Tangle - The SVB bank failure, explained.

Episode Date: March 14, 2023

Over the weekend, U.S. regulators took over Silicon Valley Bank (SVB) after it collapsed on Friday morning. In a matter of 48 hours, SVB experienced a bank run and capital crisis, becoming the second largest bank in U.S. history to go under. Over the weekend, panic spread among investors and economists who feared the failure of SVB could set off a national financial crisis, but those concerns were mostly allayed when U.S. regulators announced emergency measures to protect depositors.You can read today's podcast here, today’s “Under the Radar” story here and today’s “Have a nice day” story here.Today’s clickables: Quick Hits (1:03), Today’s Story (2:57), Right’s Take (14:42) Left’s Take (9:15) , Isaac’s Take (19:43), Under the Radar (25:45), Numbers (26:41), Have A Nice Day (27:17)You can subscribe to Tangle by clicking here or drop something in our tip jar by clicking here.Our podcast is written by Isaac Saul and edited by Zosha Warpeha. Music for the podcast was produced by Diet 75.Our newsletter is edited by Bailey Saul, Sean Brady, Ari Weitzman, and produced in conjunction with Tangle’s social media manager Magdalena Bokowa, who also created our logo.--- Send in a voice message: https://podcasters.spotify.com/pod/show/tanglenews/message Hosted on Acast. See acast.com/privacy for more information.

Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight.

Interior Chinatown is streaming November 19th, only on Disney+. Chinatown is streaming November 19th, only on Disney+. From executive producer Isaac Saul, this is Tangle. Good morning, good afternoon, and good evening, and welcome to the Tangle Podcast, the place we get views from across the political spectrum, some independent thinking without all that hysterical nonsense you find everywhere else. I'm your host, Isaac Saul, and today we are going to be talking about the bank collapse, more specifically, the failure of Silicon Valley Bank. There's a lot here in this story,

both politically and economically, a lot of stuff going on. We're going to try and unpack it, explain to you what happened, how it happened, and then jump in with some opinions from both the left and the right. Before we do, though, as always, we'll start off with some quick hits. we'll start off with some quick hits. First up, the Consumer Price Index increased 6% in February compared to a year ago, down from 6.4% in January and about what economists expected. The inflation index rose about 0.4% on a monthly basis. Number two, the Biden administration approved an oil drilling project in Alaska while also issuing a rule restricting drilling on 16 million other acres of the National Petroleum Reserve. Number three, Meta, the owner of Facebook and Instagram, is planning to lay off another 10,000 employees after cutting some 11,000 employees in November.

thousand employees after cutting some 11,000 employees in November. Number four, Senate Minority Leader Mitch McConnell, the Republican from Kentucky, was discharged from the hospital yesterday after a fall last week. He will spend some time in an inpatient rehabilitation facility. Number five, Russia signaled a willingness to extend its grain exportation from the Black Sea for 60 more days. Separately, the first arrest warrants from the International Criminal Court are being prepared against Russian officials over alleged war crimes in Ukraine. SVB, the 16th largest bank in the U.S. with $175 billion in deposits, is now the biggest American bank to fail since the 2008 financial crisis. Its customers are primarily businesses and investors in the tech sector.

The new concerns following the collapse of the 16th largest bank in the U.S., Silicon Valley Bank, experiencing a bank run, a stock price plunge, and a government-ordered takeover on Friday, all of it happening fast and sparking concern about the impact on other regional banks. This is the biggest failure since 2008. It's actually the second biggest failure ever since Washington Mutual in September of 2008. Over the weekend, U.S. regulators took over Silicon Valley Bank, or SVB, after it collapsed on Friday morning. In a matter of 48 hours, SVB experienced a bank run and capital

crisis, becoming the second largest bank in U.S. history to go under. Over the weekend, panic spread among investors and economists who feared the failure of SVB could set off a national financial crisis. But those concerns were mostly allayed when U.S. regulators announced emergency measures to protect depositors. First, we should cover what is a bank run, which requires understanding what a bank actually is. Banks are essentially borrowing short and lending long, as economist Noah Smith puts it.

Your money in a checking account is money a bank is borrowing from you, but the bank Banks are essentially borrowing short and lending long, as economist Noah Smith puts it. Your money in a checking account is money a bank is borrowing from you, but the bank has to give you that money back whenever you ask for it. Banks use that capital to invest in long-term assets by offering other customers things like loans or mortgages, which earn high returns but can't be quickly liquidated into cash. This is how banks make money, long-term gains while holding short-term cash. But if a bunch of people all come asking for their money at once, a bank can get into trouble because it can't simply liquidate all of its long-term investments to give people their money. This is what is called a bank run. So what is unusual here?

Well, SVB was a Federal Deposit Insurance Corporation Insured Bank, or FDIC Insured Bank, which means that every depository account was insured for up to $250,000. a $250,000 limit because many of SVB's clients were startups, companies that are too young to have enough revenue to pay their bills, instead using money they raised from venture capitalist investors. A lot of these startups were storing the cash they raised with SVB, which bills itself as the financial partner of the innovation economy because it provided many services to startup founders outside of simply being a bank, like, say, helping early employees secure personal loans for homes. Over the years, SVB has been pretty successful because so much venture capital money has been flowing to startups due in part to a long span of historically low interest rates.

However, it was still much smaller than the biggest banks. It had about $200 billion in assets compared to, say, JPMorgan Chase, which has $3.31 trillion of assets. So what happened? Well, in a single day, about $42 billion of that $200 billion in assets was withdrawn. There are a few different theories about what caused the bank run, and the likely explanation is some combination of all of them. The initial event seemed to have been SVB's parent company announcing that it was going to sell billions of dollars of securities from its portfolio at a $2 billion loss while also attempting to raise more money. SVB was aiming to clean up its balance sheet,

but instead, the move signaled that it had a cash crunch, which spooked its clients and the markets. In response to the news, big-name investors like Peter Thiel were telling their companies to withdraw their money from the bank while they could, sensing something was amiss. Those instructions, predictably, spread rapidly throughout the very insular venture capital and tech worlds. And because a bank run can sometimes be a self-fulfilling prophecy, the panic quickly compounded. SVB's very homogeneous set of clients was a major contributor to the panic, but was not the only source of its financial vulnerability.

Economic conditions for companies like SVB, which thrived in a climate of low interest rates, was already rocky. Since SVB invested in safe securities like U.S. bonds while holding its clients' cash and rising interest rates make bonds worth less, SVB's profit model became more and more vulnerable as interest rates continued to go up. At the same time, SVB was also getting hurt on the cash flow end as rising interest rates reduce investment in startups and business creation. And SVB wasn't the only bank failure in the last week. Before SVB failed, Silvergate Bank, a cryptocurrency-centric bank, also failed. Signature Bank, a New York-based institution with deep ties to the crypto, real estate, and legal industries, also suffered a

failure over the weekend after the SVB episode scared its depositors into withdrawing their money too. This became the third largest bank failure in U.S. history. Signature had 40 branches and $110 billion in assets. Since bank failures can often be contagious, these failures prompted the U.S. government to step in and ensure all depositors could get their cash back and be made whole. That was an important step because it ensured companies that used SVB to bank could still pay their employees. The government said bank fees and the newly formed Bank Term Funding Program, a fund that banks pay into, will cover those losses rather than taxpayers' money, emphasizing the move did not amount to

a bailout similar to the government's actions after the 2008 crash. Stock prices of mid-size and regional banks still cratered nonetheless, despite President Biden assuring Americans they could have confidence in the U.S. banking system. Today, we're going to take a look at some arguments from the left and the. Many on the left pointed to a 2018 rollback of bank regulations under Trump and self-dealing of SVB that helped create this mess. Some argued that the government reacted well to the crisis and called for more oversight and regulation. Others criticized disconnected conservative culture war arguments about why the bank failure happened. In Mother Jones, Hannah Levantovo pointed the finger at Donald Trump,

SVB's president, and a lack of regulation for the failure. This precarious scenario may not have been the case were it not for the work of SVB's president, Greg Becker, who eight years ago asked the Senate committee to relax regulations that would soon be applied to his own bank, Levantovo wrote. His appearance kicked off a half-a-million dollar lobbying effort that led to a bill signed signed by then-President Donald Trump, undoing regulations precisely as SVB and other banks had asked for. At the 2015 Senate hearing, Becker had his sights set on chipping away at a portion of the Dodd-Frank Act, the sweeping Wall Street reform bill passed in the wake of the 2008 financial crisis. A key rule in the law required that too-big-to-fail banks, which Dodd-Frank defined as those with more than $50 billion in assets, undergo stricter oversight, including higher capital ratio requirements designed to shore up the bank's ability to

withstand financial shocks. Becker, along with several other banking executives, asked senators to raise the threshold for banks that should be subject to this expanded level of supervision from $50 billion in assets, a milestone his bank was quickly approaching, to $250 billion, Levantova said. His testimony explained that the stricter risk checks would needlessly cost his bank millions, diverting resources from their ability to lend to small and growing businesses that are job creation engines. Following the hearing and three years of SVB lobbying lawmakers, Becker got his wish. In 2018, Trump signed a bill into law raising the threshold for stricter bank oversight to $250 billion in assets.

In CNN, Daryl Duffy said despite the failure, this isn't likely to morph into a larger crisis. Yes, there were failures of risk management and regulatory supervision, and there are likely some other banks whose balance sheets have been similarly weakened by the rapid increases in interest rates, which dramatically diminished the value of treasuries and mortgage-backed securities. According to FDIC Chair Martin Grunberg last week, banks have yet to recognize about $620 billion of losses in market value caused by rising interest rates, Duffy said. Since the collapse of the Lehman Brothers in 2008, the largest U.S. banks have been forced by regulators to be much more resilient. They also rely far more heavily than SVB on retail

depositors, who tend to have a greater share of their deposits covered by FDIC insurance and are less prone to run at the first sign of trouble. Of more immediate concern is the potentially systemic impact this will have on the tech sector, which has already seen mass layoffs and investments shrivel up in recent months. Close to half of all listed U.S. venture-backed tech and healthcare firms were SVB customers, and many of those companies were racing to line up funds to make payroll in the aftermath of the collapse, he said. If a large fraction cannot survive, then it is in the U.S. government's own interest to step in. It can do that in a number of ways. The SVB catastrophe could, for example, serve as a catalyst for the government to establish a new domestic

industrial development bank, as proposed by Senator Chris Coons, which could provide bridge loans to the tech industry. For some tech startups, the Small Business Administration could step in with emergency loans, as was done when COVID hit in March 2020. In The Atlantic, David Graham criticized some conservatives who were blaming wokeness for SVB's failure. A financial panic like the one that struck several U.S. banks over the past few days presents a dilemma for the committed partisan. You don't want to side with the failed Silicon Valley Bank and other collapsing institutions and come across as coddling the rich.

But you also don't want to root for the bank to fail and end up being a cheerleader for broader economic collapse, Graham said. This is especially tricky for Republicans, who spent the weekend looking for a way to criticize President Joe Biden's handling of the crisis, even as they waited to see what his handling of the crisis would be. But a few prominent Republicans found a third way, blame it all on wokeness. I mean, this bank, they're so concerned with DEI and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission, said Florida governor and presumptive presidential candidate Ron DeSantis. This is a

clever maneuver, sidestepping messy questions about whether and how to rescue the failing banks by instead attaching the panic to an existing narrative about wokeness in the Democratic Party. It also avoids the risk of appearing to be against entrepreneurs who might lose their shirts in bank collapses or against the financial system that has historically backed Republicans, Graham said. The only flaw is that the line of attack makes no sense. In reality, Silicon Valley Bank failed because it made some bad business bets. It invested deposits in long-term assets such as treasury bonds. As the Federal Reserve raised interest rates, those investments lost value while simultaneously squeezing many of the depositors. The result was a bank run, complete with lines outside branches. All right, that is it for what the left is saying, which brings us to what the right is saying.

Many on the right also criticize government policy, though they point to monetary policy and the failure of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. Some argue this is not a bailout and the depositors should be made whole. Others suggest SVB made several huge management mistakes and may have been distracted by DEI and other political worries. The Wall Street Journal editorial board called it a de facto bailout of

the banking system. The unpleasant truth, which Washington will never admit, is that SVB's failure is the bill coming due for years of monetary and regulatory mistakes, the board said. The Federal Deposit Insurance Corporation closed SVB, and the cleanest solution would have been for the agency to find a private buyer for the bank. This has been the first resort in most previous financial panics, and the FDIC was holding an auction that closed Sunday afternoon. But Rohit Chopra, the Elizabeth Warren acolyte on the FDIC board, is hostile to bank mergers on ideological grounds, and the purchase terms could be too onerous for some potential buyers. The biggest banks are now the safest, and deposits are flooding into them. J.P. Morgan can park that money at the Federal Reserve

and earn interest on its reserves. Why take on a new political headache? SVB executives made mistakes, and they will pay for them, but they were encouraged by easy money and misguided regulation. As the Fed flooded the world with dollar liquidity, money flowed into venture startups that were SVB's customer base, the board said. The bank's deposits soared, far beyond what it could safely land. In a world of near-zero interest rates, SVB put the money in long-duration fixed-income assets in search of a higher return. Regulators after the 2008 crisis had deemed these treasury bonds and mortgage-backed securities nearly risk-free for the purpose of measuring bank capital. If regulators say they're risk-free, banks and depositors may be less careful. But those securities declined in value as the Fed

took interest rates up quickly to break the inflation it helped to cause. In the Washington Examiner, Con Carroll said SVB is not getting a bailout. The term bailout is a dirty word, and rightly so. When taxpayers are forced to pay for the mistakes of corporate executives, and investors who were supposed to be monitoring those executives, bad incentives for risk-taking are created, Carroll said. But this is not what is happening to Silicon Valley Bank. Silicon Valley Bank is not getting bailed out. It is dead. Its investors and bondholders have been completely wiped out,

and the executives are now unemployed. The only people getting bailed out here are the depositors, the ones who put their hard-earned money in accounts with Silicon Valley Bank, including the companies that have bank accounts with them. So when Senator Bernie Sanders says now is not the time for U.S. taxpayers to bail out Silicon Valley Bank, you should be happy to know that Silicon Valley Bank is not getting a bailout, its depositors are. This is an important distinction. The executives who ran Silicon Valley Bank definitely made some big mistakes. They've been punished with the loss of their jobs, but they are not guilty of the same reckless behavior that caused the global financial crisis over a decade ago. In the run-up to the mortgage

meltdown, financial firms were issuing predatory mortgage loans they knew were very risky and then engaging in highly questionable financial engineering, some would even say fraud, to sell those mortgages as safe investments, Carroll wrote. Making bad predatory loans is not what caused Silicon Valley Bank to fail, quite the opposite. If anything, Silicon Valley Bank didn't make enough loans. Instead, it bought a bunch of ultra-safe, low-yield treasury bonds. In other words, it did exactly what people like Senator Elizabeth Warren wanted it to do. It bought safe assets. what people like Senator Elizabeth Warren wanted it to do. It bought safe assets. In the Wall Street Journal, Andy Kessler pointed to management mistakes, DEI, and ignoring the rising interest rates for SVB's mistakes. Everyone except SVB management, it seems, knew interest rates were

heading up. Federal Reserve Chairman Jerome Powell has been shouting this from the mountaintops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term without any interest rate hedging, Kessler said. The bear market started in January 2022, 14 months ago. Surely it shouldn't have taken more than a year for management at SVB to figure out that credit would tighten and the IPO market would dry up. Was there regulatory failure? Perhaps. SVB was regulated like a bank but looked more like a money market fund. Then there's this. In its proxy statement, SVB notes that besides 91% of their board being independent and 45% women, they also have one black, one LGBTQ+, and two veterans. I'm not saying 12 white men would have avoided this mess,

but the company may have been distracted by diversity demands, he said. Management screwed up interest rates, underestimated customer withdrawals, hired the wrong people, and failed to sell equity. You're really only allowed one mistake. More proved fatal. Was management hubristic, delusional, or incompetent? Sometimes there's no difference. All right, that is it for the left and the right are saying, which brings us to my take. Let me start with the easy stuff. First, no, this did not happen because of wokeness or diversity demands. Anyone making those claims is just a partisan hack and should be treated as such. If you think a bunch of conservative, anti-woke, straight, white people would have avoided these errors, you'd have to be ignoring basically every other bank failure in U.S. history.

Of course, I doubt SVP is that woke anyway. Maybe I'm just cynical, but I'd bet it wanted to project itself as a liberal institution more than anything else. The Bay Area is a liberal bastion, and SVB's limited attention to diversity, equity, and inclusion was probably more about good business than any devotion to DEI. Second, this does not amount to a bailout, and I think the Journal's editorial board and Senator Bernie Sanders are wrong about that. Nobody was bailed out. Shareholders and bondholders are being wiped out, and depositors, who did nothing wrong but trust the bank, are being made whole. The money is coming from funds that banks pay into, and the government is not losing a bunch of taxpayer money by taking action.

That is a decent outcome, all things considered. Third, yes, it turns out the brilliant startup folks in Silicon Valley are not infallible geniuses. The tech sector has enjoyed so much positive press, so much hedonistic self-congratulation. Remember when they were legitimately rallying around calls to secede? We somehow seem to believe everyone in the Bay Area is operating on a different wavelength than the rest of us.

It turns out, if you look closely, the tech sector is actually having a rough run. They're in a wave of layoffs, facing huge crypto instability, struggling to hit profit expectations, and now we're seeing what happens when a bunch of low-interest, essentially free money starts to dry up. Things are likely just going to get worse. What is interesting, and perhaps most frightening about this entire episode, is just how wrong all the smartest people in the room seem to have been. And that goes for folks on both sides of the political aisle. Atop the blame pyramid is obviously the executives from Silicon Valley Bank. Andy Kessler, under what the right is saying,

rightfully got a lot of heat for his absurd mention of SVB's purported focus on DEI. But that was two sentences in his entire piece. His liberal critics are ignoring that he was right about pretty much everything else he wrote. This was not about one or two mistakes. It was about several

that compounded each other's effects. The bank was over-leveraged on U.S. bonds, reacted too slowly to changing conditions, and had a total blind spot about the people it was serving. They paid the ultimate price, and deservedly so. Most of the other criticisms I saw about how this environment was created are right, too. Hannah Leventova, under what the left is saying, nailed it on bank oversight. SVB's president literally lobbied against regulations that could have stopped this.

It doesn't get any more egregious than that. She's right, too, that President Trump's administration gave him exactly what he wanted. The Wall Street Journal's editorial board, under what the right is saying, is on the money that these safe investments in U.S. bonds are exactly the kind of investments progressive icons like Bernie Sanders and Elizabeth Warren wanted banks to make. Well, it turns out that when the government spends a decade flooding the economy with zero interest rate cash and then has to turn up the dial to beat back inflation, there can be huge repercussions when the value of those bonds takes a hit. This is precisely the kind of thing the Journal's editorial board has been warning about for years. Speaking of the government and regulators, where was the San Francisco Fed,

who somehow missed the vulnerability of SVB? Aren't they the ones who are supposed to protect depositors from this kind of bank run? Then, of course, everyone is also right to mock the insular venture capitalists in the Valley, some of whom, and there is no other way to put this, completely lost their heads in this meltdown. Given that we know bank runs can be as contagious as a virus, one would think a focus on calm and reason would be at a premium. It's actually important to remember who kept their wits. Here is how entrepreneur Jason Kalancanis, one of the most visible people in the startup world, spent his weekend.

On March 12th, he tweeted in all capital letters, you should be absolutely terrified right now. That is the proper reaction to a bank run and contagion. At POTUS and at Secretary Yellen, must get on TV tomorrow and guarantee all deposits up to $10 million or this will spiral into chaos. The day before, Jason said, on Monday, 100,000 Americans will be lined up

at the regional bank demanding their money. Most will not get it. This went from Silicon Valley insiders on Thursday to the middle class on Saturday. Main Street finds out Monday. One startup founder told Vox that he got five calls in one single day from different VC investors telling him to pull his money out of SVB. Sam Altman, the CEO of Open AI, the folks behind ChatGBT, ominously tweeted on Friday that investors should just start sending emergency money to their startups, no questions asked. Venture capitalist Matt Harris summed up my reaction nicely when he said, looking forward to the tweets from VCs who sparked this bank congratulating themselves

on their prescience. A lot of people got a lot wrong. For now, the good news is that the tide of bank failure seemed to have momentarily slowed, and there isn't reason for any kind of major panic. Larger and more concerning might be the takeaway from writers like Will Gottsagen, who said that Silicon Valley, briefly the engine driving the U.S. economy, is seemingly just a house of cards. For our sake, I hope he's wrong, but it's hard to be confident when everyone in the system, the regulators, the bank executives, the Silicon Valley smarties, and the venture capitalists seem to have gotten so much of this so wrong. All right, that is it for my take. Our main topic took up a little more space than usual today,

so we're skipping our reader question. But as always, if you want to write in with a question, you can reach me at Isaac, I-S-A-A-C, at readtangle.com. Next up is our under the radar section. A California state appeals court has reversed a lower court ruling and upheld Proposition 22, reviving a ballot measure that allows app-based services like Uber to treat drivers as independent contractors rather than employees. The ruling is a major win for the industry, though it is expected to be challenged to the California Supreme Court. However, the appeals court did strike down a provision of Proposition 22 that limited the

ability of gig workers to unionize. In 2020, roughly 60% of voters approved Prop 22, which allowed app-based transportation services to classify drivers as independent contractors so long as they were being paid minimum wage and receiving expense reimbursement and health subsidies. Reuters has the story. There's a link to it in today's episode description. All right, next up is our numbers section.

SVB's rank in size of assets among all US banks was 16th. The amount of value SVB lost in just 24 hours was $160 billion. The amount of company stock SVB CEO Greg Becker sold two weeks before the firm disclosed its extensive losses was $3.6 million. The amount of assets SVB had at the time of its failure was $209 billion. The amount of deposits SVB had at the time of its failure was $175.4 billion. $175.4 billion. Alright, and last but not least, our Have a Nice Day section. A new research paper in the journal Nature Human Behavior suggests party loyalty and partisan motivation may be interfering less with Americans' thinking than previously believed. The study, done by MIT behavioral researchers, suggests both Democrats and Republicans are

more open to being challenged than previously thought. Our results are clear and unequivocal. Learning the in-party leader's position on an issue certainly did influence partisans' attitudes, but it did not cause the partisans to ignore or discount arguments and evidence that ran counter to the leader's position, David Rand, who was involved in the study, said.

That's good news for Tangle. You can read more about the study with a link in today's episode description. All right, everybody, that is it for today's podcast. Hope everybody is doing well and your cash is secure in your local bank. Please don't freak out and go withdraw it. We'll be right back here same time tomorrow. Have a good one. Peace. same time tomorrow. Have.tangle.com. We'll be right back. Call it Dome. More festive, less frantic. Get deals for every occasion with DoorDash. Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web,

his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+.