Increasing fallout following the historic collapse of Silicon Valley Bank.
>> Are you an Etsy seller and didn't get paid today?
Neither did I.
>> The demise of the nation's 16th largest bank once a titan in the world of tech
startups, wreaking havoc including for sellers who use ecommerce site Etsy.
The company, acknowledging some users aren't getting paid because it
distributed money through SVB.
>> Silicon Valley Bank where many tech startups had deposited their money and
did their banking collapsed over the weekend and is now taken over by the FDIC.
The federal government has stated that all depositors will be made whole
including those who had more than the FDIC insured $250,000 deposited in the bank.
And I'll explain why they made that decision in just a moment including why
the bank collapsed in the first place.
Now, it's important to understand that there's a difference between
taking care of the depositors and bailouts for the investors for the bank.
There will be no bailouts for the investors for the bank, okay?
This only has to do with companies that had deposited money into the bank
which has now collapsed.
So this was done to prevent more bank runs and
a complete collapse of the US banking system.
But what went wrong in the first place?
Why did the bank collapse?
Well, last week Silicon Valley Bank announced that it had sold some
government bonds, okay?
So SVB said it had sold 21 billion in securities at a loss of about 1.8
billion after tax, it also set out to raise about 2.25 billion in capital.
Now, what happens with banks typically is depositors deposit money into the bank and
then the bank invests that money.
Now, in this case, SVB decided to invest its money in what is typically
thought of as safe investments, right, government bonds.
But when interest rates went up, the value of those bonds went down and
as tech companies needed money and were withdrawing money, Silicon Valley Bank did
not have the liquidity necessary to provide the cash for the withdrawals.
So that is why they had to sell those government bonds in order to have
the capital necessary to provide the money that the depositors wanted
through their withdrawals.
I have more details on this and what went wrong in just a moment.
But Cenk, so far any thoughts?
>> Yeah, tons of thoughts.
So I wanna explain a couple of critical parts of why this happened.
And then of course, we're gonna get to what the correct course of action is and
why it's the correct course of action.
First of all, Silicon Valley Bank had tons of startups in it,
which means that about 95% of its money was not in short.
Because if you have a lot of retail clients, Bob and Joe and Sally,
they're all insured because they're under $250,000.
But a lot of the businesses are not insured because they're above $250,000,
they have a lot of money above that they put into the bank.
Now, the part that nobody is talking about is that what's triggered all of this in
the first place was that VCs stopped giving money to startups, okay?
And part of the reason they stopped giving money is because the interest rates
in the first place, higher interest rates leads to a different financial equation
for whether you fund startups or not.
So, the startups had to use more of the money that they had in the bank.
So now money is starting to go out of the bank, right?
No problem, they put it in safe treasuries as Anna told you, right?
The problem is because of higher interest rates, the treasury's went up,
the interest rates go up and they're the ones that they have at lower
interest rates when they go to sell it, they lose money on.
They still get money, they still get assets, right, to be able to pay their
depositors, but they've lost some amount of money from them.
Then they are forced because of the amount of money that they have lost
because of this economic condition, to go raise a little bit more capital.
That's when word hits the street and panic starts.
>> Exactly.
>> At that point, the VCS [LAUGH] turn around and they tell all their startups,
get you money out of the bank, we got a run coming, and 42 billion pours out and
then we're gonna tell you the rest of the story.
>> Exactly as the Wall Street Journal reported,
venture capital firms reportedly began advising their portfolio companies
to withdraw deposits from Silicon Valley Bank.
On Thursday, March 9th, customers tried to withdraw 42 billion worth of deposits,
about a quarter of the bank's total,
according to a filing by California regulators, it ran out of cash.
So there was a bank run due to panic, and as a result,
the federal government had to step in.
Now, over the weekend, there was a lot of confusion, there were a lot of
questions as to what would happen to the depositors who were not insured, right?
And so, Janet Yellen kind of gave, treasury secretary of course,
gave a mixed signal about it.
But what's now come out is that they will in fact make all depositors whole,
but they will not bail out any investors,
which I personally think is the right way to go, I'll explain why in a moment.
But to summarize, the Federal Reserve's sharp and
decisive interest-rate hikes played a role in a few ways.
They reduced the value of the bonds on SVB's books and spurred depositors
to withdraw money from the institution as the tech industry cooled.
The venture capitalists who made SVB such a big deal in the first place also played
a role in egging startups to pull their funds from the institution.
Okay, now, the bank made some pretty terrible decisions and
in the lead up to what transpired, the collapse,
they had lobbied hard and succeeded in loosening certain banking
regulations that would force them to have capital on hand, right?
Enough liquidity on hand to deal with a situation like this.
So we'll get to those details, but here's some of the other things they did.
Their clientele was not diversified.
They mainly focused on the tech industry and the tech sector, and
look at what happened to the tech sector in recent months, right?
I mean, it's been gutted significantly.
And so the tech sector went from depositing a lot of money into the banks
to all of a sudden needing to withdraw a lot of money from the bank, so
that played a role as well.
So the banks were pretty flush with cash, at one point.
For instance, SVB focused on the tech sector because they went from having $60
billion in deposits in 2020 to more than 200 billion in deposits by 2022.
Now, the bank's investments also were not diversified,
it invested heavily into government bonds.
But to be quite honest with you, if it had invested in other investment vehicles,
I don't know if that would have worked out well for them either.
>> Maybe a little diversity would have helped, but
overall that wasn't the major issue.
The interest rates moving was a major issue,
but I don't think that they had particularly risky investments.
>> And the bank by the way was already in trouble before the bank run because,
again, when interest rates increased, depositors started looking for
banks that offered higher interest rates as well.
So that's another part of this story.
So for instance, if you go to one of the big banks, right,
whether it's JPMorgan Chase, if you go to, I don't know, a Bank of America,
their savings accounts pay you nothing in interest, okay?
The smaller banks are a little more attractive to people who are looking
to save or companies that want to deposit their money because they will offer
you an interest rate.
So there's one place that I bank at, it's not one of these big banks and
it offers a 4% interest rate on my savings account, pretty sweet.
Why wouldn't I put my money there?
Of course, it's FDIC insured, I do not have more than $250,000 in that account,
not even close, but you guys get the point.
So all of a sudden you also have this issue with Silicon Valley Bank trying to
keep up with the competition by offering higher interest rates to depositors.
Now, what happens now?
The FDIC as I mentioned, has made it clear that all depositors will be made whole and
I think that was the right way to go.
Before I explain why I think that was the right way to go, Cenk,
why don't you jump in.
>> Yeah, so look guys, let's be clear about a couple of things.
First of all, no way to bailouts for the bankers.
And so why would we give them anything, let alone bonus or
the insanity that happened in 2008, right?
So no way to shareholders of the company, you took a risk that's called capitalism,
there goes your money and it should be okay, executives likewise,
maybe even worse.
Okay, so the depositors, so some people were like, hey,
above $250,000, [LAUGH] sad day for you.
No, no, no, no, no, guys, think about it, right?
So let's say there's a company and they're an SVB and they've got,
let's say that they're small and midsize company,
they got $10 million in the bank, so they're gonna lose 9,750,000.
Well, guess what's gonna happen, they're bankrupt instantly, right?
They have no money.
They literally have no money to pay anyone.
So the next time payroll comes up, they'll tell all their workers, sorry, but
you're all fired because we literally have no money.
So it's not a ha ha situation.
Now that could have affected up to five million jobs, it wouldn't have
been that many because someone found a way to get their money back and
there would have been some avenues.
But tons and tons of jobs would have been lost, that's totally true.
Okay, now, the second part of it I think is equally important.
If you say depositors are not safe at small to midsized banks,
every business in the world is not gonna go, maybe I lose all my money.
No, they're all gonna run, they're gonna run the Bank of America,
JPMorgan Chase, etc.
Every one of them will.
And it doesn't matter if you catch feelings over it, it doesn't matter what
you think of it, they're not gonna risk that money and risk going out of business.
They are all, literally, all of them would have moved to the top four banks.
>> So in other words, all of the banking in the country will further be
concentrated in the big four which we don't want [LAUGH].
Okay, that is- >> Guys,
anyone arguing that we should have done that, doesn't understand anything.
I'm sorry, but it's true.
You want JPMorgan Chase, Bank of America, Citi, etc., to be even larger.
You want them to be these giant conglomerates that have almost all
the money and power, are you out of your mind?
If you didn't guarantee deposited money, that is a law of mathematics and business,
there is no question it would have happened.
So as people were cheerleading it, I'm like, no, you insane,
don't do that, that is so counterproductive.
And a lot of it was driven by emotion, emotions, I understand by the way,
because these guys rip us off and they deregulated, they pushed for deregulation.
>> Right. >> We're gonna talk about that later in
the show.
But it was egregious what they did and
punishing depositors would have been totally counterproductive.
>> And it's easy to get caught up in labels that trigger certain connotations,
right?
That I totally understand.
So we're talking about tech startups, so you think tech startups,
you think bank, you think everyone's a bad guy and
everyone should be punished including the depositors, I disagree with that.
In fact, a lot of these startup companies like Etsy, for instance.
If Etsy were to go under as a result of this, well think about how
the vendors on Etsy, these are not millionaires and billionaires.
These are people who are selling their handmade stuff or
selling vintage clothing or whatever it is.
I don't think they should be punished over the deregulations
that were passed by our government which allowed for the banking system,
and this bank in particular, to avoid having the capital on hand,
the liquidity on hand to deal with the situation like this, right?
I don't think the depositors should be punished and I'll give you an example of
what some of these workers would have to deal with, right?
A lot of Etsy workers had to deal with some big questions today,
I wanna go to this video so you know exactly what I'm talking about.
>> Etsy used SVB to facilitate some of its payments to sellers.
Now, the company telling Yahoo Finance that quote, recently experienced a delay
in issuing payments to some sellers- >> I'm freaking out,
those funds feed my family and pay my bills.
>> Amanda Nielsen runs her handmade soaps business through Etsy.
It seems a little unfair, doesn't it?
>> It does seem unfair, it really does [LAUGH].
>> She says she's no longer receiving deposits though Etsy says it expects to
pay sellers via other payment partners within the next several business days.
I had no idea this was gonna affect me.
>> Yeah, so I don't know how it would be beneficial in any way to advocate for
something that would destroy the livelihoods of ordinary people.
And the depositors didn't take risky bets, right?
The depositors just deposited their money in a bank that they unfortunately trusted,
and because of deregulation and because of the behavior and
the poor management of the bank, they collapsed.
And so that's just where I'm at and I agree with you Cenk,
any investor into the bank should not be bailed out and there is no argument
from the federal government that any of them will be bailed out.
The other thing I want to just quickly mention because I think it's important is
how the Federal Reserve is stepping in because that is a little concerning.
So the central bank said that it would make additional funding available to banks
through a new Bank Term Funding Program which will offer loans of up to one
year to banks that pledge US Treasury securities, mortgage-backed securities,
and other collateral.
Up to 25 billion from the Treasury's exchange-stabilization fund
will backstop the Fed lending program.
Many of those securities have fallen in value as the Fed has raised interest
rates.
I mean, we just talked about that, right?
The terms would allow banks to borrow at 100 cents on the dollar for
securities trading potentially well below that value,
potentially putting the government at risk of losses incurred by banks.
Critics said the move would essentially offer a backdoor subsidy to bank investors
and management for failing to properly manage interest-rate risks.
And I think that read of it is correct.
What do you think about it, Cenk?
Yeah, so look, the Feds been doing something really questionable for a long,
long time.
This is a tiny, tiny percentage of it, but overall,
I'm worried about the general movement that the Fed is going in.
So in the old days, the Fed's already a black box, right?
So it's run by the New York Federal Reserve,
which is run by the biggest banks in the country.
And so they wind up printing money and giving it to themselves over and
over again.
They get in the past, until the interest rate started going up, they get money for
almost nothing and then they charge you an interest rate for the loans and
they make the difference.
It's free money, it's unbelievable, right?
So, but now they started doing something more dangerous in around 2008
when the crash happened, they started buying things.
The Fed buying things makes no sense.
And I've had every expert in the world on
this show- >> Yeah.
>> And asked them and they all go, I don't know what it means either, right?
>> Nome Prince has written about this extensively.
She has done many talks about this, you can watch on YouTube.
It's a disaster what the Fed has been doing.
But anyway, continue.
>> Yeah, so they buy things but they sell them.
And so every once in a while, they'll come out and say, hey,
AIG we got all of its assets, we paid people but
we sold it many, many years later and we made money on it.
The Federal Reserve made money on it.
Yeah, but if the Federal Reserve can make money on it, so
I think you could lose money on something, right?
And now it's got trillions of dollars on its balance sheet, I don't even understand
what it means to have a balance sheet for the Federal Reserve.
And by the way, neither does any expert in the world, okay?
So what that means is if the Fed winds up losing a ton of money,
what does that do to the dollar?
What does that do to the economy?
Since it's a black box that kind of prints its own money,
no one knows and it's the last backstop.
And Ray Dalio, one of the greatest investors of all time was here and
he told us the Federal Reserve is the very last stop.
If something goes wrong with the Federal Reserve,
it's basically an absolute international calamity where everything melts down.
So they're playing a pretty dangerous game over there.
Now, this one is Treasuries, which eventually go to them anyway.
So if they just wait for those to come due,
they almost by definition get their money back.
So it is very unlikely for them to lose money in this case, but
that doesn't make the general concept okay.
>> Yeah, I'm gonna wait and see how it plays out in this case.
What I've seen from the Federal Reserve so far,
especially following the 2008 economic collapse, has been so incredibly
damaging to the economy, has led to an explosion of inequality in our country.
And I just don't trust Jerome Powell, I don't.
I mean, he has made awful decisions that have
honestly provided all sorts of favors to his buddies.
And at the same time, I mean,
has done nothing to really help the American people.
Well, he by the way, simultaneously and
transparently says that he's increasing interest rates to increase unemployment.
>> Yeah, so, look, I think it's complicated and
I think that whether it's Jerome Powell or anyone else, they're just gonna do
whatever the big banks want, the big banks are on the board, right?
So, is everybody happy about them raising interest rates?
No, a lot of business interests don't want them to raise interest rates,
so he's going against business interests a little bit, so
that's why it's complicated, right?
But he could be cooling the economy too much and
he knows that it's gonna create unemployment and he's okay with it.
And so when Trump was in office, he pressured the Federal reserve,
pump up the economy, pump it up, pump it up, right?
So lower interest rates just go nuts.
Well, now we're paying some of the problems of that, it's come due.
And so now he's cooling it down, which means the economy will slow down and
that's gonna fall on Biden's lap, especially by 2024 election.
So these are all complicated issues.
But the bottom line in this particular case, and by the way,
let me just say before the bottom line, some people are like, yeah, you guys have,
[INAUDIBLE] no, we don't, we don't.
>> And by the way- >> I'm telling you the reality.
>> No, we don't, right?
But if we did, what did we do wrong?
So our entire business should go under as a result of our piece of crap government,
okay, with the help of democrats as well, deregulating the banking system?
If we had been invested in that bank, meaning deposited money into that bank,
into an account, right?
That paid the employees at this place, how did we do anything wrong?
I don't get it.
>> Yeah, and in fact, our account is not, let's put it this way,
it is not significant enough to earn interest.
So it's not like anybody's shopping for a better rate, you're just trying to
keep your money somewhere and all of a sudden they go out of business and
you can't pay anyone, that's an epic disaster.
Never root for that guys no matter what the situation is, it's about humanity.
Anyway, overall bottom line on this is that in this case,
I think the Federal Reserve did the right thing because it costs almost nothing.
It is treasuries which normally go back to them anyway.
It's a rare case in that situation, it was right to save the depositors.
But guys, most importantly, do not lose sight of this.
You lose those small and midsized banks and
the big banks are going to be a colossus we cannot deal with.
They're gonna have too much money and power,
they're gonna rule the whole economy and that is a terrible outcome.
So, thank God we dodged that bullet in this case.