment. And really a perfect example of why regional banks can add real value, where they sort of specialize in this sort of environment. And then, you know, they are very ammished in lots of stuff.

I mean, there's some stuff that's coming out about what sort of the way, the way, you know, how general partners and VC firms or LPs were intertwined with them and how that led them to push startups into this direction. Like, there's probably going to be lots of dirt that comes out over the next little bit as the recrimination sort of flow. But in principle, at a high level, you can understand why an entity like this would exist because you do have a very special use case where the risk involved is very different than the risk for most banks and having a specialty in addressing that risk in dealing with it

sort of makes sense for a bank like that, like a bank like that to exist. So I, and I think one of the unfortunate outcomes of this, so we can get to this a little bit, is the way bank failures have been handled over the last decade or maybe even longer than that is by and large the FDIC comes in. They love to come in on a Friday because they have the weekend to sort of solve it. And they facilitate the sell of a bank to another bank. And I think probably the ideal outcome here would have been to facilitate the sell of SVB to one of the systemically important banks, right? Like we'll use J.P. Morgan as a stand-in. The problem there is SVB was sufficiently large enough that that would have triggered, no one banked them more than I think it's 10% of the nation's

deposits. And so that would have, and so it needed a special waiver to get past that. Again, this is sort of what you hear on the grapevine. That was not something the administration wanted to do, you know, making the big banks get bigger sort of thing. But the problem is that, well, there's a few things that happen. In the short term, SVB no longer exists. So a lot of the actual positive outcomes of SBB and that capability is gone. Right. So the money will be there. But like the FDIC is basically set up like another bank that basically has all the deposits. You're going to be able to get all your money, but all the banking parts gone, right? Right.

And new deals are untenable. I mean, so in terms of the banking that they did, would they essentially look to venture funding and treat that as like a stand in for credit for some of these startups that had no credit themselves? You know, maybe we can get into, this gets into like how and why they failed. I mean, there was basically two big issues. Number one was you had this huge expansion in money, particularly during the pandemic. And a huge chunk of that went into tech. And the way that went into tech was via absurd raises and valuations for all these companies who then had all this money and they put it in Silicon Valley Bank.

So they had a massive influx of deposits that was sort of definitionally downstream from there being zero. rates and easy money. And so they had a risk on the deposit side that when and if rates went up, the number of deposits would plummet because no one would be able to raise new money. So they had that interest rate risk on the deposit side. On the asset side, one of the challenges that also made Silicon Valley Bank unique is they do generate loans. Like they do loans for like a lot of like founders, whether mortgages through through through them for example. I saw there were a lot of mortgages. Yeah, there is venture debt, which is, which, which, which is a category. But the amount of loans they do don't even come close to the amount of deposits that they were getting, particularly over

the last few years. So they have a problem where the idea of a bank is you should make more money on the, with deposits you have on your books. Right. And you have to pay, because you have to pay out an interest rate to the depositors because to for, for giving you a loan. Remember, this is all loans. And so they were. were left with this massive amount of money, not nearly a large enough loan business to sort of use that money productively. And so they, Silicon Valley Bank for many years, would put the money into one year sort of bond.

And there's a different sort of bonds. There would be treasuries, could be treasuries, could be agency back to mortgage securities. Like these are, these are not the mortgage base securities, needs to say, have a very bad name after 2008. The mortgage back securities there about are. are very high quality. They're backed by the federal government.

Like they are, they are very low risk assets, even though they're called mortgage-based security. So they were buying very low-risk assets, but if you buy it for a year, the amount of your earning on that is very, very low. So they switched a couple years ago to buying long-term ones,

which paid higher rates. The problem is those higher rates were higher rates relative to like one-year treasuries, right? We'll use treasuries as a stand-in for the securities generally. And so they shifted to buying long-term treasury, The problem is they buy those long-term treasuries, that better rate is like 1.4% versus 0.4%. Well, 1.4% on treasuries, when today treasuries pay like 5% is not great.

And it's not great because, say, you want to sell that treasury in the market. So I'm going to, Andrew, here's a treasury that pays 1.4%. And you're like, I could just go to the U.S. government and buy treasuries that pay 5%. Why would I want to buy your treasury? And so they're like, okay, I have this $100,000. I'll sell it to you for $60, right? Right. And you have to-

Price craters. You have to compensate the purchaser of that treasury for the amount of interest gain they're foregoing by just buying new ones, right? And so they have this huge amount of assets on their books that were, on a market price, were very, very low. And now, again, we get very deep in the rattle here. No, no, no, no. I appreciate this because it's tracking with everything I read. The deposits between the end of

2019 and the first quarter of 2022, the bank's deposit balances more than tripled to $198 billion. And now deposits were up throughout the banking sector during the pandemic, but they were up 37%, not tripling the deposit balances throughout the sector. But SVP, SVB, not SVP, shout out to Scott Van Pelt. SVB was doing very, very well. And ultimately, they were invested in these long-term plays that then they had to sell once depositors began pulling out their money. And if you sell them. So this is one more distinction that sort of gets into the weeds. So when the, this is some amount of years ago, when the government basically increased the capital requirements.

And they were increased much, much more for the systemically important banks, which SVB lobbied hard. for the limit to be pushed to $250 billion. They could stay underneath it. But there were still requirements. And the government basically realized like, okay, we're going to require them to hold more money. If they buy even super safe investments like treasuries, there is risk because the value sort of fluctuates with interest rates. And so what the government basically said is you can classify these purchases in two ways.

Number one is where you hold it to sell. That's not the exact right term. but the other one is you hold to maturity. And hold to maturity basically says, okay, I have this $100 treasury. I am going to hold that treasury for 10 years until it finishes selling. I'm going to collect my coupons along the way, my interest payments along the way. And what the government said is, okay, because you are promising to hold that until maturity, you can record it on your books as being worth $100.

Even if in the meantime, the value on a market basis goes way down. And this is important because a bank has to have more assets than liabilities. Those depository liabilities have to have more assets. And if they had to mark all these treasuries to market, they would be insolvent. And so, but it's good money. It's not going anywhere. This is, this wasn't a case of Silicon Valley Bank not having money. The problem was the money was, uh, on a mark to market basis was not, they weren't

earning any money on it. And so the actual value was lower. So the issue. the issue they ran into is while they had assets, you cannot touch those assets. You have to actually hold it to maturity. If you sell some portion of those assets, your entire book must be immediately marked to market.

And if your entire book is marked to market, you are now insolvent. And so this has been a known thing for a while. I think I first read about Silicon Valley Bank being in the situation four or five months ago. I'm going to have to dig up exactly where I saw it, where and basically the takeaway was, because, yeah, they're technically insolvent, but by an accounting basis, they're not because of this rule.

And it will be fine because the money is still good. As long as you trust the U.S. government to pay back the treasuries, the money is still good as long as they don't have a bank run. And so basically, as long as they never get in a situation where they have to potentially sort of sell this sort of stuff. That brings us to last week. And as far as the potential solutions here in the past, you mentioned regional banks. banks being bought. And like I was a Wachovia member. And then eventually they fell apart and were bought by Wells Fargo. So I'm curious in SVB's case, from what I understand, the hold the maturity aspects of their securities, that presented a problem for a potential buyer as well, right? Because

when you sell all the assets, they are marked down and then somebody else has to have those losses on their books. That's exactly right. Right. Even if you were acquired Silicon Valley Bank for $0. All of those assets are immediately marked to market. So you are in the hole by $15 billion or whatever sort of the loss, the loss was. So that made it very hard to sort of sell them because it just like, I mean, this was a conventional solution here wasn't really available because it's basically like asking other banks to fall on a grenade.

Right. I mean, again, there is franchise value to Silicon Valley Bank. there would be value in owning this asset that has this relationship with Silicon Valley in general. So you could see like basically the price you would pay for it is not any dollars. It's assuming the value of these maturity. So this does get sort of long term into this solution here. I do want to talk about the bank run because I think that part is actually really interesting. But basically the solution here that was just announced a couple hours ago is because there's other banks.

No bank was in bad as shape at Silicon Valley Bank, in part because they had the this extreme situation where they had all these deposits. So they had a massive book of these of these bonds. And number two, that shift to buying long-term securities in the pursuit of a couple of basis points of interest gain was insane. And there's going to be lawsuits. They had no risk officer while they're pursuing this unbelievably risky, risky strategy. Like there was significant mismanagement by Silicon Valley Bank.

They deserve to go out of business. Management deserves to lose their jobs. They deserve to be grilled before Congress is going to happen over the next few months. They screwed up. No question about it. Let's be super duper clear. The problem, though, is there are lots of other banks that have this problem. They have underwater treasuries and agency-backed mortgage securities that are good for the money

in the long run, but on the market are worth significantly less because of the opportunity cost issue where anyone they would sell to could just buy fresh, like buy mortgages that were originated today because those mortgage has very high. rates, right, by treasuries that originated today. So to sell them, they would have to have much lower things. So basically what the Fed is doing is backstopping that. So they can basically lend them money based on these assets, which are good assets. That's worth reinforcing.

This is in 2008 where you had junk assets in there. Like they're good, like we're talking like U.S. Treasuries. They're good assets. And this is where this is still a little fuzzy. So again, if this is slightly wrong, bear with me because of the timing here. they talk about no cost of taxpayers. So there is some aspect where there...

Doesn't seem possible. Well, okay, so there's a couple things. Remember, what is the function of the shortfall of all these treasuries and bonds? It's ultimately a function of opportunity cost in that if you bought these, you're not buying treasuries that pay much higher interest rates. And so it follows that if the federal government is going to lend against these at par value, par values like the original values. You have a hundred-dollar treasury, we'll give you $100 a loan.

So, yeah, you're not marking it to today's prices. Right. And the, and the U.S. government has infinite sort of capacity to hold these until maturity. So there is no loss as in your $100 goes down to $50. The loss is the foregone opportunity cost. That $100 could have been spent much better somewhere else where you actually get a much better return. So broadly speaking, they're like, there are losses here, but you can sort of hand-wave it because the losses aren't explicit money out-the-door losses.

It's money not made losses. So that's number one. And then number two, the other sort of implication here is there the FDIC does have an insurance fund that is used to backstop that $250,000, but can also, it's probably sufficient to backstop here. Again, Silicon Valley Bank had assets. That $192 billion assets is not gone. It still sort of exists. So there is money to backstop it there. There is money to backstop elsewhere, but this takes this full circle.

The way that FDIC is paid for, that $250,000 insurance is the banks actually pay an insurance premium to the FDIC. And the problem is that insurance premium has been collected and priced on the assumption that the payout is $250,000 per deposit. And so what needs to happen, I'm sure will happen, is a dramatic increase in the insurance premiums that are paid by banks. And along with much more stricter, like regional banks are going to get the hardcore rules that are applied to the big banks applied to them.

And so what's, this is sort of the other long term risk here is being a bank is going to be really unprofitable or very little growth opportunities for a long time to come and maybe forever. And maybe that's a good thing. Like that is probably the appropriate outcome of basically deciding that deposits ought to always be secured. If deposits ought to always be secured, you're taking all away all downside risk, which means you ought to take away all upside risk. It's actually essential because otherwise, if you can go to a bank and say, hmm, they have a savings account that pays 0.5%, and they have this fancy account that pays 7%. I'll go to 7%. And it's fine because my deposits guaranteed.

That's a very, very bad outcome, and those accounts need to no longer exist or need to have huge premiums attached to them to sort of pay for this. And again, this is all stuff that should happen, but there will be an economic impact, which is credit is important from banks. That is what drives economic growth. And this is going to lead to a big restriction over the next couple of years in sort of money that's just available from banks in general. So this will have probably a recessionary impact at some point because of the tightening of money that's available in general.

Again, the right thing to happen under these circumstances, but we're two hours in. There's going to be very real long term effects. Yeah. Well, and it's interesting because just if you think about the incentives here, if you're backstopping everything and not adding regulations, all these. banks are going to be incentivized to take even crazier risks going forward. And so it makes sense that there would be some sort of tradeoff in exchange for insuring deposits nationwide. It has to happen. Absolutely. But as with everything, there will be consequences. There will be consequences. Absolutely. Right. So as far as SVB, what were some of the systemic factors that led to it?

and what were some of the SVB mistakes? I'm fascinated by their mishandling of the press release last week as they were trying to raise money to. It sounded like they still had money to cover all of their books, but they wanted to raise an extra $2.25 billion and then didn't explain it properly to the public. And that sort of sparked the panic. But system versus SVB leader. How do we apportion blame here? Oh, SBV leadership absolutely shit the bet.

I mean, just to be super duper clear. So they have this issue. So we talk about hold of maturity, right? They have a huge part of their assets are in there that are super far dated. And that was insane. They basically made a bet that interest rates would never rise, which was a very stupid bet. There's a lot of people trying to blame the Fed for this, you know, saying they were signaling no interest rate rises in 2021. And I think there is some aspect.

of truth to that. The Fed dragging its feet on this huge influx of money, all these supply chain issues, the inflation that was clearly happening. You're sure there are insistence. It's transitory. It's transitory. It's transitory. Like, there is an aspect where the Fed did lose inflation fighting capability. So there is some aspect to blame there. At the end of the day, though, I think this blaming of the Fed goes too far. Your job as a banker is in part to understand interest rate risk. And to realize that. And hedge appropriately. Well, it's not just that they're on both sides, on the deposit side and on the credit

side and the debit side, both were exposed to interest rate risk. So they had correlated risk on both sides of the ledger. If interest rates rose, their deposits would go down and their long-term portfolio would be screwed. So they basically like doubled down on this idea, like effectively doubled down on this idea that interest rates would never rise. Once interest rates rise, they were inevitably irretrievably screwed

and Silicon Valley Bank more than most or more than anyone because they had such a misbalance in general. They had so much exposure on both sides and they had bought so many of these securities. So it was a just tour to force of horrible management by Silicon Valley Bank bank managers. First and foremost. Good answer.

I was curious about where you stood on the Jerome Powell bashing and the rate hikes and everything else because reading about it all weekend, there are a lot of people that singled out, pal. And it does seem plausible that like the strategy the past two years was so sort of illogical in 2021. The fact absolutely waited way too long to raise rates and then try to make up for it for it,

I raise them very rapidly. And the reality is just, you know, just broadly speaking, there is a broader systemic here, which when rates go up like that, stuff always breaks. It's happened forever. Like this happened to long-term capital management.

This is basically the same story. I'm surprised it's taken this long for like cataclysmic consequences, given how quickly it's risen, how much the rates have risen and how quickly it's all happened. Right. I mean, it's pretty crazy. Well, there's also an aspect that happened pretty quickly because it really has been like six to nine months, right?

Where stuff's already blowing up. And, you know, as part of this announcement, they shut down another bank in, in signature bank in New York, which I think Barney Frank's on the board of directors, by the way, which is kind of funny. So, and then there was a crypto bank, silver light or something, wherever that went down. Silver gate. Silver gate, yeah. So, like, there, it is sort of blowing up sort of, sort of broadly.

I do think it was really important they shut down signature bank because that was, they were the second most exposed. I actually got a tip about that over the weekend. Like, so everyone was going through all the regional banks books, right? It's showing like all these issues. And they had a massive similar situation where all these hold to market mature, you know, or hold to matured that were drastically underwater and basically, if there was a run, they were totally screwed. It was important to knock another bank out, I think, to send the signal that, like, you don't get a free ride off this saving.

Like, if you're in really bad shape because you did this stupid stuff, you're out. And so I think that was actually an important aspect of this move. But there is an issue where, you know, and the other thing about Silicon Valley Bank, a little bit of understanding is the reality of the massive amount of money that flowed into the system during the pandemic was going to go somewhere. And it happened to almost, you know, a ton of it went into tech and crypto and this sort of stuff. But like the reality is the bubble was created by the Fed.

And that bubble was going to go somewhere. And if you go back and play this out, someone was going to blow up. It was inevitable. It happened to be in tech in Silicon Valley Bank. that was sort of the tip of the spear here there. But this is why there is broad blame that can be placed where there should have never been this much money in the system. Because we had not just fiscal easing, but we also had, or monetary easing by the Fed, we

also had so much money by Congress. So you had a double sort of stimulus. When it turned out, we actually probably didn't really need it that much, you know, given that people couldn't spend money anywhere. So you had all this sort of stuff, all the people buying goods, which backed up shipping, which, you know, we're still unwinding. what happened during COVID. Like this is honestly kind of all downstream from COVID lockdowns.

Like this is right. Like you can actually trace it from A to Z. All that can be true. And you can also say that Silicon Valley Bank was horribly managed and is at fault. And and honestly, this goes back to the whole VC thing. People like, you can understand why all these valuations went crazy in 2021, 2022, and all this money sort of was putting these startups at these insane rates and it's going to lead to just a massive amount of startup death because they raised way too much money.

They're going to run out of money, try to raise again. Like your evaluation is way too high. Your business doesn't have traction. You're out. Like there's going to be a massive ongoing death event in startups. And you can look back and say, well, there's like a prisoner's dilemma. Like my LP's asking, my limited partner is asking, why is the next door venture capital just, you know, distributing all this money?

you're trying to hold it because you say prices are too high, that's just the market. That's the way, you know, you get in, blah, blah, blah. Despite the fact you can point to that and say the environment was crazy, that should not absolve individual VCs from making stupid investment decisions, right? Like, it was dumb. And, you know, and frankly, it shouldn't absolve startup founders from taking way more money than they should. It can feel unfair because, look, that's just the environment we're operating in, but it

doesn't absolve, like there's a haste to sort of absolve personal responsibility. You can both acknowledge the environment that something happens and also recognize there is responsibility for a lot of bad choices that led to the situations that we're in. And the, and the, and startup founders made bad choices to raise all that money. VCs made bad choices to invest all that money. Silicon Valley Bank made bad choices to try to figure out what to do with all money that is in their bank and buy these, these long-orn bonds. And you could point to the Fentz, look, we were in this bad environment. And that, that is true. I think, like, that overall critique is an accurate critique. But it's wrong, I think, to go all the way and say that's like

the sole responsibility. The end of the day, take responsibility for your own individual choices. And could the leadership at SVB, could they have hedged more than they did in the past year to sort of mitigate some of this, like, downside risk or cataclysmic risk? I mean, maybe to an extent. There's some weirdness around what hedging you can do versus hold a maturity sort of bonds. There's also the point that- Where they sunk the second they put all that money in hold of maturity bonds?

I mean, there's an aspect of like hedging does cost money. And it's not like, right? Now you say, oh, I want a hedge, raise my hand, right? Like the Twitter should invent something like threads because I feel there were an insufficient number of threads this weekend. But I feel like there will probably be some breakdowns of what they could or could have done or should have done. But I think you're right.

Once they bought all these long trips, I think they were screwed. the appropriate response probably should have been only hold short-term securities, go to your investors and say, look, we're not going to make any money for the next little bit because we are in a systemically. It's an uncertain environment. Yeah. Like, yeah, once they bought all those, they shifted their strategy to start buying launch of securities, they were inevitably screwed.

Like it was going, like that, so basically Silicon Valley Bank basically blew up a couple of years ago when they made that shift from buying short-term to long-term securities. This was sort of going to happen. And so, well, it was going, wait, it wasn't necessarily going to happen. This gets to the most, what I think is one of the most interesting points about this. It was going to happen if there was a bank run, right? Let's talk bank run. Yes.

I mean, that is the most interesting sort of sociological aspect of what's happened over the last four or five days, and particularly in the VC community and everything else. So tell me why you're interested in the bank run. So again, these issues with Silicon Valley Bank were known, okay? So the, but what triggered this, they were in retrospect, I thought they were fairly well known. It turns out they were not fairly well known. I have mixed emotions about that on one hand. It's like, damn, I could have written about this.

On the other hand, I would not want responsibility for starting a bank run. So maybe I'm glad I did not write about it. Your hands are clean out there in Taiwan, man. Whatever I'm giving up in credibility for having made this call, I've gained in not having, like, you know, total. screwed a bunch of people. So, yeah, you would... You could have been the Michael Burry of the Silicon Valley Bank situation. No, but honestly, I just, I, it never even occurred to me to write about it because to me, the logic of why they were in a whole made so much sense that I'm like, surely this

is clear to everyone. And it is, this is not so, sorry, I'm not, this sounds like patting on the back. I just know, I happen to have friends that are in this area. So I, you know, just conversation that came up. I'm not some sort of bank genius here by any means. If I would have, I would have appreciated that this maybe could have happened and sort of written about it. But so you have this issue where they are technically insolvent. And you go back and look at their stock price. Their stock price has been plummeting for months. Like it's down 50.

Even before this happened, it was down like 50% over the last nine months. So their investors were aware of this risk and it had been sort of going down in value because this was happening. So again, this is not exclusive to me. Like Wall Street sort of was aware, aware that this was an issue. I think there's a couple things. Number one, VCs and founders don't think about banking at all, right? Like, there's an aspect where, wow, you're a moron. You had all this money sitting in a low interest deposit account. You should have at least been buying U.S. Treasuries. They're busy building new companies, right? Like, technically all these founders are at fault, like not the employees. I think asking the employees would for a founder.

If you have $50 million in the bank, you should probably figure out what to do with that $50 million. But I'm also sympathetic, like, there are small teams. They're trying to build a product, find product market, it fit. Like, it's just not something that anyone in the ecosystem was working about. I do think this is a, should be a bit of a come down for people in tech who talk about finance being worthless, make fun of, you know, me personally, make fun of the MBAs and pointless, da, da, d'da, turns out the actual management of your money and understanding interest rate risk is actually pretty important to your business. That should be, that should be a takeaway. But so, you have this general problem. They're getting killed, right? And they have a hold of maturity,

which they can't touch. They also have a large asset that's called Hold to Sell. And the Hold to Sell stuff, they have to price that market to market. And so their earnings are getting destroyed because they have to mark to market this. So they have two buckets of, we'll call them all treasuries. The hold of maturity, they don't have to mark down. So that on their income state, they can't sell. On their income statement, though, it makes them look healthy.

They have the hold to sell, which they do have to mark down. So it's obliterating their earnings, right? So what they're saying is, look, we should sell this portfolio at a loss and then take that money and buy new treasuries and new agency-backed mortgage securities that will pay a much higher return. And so basically like just eat the loss, reset things. Now this loss was going to be like $2 billion. So to fill in that loss, they needed to raise new equity.

Like the equity is what actually, you know, undergrids the bank. Like, what's, you know, making sure you have more assets and liabilities. So they go out and they want to initiate this bank raise. And what I understand was going to trigger this is that Moody's was set to downgrade their debt from like double A or AAA. Something pretty high to like triple B or double B like approaching junk status. Because again, they had this huge problem, right? Moody's was on the ball. They actually were this sort of or maybe they weren't maybe they should have done a few months ago.

But so this was going to happen on Monday where Moody's is going to downgrade their debt. So to basically shore up their position, they were going to sell all these bad assets, buy new ones, and make up that loss by issuing new equity. And they were going to, they needed to raise that $2.2 billion in equity. So basically they're giving away the value of the bank to get money back in to make up their losses, which is, you know, the way it should happen. General Atlantic, I believe, was on call for $500 million. But they never actually closed the round. And so they come out Thursday morning and they're like, we're selling all these crap securities and we're raising money. but they hadn't yet raised money.

Like it wasn't actually finished. And so when they come out and say we're selling these bad securities, everyone's like, that's bad. Oh, shit. Let's look at their books. Holy crap, this bank is screwed. And then everyone's like, get your money out now because, again, this is the other factor. Because they mostly serve startups, the vast majority of their money was uninsured. It was over the $250,000 account.

Most normal banks that have lots of retail customers, a huge portion of their deposits are people like you and me who don't have over $250,000 in their accounts. And so, but that's Silicon Valley Bank. It's almost all businesses that are over that. And so that basically starts a bank run where get your money out now. And, you know, VCs are reaching out to our phone companies. Get your money out now. XYZ.

And that was the one thing that could not happen to Silicon Valley Bank. And I think Matt Levine made this point very, very well in his column over the weekend about this. We'll put a link in the show notes, which is so they had two risks. They had the, they had their deposit. was sensitive to interest rates, their deposit base. Their assets were sensitive to interest rates. And their customer base was sensitive to contagion. And like the VC's just sort of moving as a herd.

Like, where's your contrarian thinkers now, right? And there's a bit here where, again, there is a, on an individual basis, all these VCs advising their startups and all these individual startup founders did the right thing by getting their money out. collectively they obliterated a Silicon Valley institution that actually provided useful and meaningful services to the Valley. So there was this prisoner's dilemma that basically, which is a bank run is a prisoner's dilemma, that basically ensued. And I think what's so interesting about this is a lot of it happened on Twitter. Like this was the first social media bank run. And it was combined with the fact that to get your money out, unlike, you know, it's a wonderful life or whatever. you have to go line up at the teller and get your money,

which takes time. You just tap a couple buttons on your phone or in your web browser and boom, the money's out. So this is an internet story in many respects in two accounts. Number one, the speed with which something can happen. And number two, the speed with which contagion can spread via social media. Yes. Well, that's what fascinates me.

I'll read you a tweet. This is David Ulovich, a general partner at Andreessen Horowitz. He says, we saw the first. first memetic social media fueled bank run in history Thursday and Friday. As my partners and I spend the weekend working to help our portfolio companies, you can be sure our foreign adversaries are ramping up social media disinfo campaigns to fuel further bank runs. So I don't know about social media disinfo campaigns to fuel further bank runs, but the memetic qualities of it are really interesting because on some level, it seems

like there's always been a memetic quality to bank runs. But on the other hand, you look at where we are now and, you know, there was GameStop a few years ago, FTX last fall, three banks have failed in the last week or so here. And it just feels like social media, the consensus building aspects of social media have created these conditions where destabilizing events happen faster and more frequently than ever before. And I wonder what the government can do, if anything, to like sort of guard against these destabilizing events because I don't think it would be,

I don't think this is going to be the last time we deal with these dynamics. Yeah, to me, this is the most interesting part of this, which is when I was writing about aggregation theory and stuff like that, there's people that be like, oh, there's nothing actually different. People have been doing this for hundreds of years. It's how business works, blah, blah, blah, blah, blah. And it's not how business works because speed is a variable that matters. And going to zero in terms of distribution costs is a variable that matters.

And you want to talk about something like my go-to example always is newspapers, right? At the end of the day, the actual, like when you have a physical constraint, which is actually having to print the things and deliver them to people's doorstop, that results in a fundamentally different business model when there are not. no physical constraints when you can just distribute stuff for free over the internet. And this goes to our streaming stuff, like all the sort of differences that happened there. It's different when to get entertainment in your house, you have to actually lay a cable or get a satellite dish versus you could just come over the internet because you have. And this completely, like this ability, this speed aspect, it's a step change difference. You know, I'm sure I've told the story on this podcast before.

I've told on other podcasts about being in business school in 2009. And the first day, you know, of the strategy class, there's no internet companies. And I go to the teacher afterwards. I'm like, why are there no internet companies in here? And she's like, well, the point is not to focus on specific companies. It's to understand broad principles. You can apply them to anything. And that's true.

But the problem is that when the broad principle includes things like distribution and the distribution is zero, you put zero into like a complex math equation. the equation just explodes. Like that's what zeros do. And by the way, zero extends to just withdrawing money from the bank. It's all mobile now and frictionless. It's not the 1930s where hundreds of people are lined up on the street trying to get their money out. All of this can happen more or less instantaneous.

That's right. Part of what's fascinating. Which is what happens when there's zero in the equation. It's for all in, yes, technically you could work through the math and see what happens. You put a zero in there. from an actual practical basis, it's a completely and utterly different world, right? And so basically, Schrecheri was, okay, you don't want to talk about the impact of the internet on business structure and what that means. I'll just start a freaking site that does that, right?

Which is basically what Shetri is, right? Strickery is basically saying there's this entire universe of different ways to think about business that happens when distribution is zero. What does that mean? And that's basically what I've been writing about for a decade. And this is the application of that exact principle to bank. which is what happens when you can withdraw $42 billion in 24 hours. In a day. Yeah, which just physically was not even possible previously.

And then it's layered on how does that happen? Because you have the social media aspect, the memetic aspect, the herd mentality aspect, the fact that Twitter, which we've talked about multiple times, the reason why I think Twitter is a negative force for the world is the consensus building mechanism, the speed and the extreme. remedy that it drives to, right? Who's getting traction over the weekend? These morons in all caps, like writing crap on Twitter, and everyone like, and the, because of the, the prisoner's dilemma that's in here, it's a self-fulfilling prophecy. I was worried about it. I was reading it.

And yes, that's the way I was reading it. I was like, look, if you say that the entire system is going to collapse loud enough over and over again, coast to coast, then it might actually collapse. So it could be a self-fulfilling prophecy. That's what I'm a single of bank in general. And these people need to chill the fuck out, what's my thought? Because it's like, look, I think it's reasonable to bail out the depositors and support everybody who is invested in SVB. No, not invested.

Everyone who's invested should in this properly. No, I know you misspoke and you know this, but it's worth making this point because this word bailout has been thrown around all weekend. What was being talked about this weekend was absolutely no one from the most ridiculous VCs on Twitter, down was calling for the investors or management of SVP to be bailed out. And I just think now, depositors were bailed out. There is an aspect where ultimately consumers and taskpayers are going to pay the price, whether that be through these increased insurance limits that that reduced the amount of credit available, increased capital requirements, or by the U.S.

government eating these bonds that do pay out, but foregone opportunity costs at higher things. Like there is, it's disingenuous to say this isn't a bell out. It is. But it's a very, it's depositors. It's not investors. And that is a good thing and an important distinction to know it. Yes, because there should be consequences for the decisions of the leadership.

And it was an important distinction to highlight here because people on social media were conflating the two ideas. There was huge arguments about this. Yeah. It's a bell. No, it's not a bell out. No, it was, it is a bell out, but it's not a bailout of the way. I would not have used the word bailout because I think that you are bailing out depositors, which again, according to the technical theory of banking, are making unsecured loans to a bank.

So you are bailing out depositors. But the reality of the way our economy operates is everyone operates as if those are safe deposits. And that's in net a good thing. But this is where this all ties together. The response to that has, as you noted, has to be on the other. side of increased regulation. I'm not someone that generally calls for increased regulation. Obviously, that's the appropriate response here.

Of bank, banks should basically be unprofitable. This is, or barely profitable. I mean, you're making them quasi-public institutions. That's right. You're guaranteeing every depositor. Right. And so, so, but there's a few knock on effects on this.

And to your question of what's the proper response to the internet, unfortunately, this is probably it. If you're generally, if the world is operating in, environment of zero distribution costs of memetic contagion in everything, you have to strengthen and make more rigid the institutions that are dependent on so they can withstand this risk, right? Maybe you built a house on the coast and you would have occasional storms that were bad. Well, now if that house in the coast, as in during hurricane after hurricane, you have to make that house much more rigid or not build a house there at all, right?

And that's just an unfortunate. What we're seeing here is the inevitable reaction to the total liquidity of information that's happening because the Internet has to be a massive rigidity in response of the institutions that exist. And that rigidity is going to be painful. You're going to have things like harder credit from banks. Like banks are going to have to lock down lower yields. Like probably there is, I think we'll probably look back in five years. And there will be some line between this episode, bank tightening, harder credit, higher fees, and a recession, right? Like, this is, this is all bad stuff that's happening.

But it probably sort of has to happen because you can't have these fundamental shifts in the structure of how things work without, it's like physics, without a reaction somewhere else to sort of compensate for that. And the sort of the theme that I'm thinking about for writing about today is this was the death of Silicon Valley. not just Silicon Valley Bank, but Silicon Valley, where you had this idea of this super high trust environment where people do stuff, they're always saying about the long term, oh, I'm going to support my startup X, Y, Z, even though there was, you know, there's all these cliches that go around on VC Twitter. You know, you make your reputation not by the companies that win by the ones that lose, blah, blah, blah. That has been mostly talk for a long time. It is well and truly dead. When push came to shove, everyone was out for their own hide. That is what. killed Silicon Valley Bank, and it was the right thing to do. Like, that's what makes it tricky. Yeah, it wasn't irrational either. Yeah, but this whole, you get real economic progress in a high trust environment because the reality is like abiding by a bunch of rules and regulations is hard.

Regulators can't predict what's appropriate. And so you end up with all this red tape, all these restrictions that make it like it's like central planning by the back door, right? And that limits what can be done. And so to the extent you can have an economy or a sector that is very high trust where you're getting away with West regulation, with less restrictions, because everyone knows we're all in this together and we're going around, that is really good for innovation. And the reality is that that's gone. It's gone forever. And this weekend was the manifestation of that being gone.

And it's going to have a long-term impact on innovation. It just inevitably does. So in terms of its long-term impact, is that in large part because the funding is going to be constrained, at least in the near term? I think it's just a broad. This is, I'm still to figure out how to sort of articulate this. But just. Or the mentality is completely different. There was a real difference about being in business in Silicon Valley, you know, 10, 20, 30 years ago.

Like, yes, it was ruthless. Yes, everyone's trying to kill each other. but there was a real high trust aspect to business where, you know, you would do the right thing in lots of different circumstances because it was the right thing to do and you knew it would circle back around, the long term payoff. Actually, I think a trigger of this, I might have to cite this in my article. I actually think one of my favorite articles I've ever written was about Uber and the, the benchmark, where the whole shitstorm with Travis Kalanek went down. and benchmark basically moved in and shoved him out. And it was a shocking event because it was sort of accepted that that's VCs don't do that, right? That used to be the case a long time ago.

But that was like, you know, we found her friendly. We're do X, Y, Z. And the problem for Uber was they had gotten so large and their valuation had gotten so high that the value of benchmark stake in Uber was basically worth more than anything else benchmarked did. And so even if Bench, Benchmark and Bill Gurley were destroying the reputation with founders and we're making, and frankly, benchmark hasn't done much since then, to be honest. Like, like, because they're viewed as the people that will knife you in the back when you're in trouble. It was still worth it to secure their part of Uber.

And it worked. Uber got out the door for an IPO. They got their money back. You know, you can argue that was bad for Uber in the long run. a lot of people in the Valley think that Uber would be much better off if Travis Clatic was still in charge. Again, that's a completely separate discussion that I'm not making a value judgment on,

but there are a lot of people that think that. But why did they do that? Because Silicon Valley was an iterated game. You get into game theory, right? It was an iterated game. How do you solve the prisoner dilemma? If the prisoner dilemma is played again and again and again, like multiple times,

what you do is you always respond to your opponent by doing what they did. And there's a learning that happens where if we cooperate, if you cooperate, I will cooperate. And in an iterated game, you will actually make more in the long run by being cooperative, even if it means short-term losses or foregoing something in the short run. What happened with Uber is they got so large as a private company that it stopped being an iterated game and it became a one-shot game.

And in a one-shot game, you cover your hide. You screw the other one because that is the optimal strategy and benchmark screwed Uber. And so in many respects, that was a foreshadowed. of what happened this weekend is the money's gotten so large, the risk factors have grown so high, the ecosystem in general is just so much, like it's not this little sector in Silicon Valley. It is the largest portion of the U.S. economy,

or second largest compared to finance, whatever might be, I guess healthcare's up there, but whatever. It's very big that we are shifting to a world of one-shot games, and the iteration game is gone, and that is bad in the long run. Like, that is going to, that's less, that's going to produce less,

value in the long run. But it's also once you cross that chasm, you're kind of there. And I think we're there. Well, and to that end, when we talk about the ecosystem, I do have to mention this tweet from Sam Altman. He said, I believe that if Silicon Valley Bank were instead called Farmers Bank of Santa Clara, parentheses, they bank a lot of wine growers, true of SBB, we would have had this easily resolved. Unfortunately, it became somewhat political. And I don't mean to single Sam out here, but I saw like 10. versions of that tweet, and it just drives me crazy because, like, of course it would be different if it were called Farmers Bank of Santa Clara, because in that scenario, the bank in question

wouldn't be immediately associated with one of the two or three most polarizing industries in American life. Like, again, Wall Street, healthcare, tech, I mean, a lot of people have a lot of different takes. And if there was a Wall Street bank that went under and required federal intervention to protect depositors, like, of course that would be politically sensitive. And so I just, I couldn't help but roll my eyes. In addition to the apocalyptic predictions all weekend, there was also like this idea that everyone hated tech and that's the only reason this is sensitive. And I think that's true. But like, that's a byproduct of how successful tech has been. and at least people on Wall Street have the decency to understand that in exchange for being

one of the most lucrative industries in America, people are going to hate them sometimes. And that's what it is. And I just, the persecution complex sort of rubbed me the wrong way. I just had to get that off my chest. It's a great take. I think that's exactly right. This aspect of this overall loss of trust. And it's not just the sort of intra-silican Valley aspect.

It's the inter-silken Valley aspect in their sort of interactions with the broader society and public. And I do think that was another real wake-up call for people in tech this weekend. I mean, I think we've talked a bit about, you know, the questioning. I think it's fair to say people have about tech and its overall value. And, you know, we can debate about that to what extent is it complaining about Wi-Fi on a plane versus, like, there are being real changes or differences. But I don't think there's any question. I mean, again, this is a tricky one because we've talked so much about it off-line.

I can't remember how we've talked about on the podcast, but I know we've talked about it a lot, right? And it does feel like, at least in some of the reactions on this weekend, that these, some of these people in tech were completely oblivious to the degree to which tech is hated and despised and hated and despised by both sides of the aisle. And I've definitely- And some of it's unfair. Some of it is definitely unfair and driven by agenda-driven media coverage and all sorts of stuff that isn't necessarily supported by the facts or whatever and is hyperbolic. But it reminded me, I was running today and it reminded me of your post on Spotify in the midst of the Joe Rogan crisis where you said, look, I'm not making a value judgment on whether this is good or bad, but the attitude surrounding speech have changed over the last several years. and that's also true of the attitudes toward tech over the last several years. Like it is just an incredibly successful industry that is going to be political going forward.

And people who complain about that are ultimately missing the point because it's just sort of a basic reality at this point. Yeah, there is. It does feel like there's a real sense of entitlement, not just in terms of like monetary things, but entitlement to status and respect. Yeah. Yeah, yeah. Like we are the innovation engine of America, respect us and praise us and also bail us out.

And to your point, that can be true and also immaterial, right? Like the fact of the matter is that tech by virtue of being innovative, it's having massive effects, has been having massive effects. It's fundamentally changing the way people live. And that's going to have pushback. Now, we can have a debate as to whether those changes are good or bad, or as is almost certainly the case, a mixed bag. But you can't act oblivious and shocked that that's generating real sort of pushback. And yeah, to your point, you can say, oh, the New York Times is so mean to tech. And I think they are.

I think their coverage has been very biased and subjective and trying to score points for a very long time. I pointed this out years ago. guess what that's what happened the like if you're a challenge to the power structures that exist because you're giving people like you and me a voice or whoever it might be and breaking the sort of hole that the gatekeepers or media had you're going to be the enemy and it's right it's weird it's sort of like an entitlement to no criticism which is is is uh mistaken and frankly was a pretty bad look. I mean, it's, it's, you, again, there was a rational strategy to getting your money out of the bank. There's a rational strategy to looking, running around like a chicken

with your head caught off on Twitter to make sure that, you know, your, your companies were bailed out and all this sort of stuff. But boy, oh boy, did people look really freaking stupid this weekend. And they look stupid in a distasteful way, which was, I don't think anyone who, really understands the issues at play, begrudges bailing out depositors. When you understand it goes down to companies, it goes down to employees, you get that point. But man, to have the sort of mentality of not just we know everything, but also we ought to be above criticism because look at everything we're doing for you.

Like, I'm in tech. I want to defend tech, my natural response to. and I thought the response this weekend was pretty disgusting. And I can only imagine someone who's already skeptical of tech might have felt. Great. Well, I had the same reaction. I wasn't sure how you were going to feel about my reaction. So I'm glad that we're mostly on the same page.

And let's end on a positive note. I think you tend to drastically underrate the positive impacts of tech, but we can debate that on another show. That's another four-hour podcast one day. We'll have to do that one in person. For now, though, I want to end. with a note that was highlighted by Trung Fan, an early sharp tech listener who regularly cracks me up on Twitter. And he highlighted this New York Post article.

The lead, the NBA superstar known as the Greek freak has given new meaning to the term bank shot. Oh, man. Classic New York Post there's the best. And by the way, it's getting better because there's like this grand opening of sort of like what you're allowed to say and not say amongst the media. I think a Twitter phenomenon where there's this sort of hurting behavior. And so the New York Times or the New York Post, I should say, has this massive field to play with. It's been like, honestly, it's gotten more enjoyable over the last few years, I think,

because of that phenomenon. But continue. Yeah. Well, my mom is the ultimate MSNBC mom, but the New York Post continues to this day to be her guilty pleasure. She's always loved the post. Janice Adetakumpo, the two-time MVP who last year led the Milwaukee Bucks to their first NBA title since 1971, opened bank accounts with 50 different banks. Each one of them holding

$250,000, his boss, team owner, Mark Lazary told Bloomberg News. So, Ben, Janis knew the FDIC limits. Is it possible that he's the best basketball player in the world and the best risk management officer in the world? What do you think? I mean, it's a hilarious crossover. between my MBA, no-tech Ben persona and Van Thompson. It was my one contribution to the discourse this weekend was retweeting this tweet because it's pretty funny. Honestly, that's such a great look that that's the only comment you offered on Twitter for like 72 hours. Amazing work. I do think, though, there is actually a really interesting takeaway from this.

Janus, as well-documented, grew up poor, like drastically poor. like six people in a one-bedroom house poor, selling trinkets on the street of Athens poor, and live through real financial turmoil in Greece. I don't know if his family ever lost money in a bank issue. I wouldn't be surprised if that was the case. And one thing that does happen is when you grow up in that environment, you keep that mentality. Like, this is poor person mentality. I don't mean that disparagingly.

I mean that if you're scarred, you don't trust the banks. You don't trust the system because you've been screwed before. Even if on a rational basis, you're a multimillionaire and you ought to sort of have some sort of financial advisor and be doing this better, it's hard to sort of escape that mentality. And the problem is that this is horribly inefficient. However he's managing these 50 bank accounts, I hope he has a good password manager to sort of like figure out how that's all sort of done. And he's probably not getting the right yield on his money that he should because it's just sitting in sort of savings accounts. Like there's bad outcomes for him personally, even as you can understand why he's approaching it this way. And this is emblematic of the long-term risk we're embarking on.

We are moving to environment where we need more rigidity, more regulations, more lockdown of this sort of stuff. were effectively on economic level saying, oh, you thought trusting your bank was a good idea or you thought sort of like getting easy credit was a good thing, silly you. And this was why the FDIC needed to act. It would have been worse. If we would have had a situation where depositors took a haircut,

the net result, you know, I mentioned earlier, heard some rumors of the administration didn't want one of the big banks to buy Silicon Valley Bank. Everyone's going to move their money to the big, banks because we know we saw in 2008 those banks will be bailed out. And so there's an aspect of your nuts if you don't put your money in the bank. You know, you're going to see VCs start writing in their contracts. You will be funded on the condition you bank at J.P. Morgan or whatever it might be. That's probably going to happen regardless because part of this increase in regulation and rigidity

on regional banks is going to take away any competitive advantage they had relative to the big banks. So why put your money in a regional bank if you can just put it in J.P. Morgan? which you know that U.S. government's going to bail you out, right? All this is going to have deleterious effects on innovation, on the efficient use of money. That's the problem, like high trust environments give you more flexibility of movement to try new things and to figure stuff out. As that trust erodes, you're going to have increased inefficiency, increased concentration, more red tape. We're going to have an economy that is acting like Janus. And rationally so.

Janice went through the worst parts of wealth, i.e. not having any, and banking. And so he responded by acting what we would say was irrationally and inefficiently. But that's what happens. And I think this is an analogy for broadly speaking of why this is a sad moment, not for Silicon Valley Bank. Screw those guys. It's a sad moment for, I think, Silicon Valley broadly in that it was clear for a while. I go back to the benchmark Uber thing, but it's crystal clear. this weekend, every single person is in it for themselves.

They're like for you to have high trust in Silicon Valley as an operator or someone from the outside going forward is nuts because when push comes to shove, everyone's going to be covering their own rear end. And maybe it's an inevitable. Just like someone blowing up was inevitable with the Fed sort of decisions, it doesn't remove personal responsibility. There was an inevitability probably because the internet is so disruptive. And this zero distribution costs

per billion terms of information and memetic major social media probably made the ultimate destruction of trust inevitable, but it's still kind of a bummer to see it happen. I think that's well said, and I look forward to reading your piece on Monday. We'll put it in the show notes, and it reminds

me of the piece you wrote at the end of the beginning and signaling sort of a new era in Silicon Valley. I'm so glad you mentioned that, because I was thinking of the same sort of hook. Like this is sort of part two of the end of the beginning, where the end of the beginning was just about almost from a product perspective, like we're in a rational end spot as far as cloud services and mobile phones.

And that doesn't mean there won't be future innovation, but it's going to be in augmentation of this. And the folks that are in place are going to be heavily favored going forward. This is the equivalent, but in terms, like in that reality, if there is no potential disruptor of Apple, you know, sort of in the long run, you're, it's easy to have high trust in a world where the pie is expanding. Because everyone, there can be win-wins. Everyone can win. The implication of the end of the beginning

is that every cloud of gain comes at someone else's expense. And that breeds the conditions for low trust, for covering your own hide. Because screw those guys, I have to get mine. Well, we are coming back later this week. We're going to probably have plenty of follow-up on SVB, but we'll also be talking Google Pixel.

and the magic eraser. We got some good questions on Twitter. We got some follow up to the conversations on career. Yeah, don't overpromise under deliver. We don't know what's going to happen over the next few days. That's true. It could be wall-to-wall SVB again. And in that case, we'll roll it all over.

But for now, this has been fun. And Ben, I will talk to you Thursday. Talk to you later.