The Compound and Friends - The Bank Run of 2023

Episode Date: March 14, 2023

On this special episode of Live from The Compound, Samir Kaji (CEO and co-founder of Allocate) joins Michael Batnick and Josh Brown to discuss the collapse of Silicon Valley Bank and the impact it could have on the banking system and the stock market. Samir Kaji was a Senior Managing Director at First Republic from 2012-2021 where he founded and led a 40 person+ group and worked with over 700 private equity and venture capital firms. Prior to his time at First Republic, Samir spent 13 years at Silicon Valley Bank. As part of the senior leadership team within SVB's venture fund services group, he worked with venture capital and private equity firms covering firms such as Sequoia Capital, Francisco Partners, Lightspeed Partners, IVP,, Venrock, and Founders Fund. Samir also hosts the popular Venture Unlocked Podcast, where he interviews venture capital fund managers and limited partners. Samir is also a graduate of the prestigous Kauffman Fellows venture capital program. Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Good evening. If you're on the East Coast, you're on the West Coast. Good afternoon. We are live here on the compound and we are going to be talking about the bank run of 2023. We've got a special guest on here tonight. Michael, tell us all about Samir before we get into the program, the actual content. Samir, what do we call the Hawaiian coast? What does that refer to as? The North Shore. Far West?

The Far West coast? So it's been a really rough week for a lot of people. And we thought that Samir was the perfect guest to explain to the audience what has happened over the past week and couple of days. Samir is the CEO of Allocate and spent most of his entire career, 20 plus years as a banker at Silicon Valley Bank and First Republic Bank, his family members that still work at the bank. So I can't even begin to imagine what it's been like for you. So why don't you tell us what's happening? It's been a crazy week. And a lot of us in the industry have not slept. I don't think I've slept more than about two hours since Wednesday morning when some of the announcement came out. But yeah, I spent a long time at SVB.

I started in Silicon Valley Bank back in the late 90s. I was actually lending to companies during the dot-com bubble. So went through a couple cycles there, was there through 2012, then joined First Republic Bank, which is another regional bank in 2012, and spent eight years there. And it's just been an incredibly crazy, chaotic. And it's been one of those things where I feel like I'm in a perpetual game of prisoner's dilemma, you know, with what's happened with these bank runs. And so everything is pretty fluid. But of course, last week we had three regional banks fail Silvergate SVB, which is the big one. And then, and then signature was, uh, seized by the, uh, the FDIC yesterday. So, uh, you know, crazy, crazy week. So I wanted to, I wanted to start with the

prisoner's dilemma thing. I'm like one of the few people that don't have a strong opinion one way or the other. Like I was reading all the tweets over the weekend. And of course there are some people like embarrassing themselves, but it's like, whatever. It's like a primal scream a little bit. If you're, if you're in the middle of this, it's scary. I don't know which side I'm on. So I want to hear your perspective. Not that there has to be a side, but some people are like, how could I not tell my portfolio companies to pull the money out? We have a fiduciary responsibility to our fund investors. And that comes before my loyalty to a bank where quite

frankly, the people I talk to there might not even be there in a week, but this is about my career. I have to do, okay, I'm really sympathetic to that mentality. And then the other side of it is look at these VCs who caused a run on their own systemically important bank? And what about the community? And what about the loyalty? And how could they do this? I'm also sympathetic to that because I'm on the outside of all this. That's what it looks like to me. These guys sparked and then encouraged a bank run.

So, but I don't know, like I'm torn. What side are you on? And what am I not thinking about? I've gone back and forth on this probably three dozen times in the last few weeks. I'm sorry, a few days rather. So oftentimes what happens is what is irrational at first over time becomes rational. That's exactly what happens. So if you think about Silicon Valley Bank, so they filed this 8K.

And what they say is, we are having these massive withdrawals on deposits, cash burns going higher in these companies. These companies aren't raising cash. We need to sell available for sales securities at 21 billion. And we're going to realize a $1.8 billion loss. Concurrently, we're going to go out

and raise two and a quarter billion dollars. Okay. On the face of it, that doesn't sound that great. And then you look at their book and say there's about one hundred and one hundred, almost one hundred billion dollars in health maturity securities. These are kind of long term and HTM securities are things that you don't have to mark down. right? As long as you classify them as HTM, but you can't really touch them because the rates went up so much in 2022. If you had sold them, they would have been at $16 billion loss, which is actually higher than their $11.8 billion in common stock, tangible net worth.

So when people started looking at that, they said, okay, well, what's actually happening here? On, I think it was Thursday, the CEO of SVB goes to this group of, does a 10 minute Zoom call with all these venture capitalists and says, you know, here's what's going on. Probably said two things that I think spook people. The first thing is calm down. Let's not panic. The second is you need to support us. And I think a lot of those, a lot of that made, you know, a lot of the VCs be really nervous about like, is there something wrong here? And do we need to take some risk off the table by moving money into a money center bank and taking care of the uninsured deposits? And so once that started,

and I think you've read the headlines of Peter Thiel and his founder's fund ringing the bell. Remember, SVB has a very monolithic deposit base. It's the VC industry. And it's a double-edged sword. So the VC industry is very closely held. It can be a herd mentality. So you can get the benefit on the way up. You get a lot of new deposits, referrals.

But when it turns against you, it can turn very quickly. And so Thursday, you had $42 billion in withdrawals initiated. And at some point, you know, I drew this analogy on Twitter. You know, it was a situation where people were running out of this, what they thought was a burning building, hoping not to be the last one. But in fact, it wasn't really a burning building quite yet. And it was somebody tripped over the candle that was on the ground and set the whole house afire. And then it became a burning building. That's a great analogy. So Samir, my question is, so you mentioned Greg Becker tried to calm the investors. He said,

I would ask everyone to stay calm and to support us just like we supported you during the challenging times. It starts from the top down. And so you mentioned Founders Fund. I saw headlines that Sequoia also did the same thing. Are you nodding your head to confirm that they did that? I think every VC did. But so if Sequoia and Founders Fund had said to everybody, listen, Silicon Valley back has been a trusted partner through multiple cycles. We've seen this before. They're going to get through it again. I think everybody would have potentially calmed down, but that's not how it played out. And once they told their portfolio companies to move, I don't blame any VC for saying, well, we're not going to be the last ones here. I don't blame them at all. That's human nature. I agree with that too. I agree with that. Remember, you take asymmetric downside by not taking action. You cannot have money there and not meet payroll. That. And that's, that's exactly what happened with a lot of the Silicon Valley companies when

the funds beat, you know, became tied up in a receivership. What are the problems? What are the problem here? What are the problem here? A Silicon Valley bank very specifically wanted to deal with this monolithic monoculture. Like they did not want somebody to show up who said, I have a landscaping business. Okay. So part of this is live by the sword, die by the sword. You want this high flying, all birds wearing VC first clientele. That's great. remember the regional banks in Texas struggling when oil prices collapsed in 2015, 2016. You know what they didn't have that Silicon Valley Bank did have? They didn't have an entire culture of oil and gas CEOs on Twitter being dicks about it set, you set up this bank. That's going to be

like the center of the universe for this one type of client. Well, unfortunately this one type of client, there's like a little bit of debaggery that is endemic to the species. And, you know, I kind of feel like their best customers were not great allies to them this week. So that's a tough, I don't know. But again, how do you blame them? They're trying to this week. So that's a tough, I don't know. But again, how do you blame them? They're trying to stay alive. So it's a tough situation. So I think you could blame,

you could place if you wanted to, and it would be rational to place blame on the first people that blew the horn and said, hey, we need to move all the money out, portfolio companies move in. By the way, it was just Founders Fund. Union Square Ventures is another firm that was reported to do, and Union union square an incredibly great firm very thoughtful people so maybe you can blame the first people but when it was you know vc number 10 12 13 14

oh i agree you have yeah because because the best case scenario you're risking everything and the bank doesn't go under you You're not getting any credit for that. Correct. Like, no, no. Maybe you get a toaster from the bank, from the bank. You're not getting any credit. The downside is catastrophic. You're done.

You look like an idiot and your clients say you were not a fiduciary to me. So I a hundred percent agree with you. Well, we'll put it this way. So if you don't tell your companies that and the bank does fail and you're the only one that didn't pull out capital because you said, what's the upside? Are you going to tell your LPs? Are you going to tell your portfolio companies, Hey, I'm too bad, but I was loyal to the bank. That is not going to fly. At some point you just have to do it. So, absent Twitter, in a world where there's no Twitter,

just regular social media, where things move a little bit more slowly, this might not definitely have gone this way. I think Twitter is like a primary means by which the meme of, let's get out of this bank, like,

I know there were private chats and phone calls too, but I'm saying Twitter was an accelerant here. Twitter was definitely an accelerant. What was also an accelerant was I mean, think about it. This happened in 36 hours effectively. I mean, you had a 40-year-old bank go away in 36 hours was that it was the first bank to go through a bank run that was almost fully digital. So now I can go on my phone, quickly transfer money.

In the past, you had to go into a bank office. You had to go to a teller. You had to call somebody. It was really hard to get money out. And there are actually some banks that probably benefit from the fact that they still work in a pretty archaic way where it's hard to get wires out. It slows down these bank runs. So that was the other thing that

really accelerated this bank run to the size and scale and velocity it did. So Samir, maybe we could take a step back and just talk about how we got here. So this is a function of, first and foremost, the pandemic making the Fed take extraordinary measures. They left ultra low money policy interest rates at zero for way too long. And then they went from 150 miles an hour to jamming on the brakes and raising interest rates to the extent that we've never seen. So during 2020 through 2022, there was a venture boom. Silicon Valley Bank is at the epicenter of Silicon Valley banking per the name. And so its balance sheet effectively tripled in under two years.

The problem was their companies were not starved for money, right? These are venture-backed companies that have more cash than they know what to do with. And so there weren't loans being made. It was ultimately just deposits that they had to move into securities. And so now we're saying that the management really f***ed up allegedly and mismanaged their liability asset mismatch to the extent that is like unfathomable.

And so they were buying mortgage-backed bonds with a 1.6 yield a year ago with a duration. So anyway, when the interest rates rose, they got killed on their mark-to-market losses or ones that weren't marked. Their customers got killed. So it was live by the sword, die by the sword. How much culpability does management have for not having more of the money just in T-bills and maybe giving up some spread, but not blowing the backup? Yeah, it's huge. I mean, this is a risk issue, right? I mean, this was not done.

If you had a great chief risk officer in that situation, it probably would have been avoided. But this happened really quickly, right? So they tripled their deposits in 24 months. And you're right. These companies don't borrow much. I mean, you may have loan growth that grows at one-seventh the size, the deposit base. And so what they looked at is short term, you know, treasuries at the time were yielding nothing. They had something called net interest margin compression, right? So basically,

that is your profit between your assets and, you know, I'm sorry, what you get on deposits and what you can actually lend them out to. And so they said, hey, let's lock in 1.65 to 1.75 by going long, and then we'll put it into HTM so we don't have to mark the market. So we will eventually have these bonds pay off, and we don't really need the money. But when you had 2022 happen, what happened to the venture market? Well, deposits slowed down. Companies were burning cash. They weren't able to replenish those deposits. And so you're sitting there and you have to now fix that by liquidating those securities to take care of those cash flows. And when that happens,

they had to sell their AFS book at a $1.8 billion loss, and they can't touch the long-term. You just can't do it because you can't take a $15 billion hit. So it is a little bit outrageous to have a bank with, we'll go back to the monoculture. Basically every one of your clients is in the same segment of the economy and all of them have businesses and stock prices and prospects of going public that share the same exact risk, which is less active capital markets and higher interest rates. It's amazing, actually, to have a bank with such little diversification of depositors that you really have that idiosyncratic specific risk.

depositors, that you really have that idiosyncratic specific risk. To me, it's almost like malpractice to then have your treasury bond portfolio structured $90 billion in 10-year treasuries with no interest rate hedges. That's malpractice. I wouldn't go so far as to say it's criminal it's obviously not criminal um it's just beyond stupid uh i don't know i don't know like i don't know that people like get the regulators involved it was treasury bonds it's just mismanagement like it's not like they were funneling money to off balance. They weren't doing any of that. They just literally don't know what they're doing. That's a crazy story.

So this was a classic case of duration mismatch, right? You had too long at a time where rates were at an all time low. And remember we had 14 years of effectively zero to low interest rates. I mean, it was March of 2008 to March of 2022. I wasn't in those. I have no clue what the thought process was. I also have no clue in terms of why there wasn't some type of hedge. Because at some point, you had to believe rates. Now, rates went up much, much quicker than anyone anticipated. So if you look at 22, I mean, you were at zero,

and then you're basically close to 5%. And so that really killed the par value of those bonds. Can we talk about the government's response? So there's a lot of people who don't like handouts and don't like bailouts and don't like Silicon Valley tech bros that are the billionaires. And I get all that. But I think the fundamental misunderstanding is that, first of all, the equity and the bonds are going to zero, right? So the ones that are being, quote unquote, bailed out are the depositors. And we can't live in a country where you're asking people to do forensic analysis on a bank account or on the viability and stability of a bank before they open it up. So I think that

the government between the FDIC, the Treasury, and the Fed absolutely did the right thing. I understand why people are upset, but just talk about the reality of what potentially would have happened had they not stepped in? So what would have happened? This would have created a huge systemic issue. So the contagion to other regional banks, because there is now, I mean, the banking system is based on faith. And if you lose faith in the banking system, particularly with uninsured deposits, this is not just an SVB thing. And we've seen this, like, we'll talk about it later in this conversation.

We've seen so many other regional banks drop. I mean, you've seen their stock prices drive 30, 40, 50, 60%. But yes, this is not a bailout, right? This is, SVB is gone. I mean, this is not a ongoing concerned company. If the depositors didn't get their money, those companies would not meet payroll. This is not just a bunch of tech bros.

These are people that are running companies that work for startups. It's the mom that works at a company who's drawing a really moderate salary who is underwriting to upside of the company through stock that now may not be able to make her mortgage. I think there's this fundamental misunderstanding

that people think that this is a bailout. This is just making the deposit at all. I think it's not a bailout. It's a better way to phrase it as a backstop of the depositors. And I think that everyone intellectually understands why that's preferable to having the stock price of every regional bank in the country go to zero and all the deposits up in the air and nobody trusting anyone. I think everybody gets – like nobody is so crazy that they think that would have been better. Okay.

Not true. Not true. There are people that want Lord of the Flies. Okay. Yes. Okay. Fine. That I think that's a very small minority of people and they probably don't even mean it. Um, or they mean it until it affects them. I think most people, like if you talk to a normal person, not on the internet in your real life, you'd say, okay, there's no good choice. Cause this went on too long. The fed went crazy, too much inflation for too long.

And then they tried to fix it all in 12 months and no good options. Here are your two options. You do this thing that maybe sends the wrong message and maybe upset some people because it seems like, you know, the government is intervening and helping people that maybe you don't love because they are liberal or they're from California. Okay. That's one thing.

The other version of that is nobody trusts anyone and we have literal financial meltdown. Most people off the internet would be like, all right, it sucks, but I guess they had to do that. But unfortunately, there's a third scenario. The third scenario is the government did what it needed to do. The Federal Reserve, there's a third scenario. The third scenario is the government did what it needed to do. The Federal Reserve's job is literally financial stability. Hard stop, that's the job. How's that going? In this case, they did what they had to do. It was absolutely necessary. However, to Samir's point, banks run on confidence. And even though the Fed did what

they needed to do, Josh, you know the scene at the end of Casino where the old guys are in the room deliberating over who to whack and the guy goes, he's solid, but why take any chances? At least that's my view, right? That's like what's happening here.

It doesn't matter that the Fed did what they needed to do because you're seeing, and I don't want to like incite anything, but you're seeing, you're going to see some real, real big problems at regional banks. And the problem with that is these banks are local to their local economies. They are the lifeblood of the American business.

And if everything goes to JP Morgan Bank of America, they're not gonna be able to service these smaller accounts. So this is a real, real, real big problem. It's a lot bigger than Silicon Valley tech bros. Yeah, I think we all agree. Again, look at the stocks that were crashing today. They couldn't be further from Silicon Valley. Fifth Third Bank is not in Palo Alto. First Republic has tech clients, but they have more branches in New York. So signature is New York. Right. John, if you've got that chart of regional banks, so Danny Kirsch made a chart of, no,

I'm sorry. It's like the scatterplot if you can't find the no big deal, but there we go. Beautiful. Thank you. So this is on one axis is the S&P 500% change. On the other axis is KRE, the regional banks. The red circle with the yellow dot was Friday, which is pretty off the charts. The bright red dot on the bottom right is what we saw today. This is midday. So you saw the S&P 500 up half a percent and KRE, the regional banks, down 11%. This has never happened before. This is truly extraordinary and frankly, pretty frightening.

Yeah, I agree. And then I also wonder, just in terms of bringing this back to the market, there was almost panic that the Fed is actually not... Not only are they not going to raise by 50 or even 25 or maybe even pause, maybe they're going to cut. And so the stock market was closed down, but it was up today a little bit yeah i mean look oh god please samir i was just going to mention i mean you you said something michael earlier about you know the lifeblood of the u.s these regional banks are absolutely critical if they go away we basically have a two-tier banking system you have basically the big money center banks that have all the deposits.

And then you have these small credit unions and consumer banks where it doesn't really matter because most of the clients have accounts that are sub 250. But as a business, I mean, these banks run on the fact that they have on balance sheet deposits they can use to lend. And if they don't have those deposits, the cost of funds goes up. They have to charge more. And this is not a good thing. And you're right. The big banks are not actually set up to take care of these small businesses. I mean, a lot of, a lot of the businesses went to JP Morgan over the weekend and you know what JP Morgan told them you're too small for us. So what do you do? We're probably never going to have a depositor wipeout ever again in this country based on what we just witnessed today.

You guys think that's accurate? We haven't yet. And I don't think we can now. I think that's – What does this do to FDIC insurance? Does it go up to $5 million? And what does this do to bank? What does this do to banks profits? I mean, our banks like could be uninvestable with whatever regulation is coming. The regulations that are coming, it's going to be a choice. No, no more FDIC or FDIC

is now unlimited, but as a result, but as a result, you are basically a utility, right? You are a regulated utility in the financial system, love it or hate it. And if you're a shadow bank or you're an app or you're a FinTech that wants to do lending, we, we wish you the best of luck. You are outside of the system. We will not, and we will not vouch for you and enjoy the lawsuits. All right. But so what does that do to the American economy in terms of our dynamism and willingness to lend and take chances? And Samir, what do you think this means? What does this mean for the future of innovation and venture capital funding? Who's writing checks right now? Well, so there's two things, right? So

not having a player, as SVB banked 50% of the startups in the U.S., right? And by the way, not just the U.S., the global. And so not having them as a capital provider, right? JP Morgan is not doing early stage venture debt, right? So many companies relied on SVB, not only to do their servicing, but to provide them non-dilutive financing when they need it in the early days. So you take that off the table and you look at some of these other banks, like First Republic is not doing venture debt, not at the level of SVB. And what happens with this gap? So SVB has

not been acquired. Now SVB's UK got acquired, I think yesterday yesterday by HSBC, so that helps in the UK. But in the US, this is not a good thing at all for the tech and life sciences industry because SVB was the beacon from a banking perspective in providing them the financing they needed. So this is not good. So I also look at it and say, OK, if all these deposits either go to the big banks or they go off balance sheet, meaning they sit in treasuries, they sit in things like insured cash sweep. Well, what happens to the cost of funds at these banks?

How do you lend without charging exorbitant fees? So that's what I really worry about. You know, how do you restore- Samir, playing the devil's advocate, wouldn't you agree that maybe there was an overabundance of bad ideas slash get rich quick mentality founders getting funded in 2020 and 2021? And this is just the other side of that. And maybe it'll be a healthier funding environment if there is a lot of pain. And maybe there was just too much money available to too many people without enough due diligence or without enough care about reaching profitability.

There's got to be some element of that that it will be good to get out of the way and then maybe have the cream rise to the top. Is that at all possible? I mean, 2020 and 21 were crazy. Yeah, I agree. That's not like representative of most years. No, 21 was the most anomalous year. I mean, it was just crazy town, right? So you had, you know, 10 trillion pumped into the system. You know, everybody was, I mean, there was no semblance of risk.

No one thought they were taking any risk. And you had the ninth derivative of a grocery delivery company getting funded and raising like $100 million. That doesn't make any sense. In 2022, and even coming into 23, we've returned to sobriety. But that's from an equity standpoint. You still need somebody that can serve this market and, and eliminating F you know, someone like SVB as a lender is not a good thing. Um, so yes, you're right. I, this is a much healthier environment, but it's not healthy for regional banks to fail, right? These are two different things. Right. I agree. Is there anyone you could think of off the top of your head that if they wanted to could step into that breach um and do maybe not

everything svb did for the ecosystem but did enough of the good things that uh the valley gets back on its feet can you think of anyone yeah so fortunately and we're at a place now there's many more sort of banks that focus on technology. When I started, it was SVB and it was like Imperial Bank or Comerica, which Comerica bought Imperial. Today, there's the folks like Comerica, there's the PacWest, there's the Bridge Banks or Western Alliance. All of these banks can take a little bit. JP Morgan, in a mid to late stage, they're lending to those companies.

The big banks are lending. There's venture debt firms. So there is. But remember, we're talking about a Grand Canyon size cap that SVB, that was a $60 billion loan book. Yeah. Do we think that there is value, just brand value to the name Silicon Valley Bank? Is there any chance that there's a buyer to restore some sort of confidence to the name Silicon Valley Bank, is there any chance that there's a buyer to restore some sort of confidence to the sector or is it too late? So part of me is surprised that no one's bought them yet. I still think it's an incredibly attractive asset, especially at the discount that you paid today. So one thing to understand about SVB, and there was a bunch of VCs that came

out publicly, I think it was like 100 VCs that said, if SVB is acquired by a strongly capitalized bank, we're going to move everything back, right? We are going to move everything back. As a big bank, that's a pretty attractive thing, because those relationships are hard to replicate. You know, the innovation industry is going to continue to grow. If you look at the next 10 years, hard to debate that technology and life sciences isn't going to be a big driver of GDP growth. It just is. I mean, it just is, right? So yes, part of me is like, why hasn't anybody bought it? Now, there was a, I don't know if you guys saw this, but the FDIC apparently got a bid they rejected over the weekend. Don't know any details about it, details about it. That was some founders fund.

Oh, was that right? I think that was from DraftKings. Right. But you know, it's like, if they don't get bought in the next couple of days, like, I don't know what happens. It feels like it just gets, you know, it's just becomes a liquidation sale. One of the lessons that I think the FDIC, the Office of Thrift Supervision, some of these banking overseers hopefully took from the events of 2008 is that if you're going to do something, don't wait two weeks. Do it immediately. So if that means seizing a bank, seize the bank.

If that means selling a bank, seize the bank. If that means selling a bank, sell the bank. If that means distributing funds, just do it right this minute. And it seems like they have that lesson down. They are acting really quickly. And remember, we're talking about the government. The government is not known for moving as quickly. Now, some would argue they should have moved two days earlier, blah, blah, blah. I don't know about any of that. The crisis really got underway Thursday night. And by Sunday, they had control of these banks. And they said, you're getting everything back if you're a depositor. And if you're not a depositor, you work there or you're an executive. Don't count on anything.

That was what I think most of America, both sides of the aisles, would have wanted to see happen. And they did it. I think they should get some credit for that. Not the Fed, like the actual people functioning in places like the FDIC. They kind of did the job. It's not nothing no they i mean look the fdic knew the gravity of the situation they had to do what they had to do right i mean yeah you know doing what they did with signature doing what they did

with svb on friday they had to do it and they understood like the repercussions of widespread bank runs um now yeah you saw the thing yesterday with the $25 billion fund that was set up for banks to be able to borrow. You could bring your treasury bonds that you're down in. Let's say you have a 30% paper loss. You could bring those treasury bonds to this window and there's $25 billion sitting there to take those bonds from you if you need the liquidity. Okay. So that's a little tarpy, a little, I don't know if tarpy is the right word, but it's- It's a loan.

It's a loan. It's a loan, right? Well, can we just make the point that in contrast to 2008, and I'm not trying to say everything's fine because everything's not fine, but a gigantic difference is that the things that were, that they were trying to sell off was toxic shit that was valueless. Right. This is treasuries. Here it's treasuries. They were mature.

So I'm sure people can make the – like Nihilist can make the case that it's worse, that it was treasuries that caused this, but it's not toxic garbage. There are conspiracies going around that a lot of this was really a hunt for – to hurt the crypto industry. And Silvergate went down first, and that's why. And Signature had this- I believe that. Had this Signet unit.

These banks, I know Silicon Valley Bank is much bigger than crypto, obviously. Yeah. The other two, one of them was all in crypto, and the other one was heavily crypto adjacent, let's just say, charitably. Are you hearing a lot of that kind of thing from people that there's a reason why these banks went down and the other regionals didn't? Or is it just the obvious story that we all know about the treasuries and it's as simple as that. Yeah. I mean, look, I've heard some of that, but you know, SVB was, you know, I mean, it was because they were in an extraordinary situation of having way too much in these HTM securities. It couldn't pull it. They had to deposit withdrawals.

And then once that bank run started, it started. And by the way, it's not just signature and Silvergate that have had issues. I mean, there's a reason someone like first Republic bank had a $10 billion capital effusion from somebody like jp morgan yeah right frb is not a crypto they don't touch crypto yeah right they don't touch crypto and they're being affected i mean their stock was down to 20 today yeah so so in a twist of uh irony I don't know if that's the right phrase here, but Barney Frank of Dodd-Frank is on the board of Signature. He's killing it. He said, I think part of what happened was the regulators wanted to send a very strong anti-crypto message. We became the poster boy because there was no insolvency based on the fundamentals.

Not knowing anything, I believe that Signature was taken out back and shot. based on the fundamentals. Not knowing anything, I believe that signature was taken out back and shot. I mean... If they were healthy, you could not have done... If they were a healthy bank... Why not? I'm not sure.

I don't think... Why would that even start? Given the sweeping thing, why can't the government just be like, yeah, and you're done? I mean, I suppose it's possible. I mean, nobody can really do anything about it. If they decide this bank's closed, it's closed.

Ironically, guys, the two safest banks for like tech and VC right now, like for these regional banks, is actually having had deposits at Signature SVB. Fully insured right now. That's right. That's interesting. There's an actual press release now, which is more than other banks could say. That's a really good point. All right.

I want to close out by just getting your thoughts about maybe, I don't know if you want to use innings or percentages, but like how far do you think we are through to some sort of a revolution resolution from a Silicon Valley perspective? Like, I feel like a bomb just went off and we're still in the aftermath. I feel like it's really early and we don't even know how much worse things might get for that ecosystem.

But maybe I'm too pessimistic. What do you think? So we're with today's Monday. I mean, this all started, what, five days ago, right? This is really early. You know, I think there are levels of Samir one minute. One minute. We were all very happily celebrating International Women's Day.

And then the next thing you knew, right, it's really, really recent. Well, can we agree? Banking will never be the same. This is it. There's a before and after. But I don't think all of that is bad, though. So number one, I think every treasury function at these banks needs to be re-evaluated. I think the governance, remember, you know, banks under $250 billion didn't have to have that same level of governance.

The same, you know, things like LCR, liquidity coverage ratios. I think that gets all re-looked at. But wait, but wait, Samir, Samir, this is part of the Dodd-Frank thing. So Dodd-Frank, it was, it was over $50 billion. That was the threshold. And he had, he had a proposal to raise it to 250 and signature bank was right on the line of 50. And so he, he said like, this has nothing to do with signature bank. I propose whatever, uh, that's going to get another, a closer look for sure. Oh, a hundred percent. Look, that's going to, that's going to have a bigger look,

but it's all of these businesses now that are, that have lost faith, faith%. Look, that's going to have a bigger look, but it's all of these businesses now that have lost faith in the traditional banking system in terms of non-insured deposits. What do you do? more status quo of people and companies having their money spread out at multiple institutions in a way that maybe our grandparents were more likely to do than we are. But isn't that way too cumbersome and convoluted? How do you want to do this? Yes, we've prioritized. So we've prioritized convenience over virtually everything. Will there be a bank that bundles other banks? Listen, unironically, listen, everything- Well, hold on. I want to hear what Samir

thinks about that. Can you picture a scenario where a founder gets $5 million, let's say, for a round and takes that and opens five bank accounts? Or is there no need for that now in the aftermath of what we just saw today? Okay. So let's say absent like the FDIC insurance, not going up to five or $10 million. It is cumbersome to, you know, have five different bank accounts.

Like no one wants to do that. There's two things you could do more likely what's going to happen. And remember SVBs average depository client was like 4.2 million. Either they move it into things like treasury, so they put it into off-balance sheet and keep $250 on the balance sheet of these banks. There's these programs where you can put it with one bank, and then they go to a network of banks and spread it $250, but you're still working with one single bank. These are like the CDAR programs. There's another one called ADM that basically spreads your deposits over a network of banks up to the $250,000 limit. That's more likely than me going and opening five different bank accounts and keeping 250.

Unless the rules changed and Congress takes this issue up and we have an explicit guarantee by the federal government that every dollar you have in a U.S. bank is protected no matter what, which is conceivable now. It's possible. Insurance premiums are going to be expensive. It's not easy. I agree. I agree. I think that from crypto enthusiasts, everything is a bull case. But I unironically believe that the perceived bull case, rightly or wrongly, for crypto, which is ripping today, is this going to be a watershed moment for adoption of crypto and DeFi and whatever, whatever? I'm seeing the laser eyes back. So if that's an indication of everything, look, I mean, we are seeing people in the crypto world saying, look, I told you so,

decentralization. Who knows? I don't know. I'm not there. I'm not there yet. There are two reactions you could have this week. Two groups of people. One reaction is, hello, JP Morgan, I'd like to open an account. The other reaction is, ah, put a little in Bitcoin. I think I'm more of the former. coin. I think I'm more of the former. So this is a paradox if there ever was one. Yesterday, I bought more ETH because I believe in the United States government. And the only way for me to express a risk on trade yesterday morning was to buy a crypto. Why? Because I thought that there was going to be a backstop. I thought they were going to do it. Oh, you couldn't buy like KRE because it was Sunday.

I couldn't buy SBOs. I got it. It was Sunday morning. Oh, that's interesting. Yeah, that's a good point. Okay. Well, we wish you luck with the ETH trade. Samir, this has been awesome.

I really appreciate you jumping on on short notice and doing this for us. Thank you so much. In Hawaii. Thank you, Samir. In Hawaii, you know us. You're the best. and doing this. Thank you so much. Thank you, Samir. And Hawaii, you're the best. Thank you so much. Can we tell people where they,

cause I know you're, you're dropping threads here and there. Um, what's your Twitter handle? It's at Samir Kaji, S A M I R K A J I. Okay. Nicole,

Nicole will drop that in, in the notes. We really, if she hasn't already, we really appreciate you. Thank you, Samir. Thanks to everyone who came out tonight for the live version.

If you missed any part of this or want to experience it again, we will be dropping this on the compound and friends podcast feed tomorrow morning. Thanks again, everyone. Stay safe. Good night. Relax.

Talk soon. Thanks guys. Outro Music