Silicon Valley Bank: Latest Developments

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I've got sunshine on a cloudy day When it's cold outside, I've got the month of

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March the 12th, 2023 It's late in the afternoon in California, 4pm, rather unusual time to do a show, particularly a That Was The Week show, a weekly summary with Keith Teer on developments in tech. Last Thursday, on March the 2nd, Keith's That Was The Week newsletter headlined with Venture Apocalypse, and then we did a show about it on the collapse of startup value, the failure of government to reign in big tech and the relentless rise of AI, but it wasn't the real apocalypse. The real apocalypse seems to have happened this week. On Thursday, Keith's That Was The Week newsletter talked about the canary in the coal mine, which was then known as Silicon Valley Bank. I'm not quite sure what it is now, but on Sunday, March the 12th, Silicon Valley experienced a near apocalypse. The news is slightly more cheerful this afternoon, but Keith, you need to be more careful, I think, with your headlines. You may be overusing the A word, apocalypse. Is that the word that we might use to describe what's happening in the last few days at Silicon Valley Bank? Well, it's definitely a, you know, you've got to pick a word that describes the gravity of what happened. It's kind of, you know, a nine point Richter scale earthquake would be another one. It's a major structural change in the way that Silicon Valley works, because SVB has been part of the ecosystem here for decades, and has held together using a combination of loans and banking, has held together with the venture capitalists and the startups, pretty much the entire ecosystem. So this is a major, major change. And a lot of the big banks have always been somewhat jealous of SVB. They initially didn't think SVB would become important, and by the time they realized it was, it was too late for them to do anything. So the Morgan Stanley's, the JP Morgan's, who you would, and the Goldman Sachs even, who you would expect would bank Silicon Valley, didn't because SVB did. Of course, that's going to open up some opportunities as well. Right. So I want to get to the up to the minute news in a minute, but your new startup SignalRack, excuse me, had some millions of dollars in Silicon Valley Bank. Why? Why do all the startups in Silicon Valley, why did they at least up until the last few days, bank at Silicon Valley Bank? It was basically a bank that understood startups. I mean, most banks are not set up. If you've ever recently tried to go and open an account at Bank of America or Wells Fargo or Citibank, the oldie worldie bureaucracy that they, that inhabits those banks doesn't inhabit SVB. You can call them up. You can get things done. You can open new accounts. They do all the KYC and the anti-money laundering stuff that any other bank does, but they do it very efficiently, very fast. They have a, they have a very good online side. They deal with wire transfers daily. They understand that venture debt, which is a big part of their business. So that is just a bank that understands what a startup is. And for that reason, it's a lot easier to work with. It was a bank that understood that. Your, your description, your, your opening to your newsletter, which came out on Thursday, you write, oh boy, what a day, 9th of March, 2023 will never be forgotten at Silicon Valley Bank. The aftermarket share price fell to $77, 78 cents, a 71 decline from the previous closing month. I might add, Keith, oh boy, what a weekend. What's happened since then? Well, a lot. Let's just go through it. So the first thing that happened is when the market closed at that, at that price, the share continued to slide all the way through to the next morning until it reached a low of, I think, $34 a share. And at that point, the bank was taken over by the California Regulatory Authority asked the FDIC to step in and take the bank over, which happened around 9am on Friday morning. So 12 hours or so after I wrote my editorial, they then, the FDIC then stated that deposits up to $250,000 would be insured, but nothing else would. For most depositors, that's a tiny percentage. Now, as all that was happening, everyone was busily trying to wire their funds out of Silicon Valley Bank. Some people were advising against that, saying it would create a run on the bank. Well, honestly, it was too late for that message. By Thursday afternoon, when the SVB CEO did a press conference and said everything's going to be fine unless everyone withdraws their funds, and footnote, everyone's withdrawing their funds, he kind of signaled to the whole world, you better get your money out if you can. We tried, by the way, and it was impossible to do a wire transfer on Thursday. Lots of people did manage to do them, and we eventually did one on Friday. But all of those wire transfers were held in a state called processing, which means they didn't actually go out. So the money was trapped there. And a whole debate ensued online on Saturday and Sunday between people who thought that to protect the depositors would be equal to bailing out the bank and others who understood that the depositors were victims here and the equity holders of the bank should not be bailed out. But depositors shouldn't suffer because of what essentially amounts to mismanagement of the balance sheet. So what responsibility, if any, does the startup community and maybe the VCs have for this run on Silicon Valley Bank? As you suggest, by the middle of the week, by Wednesday or certainly Thursday, there was a panic and entrepreneurs like you were all trying to get your money out of the bank. I know that some VCs, like our friends at Albert Bangor's fund in New York City, they were advising their companies to get their money out. Was there a hysteria that caused this run on Silicon Valley Bank? Because this is not a Bernie Madoff scheme. This is not FTX or Sam Bankman freed. I mean, there was no wrongdoing here. Yeah, so there's a sequence of events that started with a disclosure as long ago as February 21st that Silicon Valley Bank had lost money on long term bond positions and sold them early at a 1.8 billion dollar loss. I don't know if you remember, but we discussed it on the show at the time. It was it was in the newsletter. Now, nobody reacted to that in a strong way. The share price remained solid. It seemed as if all was well. And then what happened last week is SVB did a new disclosure saying that they were raising two and a half billion dollars to bolster their balance sheet to kind of balance the loss. And their existing shareholders were very unhappy about that because it represented at that time about 15 percent dilution to them. So that led to a lot of share sales and it was the run on the shares that led to the run on the deposits. The share owners had good reason to sell because no one's going to bail them out. No one's going to bail them out. So some shareholders began to sell and then there were mixed messages from the Valley. Some VCs said, we've got to support Silicon Valley Bank. Don't trigger a run on the bank, including a very mistimed and mishandled press conference by the CEO himself, who was, by the way, personally selling shares and paying bonuses on Thursday.

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So, you know, all bets are legal for the CEO of a banking crisis to sell his own shares. It's legal as long as he's in an open period where he's allowed to sell. It's a public company rule. So there are open periods between earnings calls. I'm pretty sure he would have been in an open period. So this was a classic panic. Everyone caught this panic and sold. I mean, that's basically what happened. Yeah. And the interesting thing is Silicon Valley Bank was totally solvent. It had more assets than liabilities. The way that banks work is deposits are thought of as liabilities, which is the opposite of the way normal people would think. They're liabilities because it isn't the bank's money. It's the deposit. The problem with the bank then and now is that all these assets were tied up in long term commitments. Well, it's both things. Firstly, they have to pay you interest on your deposits. And then secondly, they earn interest on their investments. And normally the net difference between those two interest rates is in favour of the bank, roughly around 5 percent. So they make money by having the buys, you know, two sides, they a bit like Sam Bankman Freed, except legally they use customer money to invest. Right. And that's and that's the nature. That's the business of banking. It's not the business of banking. And so let's catch up, Keith. I mean, as hopefully we have a live audience now. The news as of the last half an hour is that regulators have unveiled a plan to assure that depositors like yourself will get their money after the collapse or maybe the acquisition. The Federal Reserve System, the Board of Governors have just put out a statement. What's happened in the last half an hour? The combination of two days work, basically really between the lines. What this means is that Silicon Valley Bank is not being acquired by another bank. The FDIC and the government are going to underwrite the deposits, but they're not going to charge taxpayers for that. They're going to use the assets of the bank, which they'll take time to liquidate to support the depositors. So basically, they're providing a stable market where you don't have to run to take your money out. And, you know, the evidence that Silicon Valley Bank was not doing anything wrong is that there are sufficient assets that the taxpayer won't underwrite any of that. So there's no bailout even of the depositors. The assets of the bank will be used on behalf of the depositors and not just Silicon Valley Bank. Signature Bank was closed down in New York today, which is a similar, smaller version of Silicon Valley Bank. And First Republic Bank has gone on the record saying it's in good shape. It has not been closed down. You note on Twitter a traffic jam of investors trying to get their money out of First Republic in Brentwood, Los Angeles. I didn't even know banks were open at the weekend. So that was Saturday morning. Now, so what's happened now is that the fear will go because this statement from the government is not just for SVB, it's for any bank where there's a run on the bank. And what they're really doing is extending the insurance the FDIC gives, the $250,000 insurance. They're extending it to the full amount that you have deposited. They're basically providing insurance and underwriting that with the asset. Yeah. And my sense is that this is the correct decision. I mean, it's as if lightning struck you at SignalRank and so many other startups. You had no responsibility for this. You had no reason to imagine that that you would lose your funds. So the current balance sheet problem, what you call a balance sheet problem at Silicon Valley Bank, you're suggesting that its assets will essentially pay the depositors and then the bank will just go away. Is that what will happen? Temporarily, it will be run by the FDIC. They created a new bank on Friday that took control of Silicon Valley Bank. It will not be a branded bank. It will sit in the background, but it will be the legal entity. And I'll be able to just go to the SVB website as normal, but it's no longer SVB. And why wouldn't a bigger bank come in and buy Silicon Valley Bank? I think to answer that, you'd have to know a lot more details than we know. I think it's probably the nature of the assets are pretty long term. And the nature of the deposits is unknown because on Friday, $42 billion was withdrawn. So that chart you just showed of the balance sheet, the right hand side was depleted by $42 billion in one day in the non-insured part. So a buyer doesn't really know what they're buying. I would say that the 40,000 customers SVB has are a who's who of the startup ecosystem. And I would imagine that that's very attractive to people like JP Morgan, Morgan Stanley, Goldman Sachs, if they had the time to properly understand everything. And maybe that's what this will give them. So there may still be a sale. I just as I said in the introduction, just back from London, one of the things I did there was see the Lehman Trilogy, a wonderful play. Great play. I've seen it as well. About the history of the Lehman Brothers Bank. Is this just a classic story, narrative of capitalism, of money in capitalism, that this is an inevitability? There's nothing very digital about it. Nothing very new economy about it. Well, you know, to really understand it, you have to get into what's happened with the economy and interest rates, because basically until interest rates started to rise a year or so ago. The delta between the interest rate that Silicon Valley Bank paid and earned was totally stable and fine. But what happened is government interest rates for government notes is now around 5 if you buy the right ones. And Silicon Valley Bank were only earning one point something percent on their long term investments that they made. So because government rates were 5 percent, they really should have been paying depositors a lot more than they were earning from their long term positions. And but they couldn't because they were long term positions. Plus, they were they were losing money by only earning one point something percent. So this interest rate ecosystem led them to make the one point eight billion dollar loss by selling early. But yeah, I understand. But I mean, these things happen in a market economy. Interest rates go up and down and it's impossible to predict. I mean, they basically misunderstood the future. They never imagined that inflation would drive interest rates up, which it has done. They didn't predict inflation. But this is the nature of capitalism, isn't it? And particularly banking in capitalism. It's the nature of capitalism. It's highly volatile. Although I will say you could forgive them for not predicting the last 12 months, but you can't really forgive them for not being prepared for anything. Their commitments were too big. And then they made a whole series of blunders. Number one, they sold cheap without. And the message was they lost money, whereas the message should have been that they replaced a one point five percent interest rate with now a four point something percent interest rate and that the one point eight billion will be made up due to that over some period of time. So they mismanaged, you know, they acted, they mismanaged the message. Then they raised money to dilute their existing shareholders and announced it as a kind of shock. And then they did a press conference that said. Don't take your money out, otherwise the bank's going to collapse, which led everyone to take their money out at a greater rate than they were already, so that they made a whole bunch of blunders. These are straightforward blunders. You don't expect any. Criminal investigation of this on the part of about it, he's not going to get a job, though, I assume he hasn't exactly performed. Well, you know what the funny thing is, the head of. Compliance, I think of the CFL, one of the senior execs was at Lehman when Lehman collapsed. So there's a yeah, if lightning strikes twice, then then there has to be an explanation. What about the social media side of this? You you retweeted a Dave McClure tweet, Dave McClure being always. Unafraid to take strongly contrarian positions, what's McClure's take on the social media aspect and the hysteria on Twitter on this? Well, Dave McClure is. He gets irritated very easily and after two or three or maybe four days of seeing everybody repeating the same old stuff, he probably couldn't watch this show because he'd probably think we're doing that as well. Well, something's happened in the last half an hour to change the narrative. Yeah, absolutely. But he was basically getting angry with everyone saying, unless you've got something original to say, shut up. And then he made the point that he's bored as if the entire thing was entertainment for his delight. And he was basically the audience calling. So what was the Twitter response? Hysteria? Was there a lot of finger pointing somewhere? I've been away, so I haven't really been following the news as carefully as you. Yeah, I saw that there was some tweets and comments from prominent VCs and investors suggesting that the government had to step in. It's always easy to say that he's in crisis. And these are usually the people who are strongly libertarian and hostile to the government. Well, it was it was. More nuanced than that, but it started on Friday with a with a lot of misunderstanding. So people who you might think of being from the left basically said tough luck. The government shouldn't do anything. These are rich people who deserve everything they get for having their money in Silicon Valley Bank and kind of hatred of the startup ecosystem, which is understandable because it can be a bit right. And you you you you connected on Twitter to a piece suggesting that the working class were bailing out Silicon Valley Bank. Yeah, that's the classic position on the left. So that that was all over Twitter. And the initial reaction was a fight, a verbal fight. But it morphed into the distinction between depositors and management and stakeholders, equity holders. And by today, nobody was calling for a bailout. It hadn't been anyway. And nobody misunderstood that anymore today. And when when Janet Yellen went on this morning around 9 a.m. on TV and distinguished strongly between depositors and management and shareholders, I think everything dissipated. And it opened up the space to support depositors without bailing out equity holders. So the feds are the grownups, Keith, you and I have often talked about that. I know you're certainly more of a libertarian than me. Did this underline the importance of regulation of the feds and of the grownups in our crazy economy? Well, you know, I don't think this is a regulation issue because Silicon Valley Bank was within regulatory framework. It didn't do anything outside of that. Well, policymakers, the Federal Reserve. Yeah, but the FDIC is super experienced at these kind of failures and seems to have done a great job with the government of quickly responding and putting in place a mechanism that probably will calm everyone down. Is this, Keith, I mean, and this is perhaps the nature of the Twitter economy or the Twitter culture is every crisis is treated as an apocalypse. Is this ultimately a bit of a storm in a teacup? I think the answer to that is yes and no. Yes, as in we won't be talking about it two weeks from now, but no, in that it will fundamentally change the way Silicon Valley works, that there needs to be a replacement for SVB and the role it played. And it's not clear who that replacement will be. And I would imagine a lot of people will want to play that role. So expect change, probably slow change. And Silicon Valley will be weaker for a while until that change is fully completed. Who's had a worse week, Keith? You wear these two caps simultaneously, Silicon Valley or Manchester United Football Club, having lost 7-0 to their greatest rival, Liverpool. Well, you know, that's a great analogy because a week ago, Manchester United were the equivalent of Silicon Valley Bank. They collapsed. Then on Thursday, they beat a European rival called Real Betis 4-1, which probably means they're going to progress in the Europa League. And then today, despite having only 10 men on the field for most of the game, they managed to not lose against Southampton, whilst Liverpool yesterday lost 1-0 to the bottom club. So what a difference a week makes. Liverpool look like fools. Well, you and I disagree, I think, on who first said this, but I think it's Harold Wilson who said a week is a long time in politics, certainly a long time in Silicon Valley history. Has anything else happened this week? I mean, your newsletter came out on Thursday, lots of stuff on generative AI, surprise, surprise. Any other headlines this week that we should think about, Keith, in addition to Silicon Valley Bank? Yeah, these will probably emerge over the next couple of weeks. But the big one is that GPT-4 is about to be released and apparently is what's called multimodal. That means that it will be able to do movies, pictures, sound and words. And so we won't need to do this show anymore. We can just put it out on GPT and the algorithm will create you and I and our conversation. It'd be interesting to see if we could do that. I think the second big news of the week is that Mark Zuckerberg is apparently putting the metaverse on the back burner, whilst Apple, led by Tim Cook's insistence, apparently is going to launch a mixed reality headset at its worldwide developer conference in June and start selling it, even though some of his design people don't think it's ready yet. So that's going to be an interesting place to look. Do you think that Zuckerberg is doing this because somebody is putting pressure on him as he decided that he actually made a mistake in renaming the company Meta and betting the company on the metaverse? I think he's probably learned that you have to manage your shareholders. His stock prices, I think, almost doubled since he adjusted his stance. I doubt he's really changed very much in reality, but the messaging has changed to be all about productivity, AI and containing costs. So I think he's become a bit of a sheep after leading the pack. Now he's just following up this orthodoxy of laying people off. And of being more conservative, it doesn't seem very Zuck-like. Exactly, but it is. And then I also saw, I'm not sure if it was in, maybe it came out a bit late, but are Meta developing a Twitter competitor, an open Twitter competitor? They describe it as a text only environment. And I don't know what it is, but I don't have a lot of faith that it will be very interesting. So let's wait. This week, given the history around Silicon Valley Bank, did that reify the value of Twitter, given all the various crises of Twitter over the last few months? Elon Musk has been quite quiet on this front. Finally, he's out of the headlines. Yeah, he was asked yesterday if he'd be interested in buying SVB and he said he would on Twitter. So he hasn't been totally quiet. But no, I think everyone's been glued to Twitter. That's the only place to get real time. Everyone being everyone in Silicon Valley. Well, anyone who cares about what's happening with SVB worldwide, you know, the UK SVB was closed down by the British government. Yeah, I know you also you have you cited Mike Butcher, our friend of TechCrunch UK. How this will impact on the UK as a lot of it just came back from the UK, lots of headlines about the impact on the UK startup ecosystem. Will the Fed's decision to bail out depositors, will that be applied internationally or just to US depositors? It'll be applied to the US legal entity known as Silicon Valley Bank, which the UK is not part of. Wow, so so startup people in the UK who have put their money as depositors into Silicon Valley Bank UK. Haven't been bailed out yet, but presumably the British government will do the same thing. I would imagine they'll do something. I don't know what, but they'll do something and we'll find out pretty soon because the markets open in the UK well before ours do. Well, I thought you could at least make Silicon Valley Bank startup of your week, but you chose not to. And your startup of the week was a little company that most people probably haven't heard of Amazon. What are they up to and why were they your startup of the week? Well, then they're not the startup of the week for all of their everything they do. They're the startup of the week for their advertising business, which is now 40 billion annual. And they're creeping up on Google. They're still way behind Google and Facebook and Facebook and Microsoft. So it's for four companies, because I remember I interviewed Martin Sorrell, one of the smartest people in global advertising who always predicted that Google and Facebook would be joined by Amazon in this. Three way domination of global advertising, you're saying Microsoft's also has an important piece of this. Yeah, Microsoft, mainly through the Edge browser and their their big search engine, which has started to grow again because of chat GPT integration. They're a smaller player, but they are one of the top ones. So, yeah, no, I think it's people don't understand how much of an advertising business Amazon is. If you look at any product on Amazon.com and look at how the results show up and look and ask the question, who's paying what to be on that page? There's a lot of revenue on every page. Amazon, though, hasn't really come through on the AI front. I mean, they invested a huge amount of money in Alexa in terms of generative AI. They're certainly in third place. If if if there is even a third place in the the looming battle between Microsoft and GP and generative AI. Yeah, well, there I mean, Alexa and Siri are not generative AI. They're basically they could operate on generative AI. Couldn't they? Couldn't they be redone? You know, they'd have to be scrapped and start over because they're architecturally they're they're both very different, by the way, I've worked with both of them from a developer point of view. Amazon's a highly structured kind of hierarchy that's completely planned. So you have to put every step of the hierarchy and there's no there's no AI in there at all. Siri is basically indexes of databases that get looked up depending on what you ask for. But again, it's a database look up with a natural language front end where whereas the large language models are, again, a completely different architecture again. So I think that that everyone's going to have to have everything ultimately. Yeah, everything. Well, we're on the brink of the Oscars, that movie. Everything everywhere all at once. Yeah, that's going to become the the mantra of everything. Even outside Hollywood. Finally, Keith, our favourite feature of the week, my favourite feature of the week, tweet of the week. But three days is a long time when it comes to tweets of the week, because your tweet of the week from somebody called Atmokanatron about Silicon Valley Bank no longer exists. So what was the tweet? He deleted it and what it was was I've completely forgotten what his thread was, but it was. You can't even remember your tweet of the week. It's only three days ago. This is like a novel. Well, I did it on Thursday and I have no idea. It just said Silicon Valley Bank is the only thing you can see when you scroll down. In my newsletter, it says SBB currently. Oh, I know what it was. It was a photograph inside the Palo Alto branch of on Thursday of people who couldn't do wire transfers lining up outside the bank. That's what it was. And why did he delete it? He or she? Who is Atmokanatron? Chris McCann.