The Prof G Pod with Scott Galloway - Prof G Markets: SVB’s Collapse, the U.S. Banking System, Venture Catastrophists, and What’s Next

Episode Date: March 20, 2023

This week on Prof G Markets, Scott and Ed unpack what happened to Silicon Valley Bank and what its stress test means for the strength of the U.S. banking system. They also discuss how branding has played a role in the chaos, particularly as it relates to the two tiers of venture capitalists that have emerged. Finally, they look ahead at regulations, potential acquirers for SVB, and what could happen to commercial real estate, which appears to share the same vulnerabilities as SVB. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Welcome to Prop G Markets. Today, we're discussing calamity in the banking industry and what to expect next in the fallout from Silicon Valley Bank's collapse. Here with the news is Prop G media analyst, Ed Elson. Ed, what is going on? I'm super busy, Scott. It's really good. It sounds terrible, but isn't it weird that, you know, the nice thing about working in media is that when crises happen, it's just incredible content?

So we've had both PropG and Pivot, we've had record downloads. You can see why media likes Tumult, because people tune into the media and want other people's view. I think they mostly want insight and they want to hear about it, but i think for the most part they want someone to tell them to calm down but what keeps them coming back is to create this situation room i mean can you imagine what if there isn't a situation every day it's just so i felt like we haven't had a situation for the past three months and i've just been brain dead yeah but suddenly we've got some content to talk about so all right well let's talk it. Tell us what's in the news. So let's start with our weekly review of market vitals.

The S&P 500 was volatile as banking news roiled the market. The dollar gained as a safe haven amid uncertainty. Bitcoin breached 26,000 briefly before falling again with the broader markets. And the yield on 10-year treasuries was also volatile as traders bounced from stocks to bonds. Shifting to the headlines. Inflation slowed last month, but only slightly. The Consumer Price Index showed prices increased 6% year over year. That's down from 6.4% in January. That data will inform Jerome Powell's interest rate decision at this week's Fed meeting. Meanwhile, the European Central Bank

raised rates by 50 basis points. Meta is laying off 10,000 employees or 13% of its workforce. That's on top of the 11,000 jobs it cut in November. In a memo, Mark Zuckerberg remarked, quote, Alina.org will execute its highest priorities faster. Meta's stock rose 7% on that news. OpenAI launched its latest language software, GPT-4, which is now capable of analyzing images. It also scored in the 90th percentile of the uniform bar exam. That's an upgrade from its predecessor GPT-3, which only reached the 10th percentile. Interestingly, Microsoft says it's been using GPT-4 for its Bing AI chatbot all along. Bing recently crossed the milestone of 100 million daily active users after launching last month. It's still way behind Google, though, which has a

billion DAUs. And finally, Saudi Aramco, the world's largest oil company, reported a record net income of, get this, $161 billion for 2022. That's a 47% increase from 2021. And for more context, it's also almost three times the amount ExxonMobil made last year, which set the record for oil profits in the West. Scott, do you have any thoughts on this? And I think the most interesting story will be if it comes out that some venture capital firms were not in a hurry to slow the panic because their incentive is to have chaos, specifically chaos in the banking sector and a lack of faith in our institutions or in the dollar, which plays right into the hands of the kind of Web3 investments they've made. There was a consortium of VCs that put out a statement on Saturday saying that they would be supportive of SVB sale, keep their assets there. They were trying to facilitate a transaction that would hopefully stave off a bailout or at least reduce the cost of backing the depositors.

And there were some really big VCs noticeably absent from that letter, that statement. And as far as I could tell, the one thing that the VCs who did not sign that letter have in common is they have huge investments in Web3. And that's kind of a little bit the problem with Web3 is it's a little bit of a bet on anarchy and a collapse of certain regulatory institutions. Inflation continues to come down, only slightly, but we'll take it, right? That's good news. And the ultimate business strategy for 2023 isn't AI, it isn't supply really recognize it or register how powerful it is. If you have 40% operating margins, which is enormous, but companies like Google and Meta probably have operating margins like that, meaning that their operating income or their profits is about 40%

of their top line revenue. They can increase shareholder value one of two ways. They can either grow top line revenues by $2.50 or they can cut costs by $1. And so at some point, the easiest way to add a lot of shareholder value is to cut costs. When your growth opportunities appear to be waning and you've stuffed so many calories down the esophagus of your company that there's fat everywhere, then the ultimate shareholder-driven strategy is to lay off people. Meta has basically doubled since November. And you're just going to see this everywhere. And we said this six months ago, we're just getting started. It's kind of the gift that keeps on giving. Now, at some point, you'll start cutting not only into muscle, but into bone. But I think they have a long way to go. If you look at how many people they hired, I think they're going to lay off 10,000 or 12,000 people and they're going to say, wow, no one seems to

miss them. In terms of the latest GPT-4, I think it's super exciting. I think there's going to be so many new businesses driven off innovation around AI. I was thinking about communication strategy. I'm a communications firm. Well, I'm going to try and figure out how I can use AI and large language models to figure out what types of phrasing and communications are most tightly correlated with an increase in stock price. Or I'm going to try and find what types of crisis communications and statements and wording result in the lowest decline in stock price when you're announcing shitty earnings. You could build some sort of AI tool that would look at every number and word in a prospectus for financial

disclosure of banks, assign a certain level of risk to them based on if it says, we're invested in crypto, all right, that's very risky, or we're invested in overnight commercial paper, all right, that's not as risky. And it could do a stress test on every bank. And then you could sell that data back to the banks and say, we've done a stress test on you behind the scenes. Would you like to know what it says? So the companies that figured out the web first, the companies that incorporated e-commerce first, the companies that figured out a way to communicate marketing through social media, they all shot out ahead or developed some sort of competitive advantage against their peer group. So it doesn't matter if you're in the communications business, the media business, or you fix cars, or you're in the automobile industry.

Whatever industry you're in, you're going to see a subset of that industry grow stakeholder value faster than others by leveraging this new technology. And then Saudi. Yeah, I want to hear your others by leveraging this new technology. And then Saudi. Yeah, I want to hear your thoughts on Saudi Aramco. You were just in Saudi Arabia like two days ago. Yeah, so I just got back from Saudi Arabia and Riyadh. And the thing that struck me there is just that, well, one, and this is related, I think Saudi may have reported the most profitable year in the history of all business, $161 billion. That's just striking.

I mean, that's more than Apple. That's just an unbelievable number. And I had never been to Riyadh. I moved to London. I want to spend more time in the Gulf. I'd never been there before. I've been there four times in the last three months. I've actually found the people quite warm. And what struck me was I met a lot of young people in the services business, entrepreneurs from Europe, from the Middle East. And generally speaking, they moved to Dubai for opportunity. And now they're moving to Riyadh. If you look at the kingdom's plans, I mean, they're smart people. They realize we're out of oil in 30 or 50 years or whatever it is. And we need to pivot and transition

to a non-oil-based economy. And we can do that with education, we can do that with tourism, but they are making these staggering investments in an attempt to pivot, kind of the mother of all pivots, if you will. And you talk about they're building cities from the ground up that I think they believe are going to be much bigger and bolder than Dubai. Tons of unbelievable investments in infrastructure and education. And you can just see that people go where the money is. People go where the opportunity is. And just as you saw a lot of people from the Middle East and Europe and Asia flock to Dubai, they're now flocking to Riyadh.

Okay, we'll be right back after the break to discuss the fallout from Silicon Valley Bank. Stay with us. I just don't get it. Just wish someone could do the research. Can we figure this out? Hey, y'all. I'm John Blenhill, and I'm hosting a new podcast at Vox called Explain It To Me. Here's how it works. You call our hotline with questions you can't quite answer on your own. We'll investigate and call you back to tell you what we found. We'll bring you the answers you need every Wednesday starting September 18th. So follow Explain It To Me, presented by Klaviyo. Support for this show comes from Constant Contact. You know what's not easy? Marketing.

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customer support. Ready, set, grow. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. Constantcontact.ca. Bank. Now, there's a lot to talk about here. So to keep things concise, we're going to unpack the story from three different angles. First, the banks and the US banking system. How did this happen? Has it happened before? How does this affect other banks? Second, brand. What makes Silicon Valley Bank different from others? Does its brand have a role to play in this or even its PR strategy? And third, beyond. That is, what can we learn from this and how will things likely play out? So Scott, let's start with a question about how banks work. When Silicon Valley Bank was seized by the government, it had $209 billion in assets.

Yet the reason clients panicked is because the bank didn't have the cash to cover their withdrawals. So sort of a fundamental question, how can a bank with $209 billion in assets be essentially broke? Well, it's not that they're broke, it's just that they're illiquid. And that is one of the pillars of an economy like ours is banks take in money and then they will invest and loan out more money than is on hand. And as long as everybody doesn't ask for their deposits back at the same time, they give leverage to the system and companies and people can invest and consume more, which pumps the economy to innovate, to fill in niches, to create new products, new opportunities. And that's effectively the best or the most basic form of kind of risk capital to

grow the economy, similar to the way some people justify the deficit by saying, well, as long as that deficit spending grows the economy by more than the interest on that additional debt, you're effectively inspiring growth. And there's some truth to that. Unfortunately, that's been used to engage in reckless borrowing, that logic. The reason we have regulation is to make sure that these companies or these banks can be stress tested in very severe liquidity crunches and there isn't a panic which creates a run on the bank and then the bank is kind of closed overnight. So in theory, any bank could experience a bank run. There is no financial institution, as far as I know, that is immune.

If everybody showed up at the same time and wanted all of their money back, I don't think there is a bank that could survive that because they don't have purely liquid assets and they loan money out to people for mortgages. They can't just call all the mortgages the same day. They loan money to businesses and they just can't call all the businesses and say, our depositors want all their money back. We're calling your loan today. So there isn't a single bank, my understanding is, that isn't subject to the risk of a bank run. The question is, how severe would it have to be? That's effectively a stress test, what your liquidity, your coverage ratios, your ability to raise capital if there's

a scare and depositors show up and want their money back. And so far, the vast majority of days, the vast majority of years, the vast majority of banks, there's enough cash on hand to handle the deposits or the redemptions from depositors. And the reason we have FDIC insurance is that people can be fairly sure or secure that they don't have to do the diligence on how the bank is handling their loans or their investments and just know that they put the money in and it'll be there when they need it. There's been 73 bank failures in the last 10 years and 72 of the 73 have had depositors covered. And the 73rd has an 800 number that says if you lost more than $250,000 or you had more than $250,000 deposited, call this number, which to me probably means that 73 of 73 bank failures have had their deposits covered. So the

whole thing runs on trust. What about SVB's balance sheet specifically made it more vulnerable than any of these other banks? Well, it was really a kind of mismatch duration. And that is at peak, long-term assets made up more than 55% of SVB's total assets. And I think most banks are somewhere around 25%. So they were investing a greater percentage of their deposits in assets that were not liquid, right? So there's just no doubt about it. The risk management here was piss poor. And Bill Cohen, who we had on Pivot, would say that buying three-year mortgage-backed bonds or treasuries, even though they don't seem like risky assets, when you're investing at literally what appears to be the historic peak in terms of prices with

the lowest interest rate, you're just setting yourself up for failure. And this is what happened with the historic interest rate move upward, which took the securities value down. SVB had more than $15 billion in unrealized losses due to the decline in the value of its long-term treasuries. Now, what they could have potentially done was had marked those securities through their value at that moment as opposed to what they would be worth at maturity, which kind of misled investors in the short run. And then when they did the risk assessment and said, we need to offload these things, get into shorter term, more liquid securities, but it's going to cost us $2 billion in losses and they announced that we're raising this money. The way they

communicated was so obtuse that it just created panic and started the run. And then the thing that people didn't recognize was the concentration of the business to not just one sector, but what appears to be a small number of individuals who could then call their entire portfolio of companies and effectively start a run on the bank. And when you start, I mean, just full disclosure, I'm either on the board of or the founder or an investor in four companies that had, I don't know, $20 to $30 million total at SVB. And when you start hearing from everybody that this company is pulling out, you kind of get worried,

am I going to be the dumb one that doesn't pull money out? And it just creates a classic run on the bank. Yeah, we'll get into the VC aspect of this in a second. But one of the effects that we've seen this week is this massive drawdown in smaller bank stocks. So First Republic stock fell 75% on Monday. Western Alliance closed down 47%. The S&P's regional banks index, didn't realize they had that, fell 25%. And what's strange about this is that it all happened after the bailout was announced. So my question is, why is there so much fear about these small regional banks if the problem has essentially already been solved by the government? Well, effectively, and this goes to your point, we have created a two-tier banking

system, or a two-tier banking system is coming our way. And it was about to come our way in 48 hours. Instead, it's going to probably happen over, call it, 48 months. And that is, even with the FDIC deciding and Janet Yellen deciding to step in and back depositors, there was still a lot of indigestion over the weekend. Will this be the first bank they don't bail out? People have had it with Silicon Valley. So why do you need that stress? Is the offering from Silicon Valley Bank or these smaller banks so much better that it makes up for that potential for that kind of very long sleepless weekend, I'll just put my money with JP Morgan. Now, if they hadn't covered those deposits,

within a week, that two-tier system would have emerged. I was just going to mention the numbers about you talking about this flight to security or maybe even like a flight to quality. But Bank of America saw more than $15 billion in deposits after SVB failed. And then JP Morgan, Citigroup, Wells Fargo, they've also seen billions of new deposits. Those numbers haven't been disclosed yet. And you mentioned in our special episode that you're sort of nervous about this. Why is it that bad? I mean, even from your, you've said that you want to keep your money in Silicon Valley

Bank or whatever the new entity will be. My question is like, why not just go for the secure option and put it in JP Morgan? What is frightening you about this? So, okay. So that's a fair question. And what you have is this slow march now towards a two-tier system. And so, for example, I have one company that has 8 million or had 8 million or has 8 million at SVP. We decided to take half of it and put it

at JP Morgan. And that is, to be fair, if you're on the board of a company or fiduciary and part of the fiduciary responsibility is to manage risk, so we thought, okay, let's not have 100% of our capital ever again at any one bank. The hard part is, and Bill Cohen argued this, it might be time for some consolidation. It might make sense to have fewer banks that are better capitalized. There's an argument for that. What I think the downside here is that, simply put, less competition is bad for the end consumer. And that is SVB came up with a lot of innovative products. They sort of pioneered, I think, the venture debt market. When General Calis invested, whatever it was, $17 million in L2 in 2014, SVB and CO2 came in and said, we'll give you $5 million in venture debt, which is

debt that is non-dilutive. And I got in a crazy low interest rate, three and a quarter percent plus warrants. By the way, they made a lot of money on that. And the reason why I think we ended up going with Co2 is because there were two bidders. And because there's two bidders, you can play them off of each other. Competitive market, the invisible hand of the market lowers the costs on the end entrepreneur and the small company. So a really robust banking system, and what I mean by robust, I mean a lot of players competing against each other, leads to better terms for consumers, borrowers, and businesses. Now having said that, regulators need to make sure that they don't get so aggressive

that they subject themselves and their depositors and the FDIC and the system to undue risk. There has to be certain capital coverage rate and liquidity ratios. But what I worry about is we end up with, if they hadn't covered these deposits, what I saw is that slowly but surely, or maybe even fast and surely, you end up with like five banks that have 80% of all assets. And what do they do? Especially because some of them are especially strong in certain regions. They slowly but surely raise the fees and lower the services. The final thing that we have to sort of cover quickly on this banking section is what's going on with Credit Suisse. So on Wednesday, Credit Suisse's largest shareholder, Saudi National Bank, said it would not provide any more financing to the bank. And Credit Suisse's stock dropped 30% immediately. And this sparked

sort of a wider sell-off of European bank stocks. But then eventually, the Swiss Central Bank stepped in and said it would offer a liquidity backstop. You know, first, we just need to get your take on this. But my specific question would be, it's very unusual that this happens several days after the SVB collapse. So do you think these two events are in any way related to each other? Oh, they're 100% related. I mean, to a certain extent, the American banking system might come out of this stronger because all of a sudden everyone sharpened their pencil and is running kind of mini stress tests on every bank they have their deposits with. And the US banking system looks like it's going to survive the stress test. It's basically its

shareholders and its depositors and its regulatory agencies are saying, okay, what happened at SVB with an increase in interest rates, with mismatched durations in terms of investment, poor risk management, and a quote unquote run on the bank, if you will, everyone is in a very disciplined, meticulous, and maybe even anxious and sometimes paranoid way looking at their bank. And it looks as if the U.S. banking system kind of comes out of this battle-tested, if you will. I'm not sure that's true of banks in other regions. And that is, you can bet that everyone's looking at big banks with a lot of these types of corporate deposits and saying, well, what is their percentage of investments in long-term securities? Who's pulled an SVB, but worse, who's vulnerable?

And I don't know how the other banks, Credit Suisse, a European bank, you don't know how's Deutsche Bank. You can bet bank of japan everybody is getting out their pencils and saying okay what happened there and then all of a sudden they report okay people are pulling out of their deposits here and then boom it's a downward spiral so i wouldn't be surprised at all if you see a lot of stories from banks in different nations that don't appear to have the same amount of Kevlar as U.S. banks. Okay, thanks, Scott. Let's go to Mia on the street. In order for banks to work, they need trust. But do people really trust their banks? Let's find out.

So where do you keep your money? My money's in a few different bank accounts right now. Okay, and why a few, not just one bank? Kind of dependent on the interest rates, who's doing some some hot deals. Smart finance girlie. We bank with Mercury as a business and personally I work with First Republic which I think is probably gonna end poorly for me. I put my money in my local bank that's located like a half an hour drive from where I live.

Does that make you trust them more, do you think? Yeah, because they're really good customer service and they're really nice, they know you and you get your own guidance counselor. How much do you trust your banks? So until now, like big trust. For sure, the last event was kind of scary and it makes you think, okay, what do I do now?

What can be the next step? I feel like I wouldn't use the word trust. I probably trust the one that I've been with the longest, the most. But I wouldn't say I trust them. No, I don't know. Not really. I'm in the middle with Bank of America.

Like, it is super corporate. I wouldn't trust it the more corporate it is. I don't think I have trust in any bank. But, you know, you can't, in 2023, put your cash in a shoebox under your bed. Are you worried about First Republic? I mean, not really. It's more of a fatalist approach. Like, there's going to be some bank by which I can deposit cash into on a bi-weekly basis. And if there's not, then we have bigger problems.

And do you think that there's really an alternative to banks? Not that I'm advocating for storing enormous amounts of cash under your bed. But I do think, especially when the market gets gross, everyone goes back to cash. Also, I'm sure there's a bunch of crypto bros walking around. I do a lot of stuff with crypto, DeFi, and stablecoins. Actually, a lot of what I do is in stablecoin. So what happened with SVB was very interesting because there was Impact to Circle's product, USDC.

Part of their reserves for the currency were in SVB and people didn't know if SVB deposits would be worth anything. Seems a little antithetical to the purpose of a decentralized exchange and decentralized form of currency that then the thing that is backing that decentralized currency is centralized, then the entire thing is not decentralized. Does that make you feel less confident or like trust less the idea of a decentralized stable coin? That's a good question. I personally, in the current financial ecosystem, I'm okay relying with banks. And the fact that it did end up guaranteed and that withdrawals opened back up gives me a lot of confidence in holding USDC.

Thanks to the US government. Thanks, Mia. Let's move on to our next topic, branding. So in our special episode of the weekend, you mentioned that Prof G Media is banked with SVB. And as you mentioned today, it's the bank for most or all of your startups. And something I've realized recently is just how much we all underestimated the importance of SVB to the whole startup ecosystem. So, you know, half of all venture-backed tech companies bank with SVB. Practically every founder I know uses it, which to me speaks to the strength of the brand. So based on your experience, can you walk us through why people bank with SVB? What was appealing about the brand in particular? And potentially, if that brand had any role to play in this collapse?

Well, so SVB did what a niche brand, a successful niche brand does, and that it figured out its market and what specific needs that market has. They were doing exactly what you're supposed to do from a kind of product market fit standpoint. Now, where the brand came into play was all the societal anxiety and resentment from citizens, taxpayers, and the representatives around backing the deposits. I wouldn't even call it a bailout, but backing the depositors of Silicon Valley Bank 100 cents on the dollar. And that is purely a brand-based issue. If this bank, if SVB had been called or named First Agricultural of Iowa, there wouldn't have been any argument. They would have come in right away. It would have been over. There wouldn't be a bunch of resentful

Americans and politicians swiping at SVB. And there are a few brands that have fallen further faster than Silicon Valley. This is a group of people who take enormous risks with kind of American capital. What do I mean by that? They build an app, a social media app, and they recognize they take big risks, invest a lot of their own and other people's capital, enormous upside. They capture all of the upside even more by weaponizing government and ensuring that there's all sort of tax breaks and loopholes and subsidies and first 10 million out, small business, 1202. And then American households that have teenage girls pay the price for the risk they're taking. I want all of the upside of the shareholder value increase, but the externalities of an attention-based economy is borne by households

across America. I'm going to build or invest in a ride-hailing company that's unprofitable to create tens of billions of dollars in wealth for shareholders, but labor pays the price. Contractors in California and across the nation no longer have overtime or workers' comp because this company figures out a way to spend $120 million to pass a proposition that classifies who used to be employees as contractors. So I think there's a general feeling that if you were to take the three largest coal fire plants in the world or the big puffs that have created climate change or a worse environment, you'd say, it's the suburbanization of America, it's the industrialization of China. But also, I would argue one of the biggest coal-fired plants is in Palo Alto. And that is

this leveraging of money to politicians, this idolatry of innovators, and a general gestalt that we can take a ton of risk and recognize 100% of the upside of that risk, but American citizens are going to pay a disproportionate amount of the downside from that risk. And I think people have just really turned on the Silicon Valley brand and have decided, okay, this is a group of people that has some very vocal, outspoken people who are constantly shitposting government. And then when shit gets real, they're angry that government hasn't shown up quickly enough. So there's a lack of citizenship and a plethora of survivalist mentality. Well, let's build a bunker in the forest, put signs up everywhere, trespassers will be shot, the US government is

the enemy, but I expect the government to connect my electricity and my water and my heating. And when there's a fire in the backyard, when I'm trying to innovate and invent new chemicals, I start bitching that the Coast Guard and the Fire Department and the Navy aren't here in 60 seconds to save my ass. just as there's two tiers in banking emerging the bulletproof banks and everybody else there's two tiers of vcs developing one is what i call venture capitalists who are citizens hamantaneha from general catalyst that tried to assemble a group on very short order on the Saturday, last Saturday, issuing and articulating support for the bank and saying, we'll keep our business with the bank if someone acquires that. I think that's a constructive attempt to solicit more interest

in an acquirer that ultimately costs the government less and creates stability. I think that's citizenship. You had venture capitalists or investors like Ron Conway and Reid Hoffman, not on Twitter, but behind the scenes working with Nancy Pelosi, working with Governor Newsom, working with Ro Khanna, Representative Khanna, to educate and discuss with the Fed why they believed you needed to back these deposits, how it could be most orderly, how they could position the bank for the best sale such that it didn't end up costing the government. They were trying to play a constructive role. And what you also have is this thickening

band of what I call venture catastrophists. Catastrophism is a belief that the world has largely been shaped by a series of sudden violent shocks on a global level. In addition, we have an attention economy where you can be famous just for being famous. You can make money just for claiming that you're the best business person in the world or saying offensive things about women and showing your cars. And even if people don't like you for the right reasons, it pays to be famous on TikTok. You can monetize it. So you take all of these dynamics and it leads to smart people with huge followings going on Twitter to their hundreds of thousands, if not millions of followers and saying, in all caps, you should be terrified. On Monday morning, there are thousands of people lining up around banks. Some will get their money out. Most will not. Chaos will ensue. I mean, quite frankly,

that's just not helpful. They have a right to pull their money out. They have a right to free speech. But Martin Luther King called it the beloved community. Johnson called it the great society, this notion that we are supposed to be as a whole greater than the sum of all the individuals. And we've hit such a hyper individualism that it appears these individuals get some sort of reward from being catastrophists, from being incredibly loud, even if it creates more systemic risk to the system. And I think a lot of it comes down to, we talk a lot about what you, you know, advice to young people. It's like, what kind of person, what kind of leader, quite frankly, what kind of man do you want to be? You're in a foxhole. And just as I say, there's no atheist in foxholes. The worst person to be in a foxhole with is a libertarian. Do you want to be in a foxhole with someone who's calm, deliberate, doesn't have knee-jerk reactions, isn't communicating on Twitter, but is calling

people and getting shit done? Do you want to be the Ron Conway or the Reid Hoffman of the world? Or when the first bullet flies overhead, do you want to start screaming, we're all doomed? And screaming at the top of your lungs and giving away your position to the enemy, making things worse,

increasing the likelihood of danger. That's the kind of person you want to be. It reminds me, in 1984, there was a police officer who planted a bomb, and I'm not accusing them of being terrorists, who planted a bomb underneath the undercarriage of a bus carrying the Turkish Olympic athletes and then found the bomb so he could be a hero. And when you follow these guys' Twitter feeds, you distinctly get the feel they would like to see a catastrophic outcome such that they could take credit for either calling it or saying that it was because of them that they saved it. It feels as if they have a vested interest not in the health of America, but in validating their own views around catastrophe. Here's the stat that really pisses me off, which I saw the other day, which is that in January 2023, there was an estimated $290 billion in dry powder, that is just readily

available cash on the sidelines, in US VC funds. And if you look at the amount of deposits that were in SVB, it was 175 billion. So that's the maximum amount that could have been lost. And you have all of these VCs, as you're saying, catastrophizing, their hair is on fire, when in reality, they could dip into their own pockets and solve the problem. They actually have double the amount that you'd need, the maximum amount that you'd need to cover that hole. But they're pretending that this is a gigantic systemic-wide issue, when in reality, I mean, I feel like you sort of add to the analogy there,

where like, you know, you've got a guy in a foxhole who's freaking out, not because he's going to, not because everyone's going to die, but because his net worth is going to get cut in half. And that, to me, feels like the most ridiculous part of this, that actually, they're worried about, oh, we're not going to be able to make payrolls for these companies. Actually, you can make payrolls. And all of the most honorable VCs and probably the best VCs said to their startups, yeah, don't worry about this. We've got you for at least the next four or five months. At least that was the case for the founders that I know

and the VCs that they're partnered with. They said, yeah, we're worried about this. Our accounts are frozen, but I got a call from my VC. They said, don't worry, we're going to protect you. We're going to provide you that liquidity. We've got your back. And we're going to guarantee you that for the next four to five to six months, you're going to have enough runway to make your payrolls and we're going to fix this

thing. And that's what every good, decent VC should do and can do because they all have the cash to provide it. My company, my ed tech company, and every company I've started for the last 10 years is backed by General Catalyst. And I knew they didn't even have to call me, and they did. They would have our backs, that they would give us the money we needed to make payroll. That's just how they roll. None of them were on Twitter saying the world was going to end. And to be online claiming it was the end of the world, again, it's not even going into a crowded theater, it's going into a crowded stadium and screaming fire, or it's being an arsonist and then grabbing

a hose and saying, I'm a hero. We'll be back with more after the break. Thank you. their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin, which delves into the multiple layers of relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues, business partners, and managers. Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into How's Work, a special series from

Where Should We Begin? sponsored by Klaviyo. We're back with Prof G Markets. Okay, let's finally move on to the future. And let's start with regulation on that topic. So as these events unfolded, it became more and more clear that the rules for Silicon Valley Bank were not the same as its competitors. And that is because SVB had less than $250 billion in assets, they weren't subject to the same liquidity and capital requirements of, say, a Bank of America or a JP Morgan. Now, that wasn't always the case. After 2008, the Dodd-Frank reform set strict limits on banks with at least $50 billion in assets.

It was only after SVB lobbied the government to extend that number that it all changed. So there's an argument to be made here. Yes, SVB maybe shouldn't have lobbied, but there's an argument to be made that this was a regulatory failing from the government's part. One, do you agree? And if so, two, what kind of regulatory steps should we take to prevent this from happening in the future? So to the first question, was this a failure in regulation? It's not entirely clear that even if the feds hadn't acquiesced to SVB's lobbying and increased the limits on the level of liquidity and reserves they would need to maintain, even if they hadn't lessened the regulation, whether or not that would have made any difference. Because the two primary drivers here

weren't what I would call liquidity, the two anomalies that kind of put this thing under faster, where this 450 bps increase in the federal funds rate or interest rates and this run on the bank. So I don't know if it would have made a difference. Having said that, you can be sure they're going to rescind that regulation and that regional banks are going to have probably similar regulatory constraints as big banks because smaller banks pose systemic risk because a small bank, which SVB was not, I think it was the 16th biggest bank, poses contagion risk because just the headline risk of this bank is going under, everybody starts freaking out. So you're going to see probably an increase in regulation, which is probably a good thing. It'll also, there's no free lunch, probably lower the returns for banks, probably depress their stock prices, right? They're not going out of business, but they're not going to be able to show the kind of levered returns they've enjoyed. But one thing's for sure, the biggest banks are going to take in so much cash.

They're going to report their biggest inflows in history, I would imagine, over the next quarter. But I think you'll see, just as we massively increased regulation with Dodd-Frank and we lowered it a little bit in 2018, we'll see increases in liquidity reserve requirements and capital ratios for regional banks, recognizing that a regional or a niche bank can in fact potentially create contagion here. So yeah, regulation absolutely is on its way. I also wanted to talk about the possibility of an acquisition. So the next step, when I say possibility, it's an inevitability. And the next step is that a large bank is going to come in and acquire SVB. But so far, nothing has happened.

And the one explanation I saw was in an article that Mia sent explaining why JP Morgan doesn't want to buy. And that's basically because Jamie Dimon still has PTSD from 2008 when they bought Bear Stearns and Washington Mutual, but they still ended up having to pay a bunch of legal fees after the bailout. And just a quote that Jamie Dimon said in 2018, we would not do something like Bear Stearns again. In fact, I don't think our board would even let me take the call. So that explains JP Morgan's approach to this. But why hasn't anyone else come in? Why is this not a great asset that they could get for cents on the dollar? It is a great asset.

They will come in. They won't get it for cents on the dollar but they'll get it at a great price. And my guess is the feds are right now orchestrating a bidding process and creating, if they haven't already, a data room with all the assets, all the investments, all the clients,

an estimate of who sticks. They'll have to do diligence and call a hundred depositors and say, are you going to stick with us? What has happened to the deposits? But there's huge assets here. There's not only the money and deposits itself, but they have a series of relationships with what was half of every startup in the world's largest economy. I mean, there's a lot of fees. There's a lot of downstream investment, banking, investments. And at the end of the day, if they hold on to, say they just hold on to $150 billion, $150 billion that you can then start loaning out again and investing at a higher rate than you have to pay depositors is a really good business.

So absolutely someone will come in and buy it. I always thought the best buyers would probably be Wells Fargo or B of A because they have big balance sheets. Wells Fargo needs a get out of jail card. They have just such a shitty reputation for ripping off vulnerable depositors for the last 10 years that I think this would make them look like a good actor. In addition, alongside of B of A, they have their roots in the Bay Area. Wells Fargo and B of A were founded in the Bay Area so it strikes me that it kind of fits their brand positioning, their relationships, they have the balance sheet but my guess is there's a dozen or more serious bidders asking thousands of questions such that they can put in a thoughtful bid. Let's end with a really interesting point that our friend Todd Benson made.

Todd thinks that what happened to SVB might be about to happen in the commercial real estate market. And that's because the dynamics here are very similar. So the value of office real estate has been cut in half since COVID and tenants aren't renewing their rents. We've seen a lot of reporting on that, which basically means that all of the loans that the banks issued to build and maintain those offices are no longer worth what they used to be. Do you think Todd is onto something here? Oh, no doubt. So Todd's point is if you really valued the loans secured by commercial offices, they're not worth a hundred cents on the dollar. Even if they're being paid, even if the interest rate is being paid, even if the government says you can value these

at their maturity date, if they were forced to sell this loan to raise capital and the loan is a $500 million loan against an office building in Midtown Manhattan, what would they get for that loan right now? Because the most enduring structural change in COVID does appear to be remote work. People are going to go bank by bank and say, what is the quality of their loan portfolio and what would it mean if they were forced to sell these loans or these investments because of a liquidity crunch? And Todd's just zeroed in on the loans that are probably have the greatest delta between what they're marked at and what their fair market value is. I don't even think people know how to mark them right now. There's no price discovery. Buildings aren't trading hands

because the people who own them think, well, eventually people will come back to the office and the people who might acquire it go, no, I'm going to wait. I have no idea what's going to happen to 1251 Avenue of the Americas. But it is an interesting thought that is there a bigger delta or impairment coming from banks who own or have a lot of their loans secured by commercial real estate? Let's take a look at the week ahead. We'll see data on new and existing home sales for February, but the spotlight will be on Chairman Jerome Powell and his interest rate hype decision, which is due Wednesday. Do you have any predictions to close us out?

So my prediction is I think Chairman Powell is going to take his foot off the gas. I can't imagine that a lot of central bankers haven't called him and said, hey, Jerry, how are you? Look, I understand why you've had to raise rates so fast. I get it. We're raising rates. But maybe we want to take a breather that they're beginning to look at all of our national banks. There's obviously unintended consequences of a 450 bps increase in interest rates, which is unprecedented since 1979. Maybe we just want to give the markets a bit of a breather here. And also, I think he has the cloud cover at least to skip rates for a meeting because

inflation came out not moderated, but not scary. It did come down. So anyways, my prediction is at the end of the day, he taps the brakes on these rate hikes and doesn't hike rates this time. That's all for this episode. Our producers are Claire Miller and Jason Stavers. Benjamin Spencer is our engineer and Drew Burrows is our technical director. Special thanks to Catherine Dillon and Emil Severio. If you like what you heard, please follow, download, and subscribe. Thank you for listening to Prop G Markets from the Vox Media Podcast Network.

Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday. Reunion As the world turns And the dark lies In love In love Thank you. to do it. So what is enterprise software anyway? What is productivity software? How will AI affect both? And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts. Hey, it's Scott Galloway, and on our podcast Pivot, we are bringing you a special

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