Jackie Reses & Kris Dickson: What Happened with SVB? Are VCs to Blame? | E988

1. 0:00 – 2:03

   Why are Jackie and Kris experts on this subject?

   1. JRJackie Reses0:00

      There are tons of rumors out there. There are three groups of people who know what's happening: the FDIC, the folks at SVB, and-

   2. HSHarry Stebbings0:08

      (jazzy music playing) Jackie, Chris, I'm so excited for this. Now I wanna start with a little bit of context, just on each of you and your role and position within the industry. So Jackie, we're gonna start with you. S- uh, well, tell me in, in the most polite and elegant way, how are you so relevant and well placed to speak on the current situation and the situation with SVB?

   3. JRJackie Reses0:27

      Well, I think that's kind of you, first of all. I currently am the chairman and CEO of Lead Bank, and we are a community bank in Kansas City that also provides infrastructure to the fintech industry. And so we work in depth with a lot of venture firms and companies in Silicon Valley to help build their products. I also have been the chairman of the Economic Development Council of the Federal Reserve in San Francisco. I was on that council for eight years. Um, and before that, I've worked in financial services for 30 years in all different kinds of capacities, helping to run a private equity firm, um, investing. You name it, I've worked across the board. Um, so that's my background.

   4. HSHarry Stebbings1:14

      You are such an OG, Jackie. I have to say-

   5. JRJackie Reses1:17

      (laughs)

   6. HSHarry Stebbings1:17

      ... I was des- I was describing you to my mother before this. I was like, "She's just so cool." Um, anyway, uh, Chris, I wanna dive into your career. Tell me, quick context, what makes you so well placed?

   7. KDKris Dickson1:28

      Well, I joined Jackie at Lead Bank as the CFO late last summer. But for the 10 years before that, I was the CAO and then the CFO of the Lehman Brothers post-bankruptcy parent estate. Um, through the end of 2022, that estate had liquidated and distributed over $129 billion of assets. Uh, it's unfortunate that we're now in this place where that kind of experience is now weirdly relevant.

   8. HSHarry Stebbings1:55

      It is indeed relevant. And so I wanna dive kind of straight into the events, because I think there's still a lot of unknowns around why this happened and essentially

2. 2:03 – 10:13

   How and why did SVB fail so fast?

   1. HSHarry Stebbings2:03

      where we're going from here. So I want to start on why this happened. Chris, if we start with you, why did this happen, and what's the cause of SVB going bust in this way?

   2. KDKris Dickson2:11

      We'll start with basic principles. At their core, banks are in the business of managing risk. They take in customer deposits and they pay interest on those deposits. Then they invest those funds at a higher yield to make a spread, and there are risks that have to be carefully balanced and managed on both sides of that equation, and those risks are super dynamic. They can evolve over time, like say, fed rates, or in today's hyper-connected media verse, of which you are a significant part, they can convulse almost spontaneously. Depositors can pull funds at any time, and banks have to manage investments for both yield and liquidity. And that balance is every bank's primary challenge. For SVB, this challenge was particularly acute, as their deposit base and their loan portfolio were heavily concentrated in the VC tech startup ecosystem. At the, at the height of the recent tech boom in 2021, SVB was awash in deposits while interest rates were near zero. Uh, and at the time, the fed messaging was that rates were going to be, uh, kept pretty low. So SVB invested heavily in long-dated securities, over $90 billion, mostly in MBS with maturities greater than 10 years. So again, just take that in, because that's a huge bet. They held these securities in their balance sheet as held-to maturity, which means they were signaling they had no intent to sell these, uh, to meet liquidity needs. And because of that, they were not required to reflect any mark-to-market adjustments on these securities in their financials. That's a huge bet on the sustainability of low rates and continued tech momentum. Then 2022 happened and momentum flipped on both. The Fed changed course toward aggressive rate hikes to try to staunch inflation, and VC funding slowed, and many once cash-happy, uh, tech startups became cash burners. And so for SVB, that meant deposits shrunk, interest expenses ballooned, and their giant investment portfolio, which now have yields way less than the fed rate, uh, was worth less and less. At the end of '22, they reported $91 billion of held-to-maturity securities with a val- an actual value of 76 billion. That 15 do- $15 billion gap was bigger than their market cap for most of the fourth quarter. So that mark-to-market gap and the fear about what that gap could mean about the bank's soundness is what ultimately led to the bust. SVB's depositors, which were super concentrated in this hyper-connected VC tech ecosystem, started pulling their funds en masse. SVB had to sell some of those securities, which they had held to maturity at a hefty loss to meet those demands. But then that loss led to a capital hole, and they tried to fill, unsuccessfully, that capital hole with a last-minute $2 billion capital raise. When that didn't materialize, depositors panicked and attempted to withdraw over $40 billion in a single day. And when SVB couldn't meet those with- uh, withdraw- withdrawal requests, they had no choice but to hand the keys to the FDIC. It's a tough story.

   3. HSHarry Stebbings5:27

      (laughs) It's a, it's a tough story. Uh, Jackie, I do have to ask you, you know, a lot of people are suggesting that there have been quite a few PR or strategic communications mistakes here. How do you think about that, given what we just heard from Chris?

   4. JRJackie Reses5:39

      Well, there was one dynamic that I thought was very unusual, and I think part of the straw that broke the camel's back, and SVB went out and made an announcement that they were doing a $500 million capital raise with General Atlantic and doing a, um, market offering the following morning.And so, they basically had a billion and a half dollar hole they were gonna fill. Ordinarily, a company can go out, announce overnight that they're gonna go do a deal in the market, raise some capital. But when you're a bank and you're already being rumored to have capitalization issues around, uh, deposits, it immediately created a panic dynamic. And there is a psychology element as a bank, where no one wants to be the last man standing in that bank with your deposits as the FDIC shows up in an illiquid situation. And so, that announcement did the exact opposite of what it intended to do, and it created immediate fears around the tech community, who started sending notes around to each other, almost in an instant, that said, "Anyone worried? Should we be pulling funds?" And immediately, the answer was, "Yes, I don't want to be the last guy standing." And so as much as there is an incredible amount of support for SVB, the psychology dynamic of that situation created a run on the bank. And so by the following morning, by 11:00 AM, it's fair to say that's the moment when the chalk strikes and $40 billion was already being demanded out of SVB by institutions that had significant amount- amounts of capital there. That is a really unusual order of operation. They should have raised the money, made the announcement that they raised the money and that they were in great position. And so that dynamic and the advice they were getting in that situation, very unusual.

   5. HSHarry Stebbings7:34

      So I- I listened to- to both of the explanations there and the different kind of sides, but one being kind of the systemic kind of capital allocation decisions, and then the PR and strategic communications decisions. And my question is like, is this a symptom of, like, systemic risk crystallizing, or is this a series of specifically bad decisions being made and screw-ups?

   6. KDKris Dickson7:55

      Well, look, with both Silvergate and SVB coming to a head in a single week, it would be naïve to suggest there isn't some broader risk to consider here. One data point that's been referenced- referenced quite often in the last few weeks, uh, came from the FDIC's latest quarterly report on the health of the insured banking system. That came out the end of February, and the report noted that banks' aggregate unrealized losses on securities remain, in their words, "elevated" at $620 billion in Q4. In fact, throughout 2022, these unrealized losses were materially higher than at any other time in the last 15 years, by multiples of three to six, depending on the year. A number of banks have securities in their portfolios that lost values as rates shot up, obviously, but we really need to do a double-click on that data to determine how broadly those losses really are spread. Not every bank is sitting on a huge pile of unrealized losses, so we really need to understand that better. As for specific screw-ups, hindsight is 20/20 and no one likes a Monday morning quarterback. SVB made a risk-assessed investment decision in 2021. Then they doubled down on that decision in 2022, even as the rate environment changed and their very concentrated depositor base saw increasing headwinds. In hindsight, that bet was a bust. But would SVB have been able to ride out the investment losses had their depositors not gotten spooked and jumped ship all at once? We'll never know.

   7. JRJackie Reses9:24

      Yeah. I mean, you do have to think, like, what could they have said differently that would have made the venture capital community, who is on instant communication with each other, and interestingly able to communicate in a very concentrated way. You know, a portfolio can be a thousand companies communicated to in one message. And, um, you have to ask the question, like, as I sit here and try to reflect on what I would have done differently, I would have changed order of operations. I would have communicated differently, but I'm not sure anything different could have stopped the pull of deposits out in an instant because people were basically making the assessment that there was a non-zero chance of risk. And in a non-zero chance of risk, why not pull?

   8. HSHarry Stebbings10:12

      Jackie-

   9. JRJackie Reses10:12

      And

3. 10:13 – 14:52

   Are VCs to blame?

   1. JRJackie Reses10:13

      so...

   2. HSHarry Stebbings10:14

      ... J- Jackie, I spoke to one of the largest pension fund, um, you know, CIOs this- this morning, and they said, "I'm angry. I'm angry at the VC community because this was caused by them." And there's a lot of people on Twitter saying that it was caused by VCs. Is that fair? I- I thought that sounded a little bit binary, bluntly, and I don't think that all of the tar can be painted towards VCs. Am I right?

   3. JRJackie Reses10:38

      I don't think so either, only because the logic of what they did makes tons of sense. Any one person can protect themselves, and I can't imagine everyone sitting there saying, "Let's just sit here and do nothing" as a risk assessment. As a public company board of directors, you're- you would be questioned thereafter if you didn't make strategic decisions when you're looking at a bank failure. I mean, I- you know, I recall 2008. My third child was born October 2nd, 2008, and there was a bank that was failing in Europe, and I remember, I was the only partner, this was at Apex Partners, I was the only partner in the United States that could actually pull credit lines in order to get all of our companies' credit lines pulled before we thought a bank was gonna fail. And so, as the only partner, I had two junior guys show up at Mount Sinai Hospital, and we started pulling credit lines. Literally, as my child is- as I'm trying to have my third child, and I just remember the panic of this is the situation that has to happen. You have to get this done. You can't be sitting there as someone who's a fiduciary for all these companies not making these decisions in any circumstance. Just get it done. And so here you are as a fiduciary for these companies, and you have to make some decisions around pulling capital. And so, as much as I think you can immediately blame the VCs, I think that's part of the equation, but I think everyone needs to look at the situation and say......in totality, did they make some decisions that probably weren't the smartest risk decisions because of understanding all of their capital was held at SVB. Or, you know, their payroll, and they have no alternative systems in which to pull from. And so I would say a lot of companies made a lot of mistakes about their own assessment of risk in addition to just, you know, the powder keg that happened the moment people realized that SVB might be a challenge.

   4. HSHarry Stebbings12:37

      You spoke about the speed of withdrawals earlier. You know, this is the first time for me, and maybe I'm wrong, but I believe the first time we've really had two things in such a bank run, which is, you know, social media and the speed of communications, and then electronic banking, the speed of the ability to withdraw. How much of a role does this, do those two elements play in the speed with which SVB came down?

   5. JRJackie Reses12:58

      I think it'll change the dynamic for how people manage their deposits going forward. Like, I would not be surprised going forward if, when a venture-backed company raises money, that VCs don't demand that they take controls over where they put their funding, how many banks they put their funding, and how they're managing their capital. And so I do think there'll be a lot of output, uh, and risk changes that come out of this that no one might have thought about. Having said that, I do think unfortunately memories are short, and if you go back to '08 and people making decisions around, "Where is my money? What bank is it in?" and you looked systemically across different banks in the United States, you could make risk decisions about who you might believe to be safer based on how they run their company. And I don't think we ended up there today. And even some of the suggestions that I saw across different blogs were suggestions of sending capital to non-banks. And so I would think that people aren't understanding where, what that risk equation is for how a bank manages their balance sheet, who's safe, who's not safe. And so I do think people need to educate themselves if they're sticking significant amount of capital into different accounts for their own operating controls of their own company, and really think hard about, is it in a systemically important bank? Is it in a regional bank, tiny bank? How many accounts do you have? Do you have backup? Um, and so, like in '08 for example, the Canadian banks were in much stronger balance sheet position than a lot of the US banks, and so the Canadian banks ended up lending throughout that cycle in a way that US banks didn't and capitalizing on their own controls around risk in a way that, that US banks just couldn't do. And I think there are a lot of the same lessons here around diversification

4. 14:52 – 21:29

   Will deposits move to the top 4 banks?

   1. JRJackie Reses14:52

      of your relationships.

   2. HSHarry Stebbings14:53

      Jackie, will we not just see the concentration of kind of wealth or the movement of deposits towards the top four blue chip banks and the complete concentration of that capital towards them?

   3. JRJackie Reses15:04

      I mean, I do think you'll see an orientation towards de-risking your deposit base and trying to orient towards systemically important banks or big regional banks, uh, like a PNC. And I, I do think that, that people will be oriented. At the same time, I do think that you will also find that there can be a lot of local banks in, uh, local regions where y- you know, if you go back and look at bank failures, you might not find that, by proportion, they have the same proportion of bank failures that some of these other companies that are doing, you know, more riskier trades, more creativity around their balance sheet. Now, having said that, Dodd-Frank changed a lot of the way that balance sheets are managed. And so what you are seeing though is that banks actually have fairly healthy balance sheets in general, and the controls that they took around capital ratios in '08 actually have helped. And so I think-

   4. KDKris Dickson15:59

      Can I jump in on that point, Jackie?

   5. JRJackie Reses16:00

      Yeah.

   6. KDKris Dickson16:01

      Because after, after Lehman's collapse and the, the global financial crisis, almost 400 banks failed in this three years after Lehman went down. Um, and so then the regulatory frameworks were amped up. Liquidity and capital requirements were amped up. And in the last five years, there have been a total of nine bank failures, and that includes SVB. So that is saying something about w- the way that banks are managed systemically now. The real danger in SVB's failure is actually something that we've alluded to here, and that would be just a crisis of confidence among depositors more generally. And that's not just the, the very financially sophisticated depositors. That includes your Main Street depositors as well. There are about 4,700 FDIC-insured banks today. Uh, that's already down by half from 20 years ago, as these, they have shut down and been gobbled up by the larger banks. But the community and regional banking system is the lifeblood of our Main Street economy, and if the outcome of all of this is a super concentration of funding and control of the banking system into systemically, uh, important, uh, institutions, that would be a travesty.

   7. HSHarry Stebbings17:16

      W- Sorry. I'm, I'm naive here, Chris.

   8. KDKris Dickson17:19

      (laughs)

   9. HSHarry Stebbings17:19

      Why, why is that so bad, that the safe names that are protected by the governments, people just want their money to be safe? Why is that concentration a travesty?

   10. JRJackie Reses17:29

       So in local neighborhoods, local neighborhoods are financed by their local banks all across the United States. And it's really important for the flow of capital into cities and towns across the country that they don't have a banking desert, because it really does become the underpinning of credit. And as much as fintech has stepped in to provide credit in a lot of these regions because everyone now has a bank at their fingertips, the combination of those two is super important in order to just keep your restaurants, your dry cleaners, and your local economies moving across the United States. Like I-

   11. HSHarry Stebbings18:07

       Agreed.

   12. JRJackie Reses18:07

       ... you know, look. I worked at Square. I helped build the banking and lending businesses of Square. I guess I left that out earlier.And so, you know, and we, and we built a bank at Square. We were the only tech company that ever have built a bank, right? We were able to put credit in the hands of tiny companies all over the country, and that's incredibly powerful because that now exists in the context of accounting software, tax software, point of sale software, expense management companies like Ramp who can offer loans. And so you're starting to see this evolution of embedded finance actually be helpful. Having said that, if you really look at disclosures underneath all of these financial products, not a dollar has left the banking system. And so it's just reorienting how those loans are being made in different regions. They're all still being made by banks. You know, if you go to Venmo disclosures and Cash App disclosures and PayPal disclosures, there are banks that sit underneath 100% of those products. And so you have to really make sure that you have a healthy banking system that exists across the country, and both things have to be true. Local kinds of relationships and banks, like Lead Bank in Kansas City is super important to the commercial real estate market there, and we pay a lot of attention to our local community and how important that is. And at the same time, you have these bigger institutions that have the scale, stability, size, they're systemically important, they spend a lot of time with regulators.

   13. HSHarry Stebbings19:43

       Final question before we discuss the outcomes. Uh, Chris, you mentioned like, you know, actually the changes that happened regulatory-wise and like the healthy nature of like the bank's actual core businesses. My question is, are we not at a stage now where actually (laughs) th- the health of the business of the bank doesn't matter, the only thing that matters is consumer psychology and human psychology?

   14. KDKris Dickson20:04

       I don't know that I'd go (laughs) quite that far. I think how a bank manages, manages its balance sheet and manages its risks are equally important, um, and they're sort of co-dependent on one another. I mean, in the case of Lehman, Lehman was deeply invested in mortgages and mortgageback- mortgagebacked securities through the housing boom. They were the largest holder of those, and they were teeming with subprime mortgages. Lehman borrowed to fund those, so they were super exposed to it, and Lehman investors were very happy with those trades, until they weren't when the housing market, turns out, the bottom fell out. Was that a psychology thing for Lehman or was that just a risk management issue for Lehman? Right? It's sort of, it's both. When people realized what was happening, um, bank, other banks started loaning funds, and then it all came to a halt. For SVB, which unlike Lehman, their investments were in agency backed MBS and Treasuries, relatively conservative and low risk at the time. They just went long on duration for their investments and they had concentration risk in their depositor base. Um, but there was no crystal ball for them to see how quickly and sharply those two risks could bite them, and simultaneously. You know, it's likely that rebalancing their investments and trading out th- that portfolio earlier and in pieces, um, may have curtailed some of the losses that ultimately did them in, but who could say?

   15. HSHarry Stebbings21:27

       Sally, we're gonna move to the outcomes,

5. 21:29 – 26:55

   What happens now at SBV?

   1. HSHarry Stebbings21:29

      speaking of who could say. And now I wanna start with, um, a really tough one, but I think we have to start here. So first, why have the FDIC not acted already, and what happens now at SVB?

   2. JRJackie Reses21:41

      Yeah. So this is a pretty standard process, and if you even go back to '08 you'll find that Thursday nights are really important nights for the FDIC, and weekends. Because what they do is they go in and there's a b- uh, there's a whole series of outcomes that the FDIC can pursue. Um, but they go in and take over a bank on a weekend, and they do that very purposefully so that they have a moment when there's not a constant pull on deposits and they're able to do the work to assess what is in there in a balance sheet. And so that work typically happens on a weekend. And so what happens in a bank failure is as follows. So first of all, you're right, it is the FDIC. Um, they take over a bank, they resolve it. They are the ultimate resolution authority de- even despite a bank being regulated by a different regulator. Other than credit unions, they are the institution whose job it is to go in and resolve, uh, how to manage bank deposits and then how to therefore resolve the issues with the, with all the assets. They, um, send their team in. They actually send people in. They work part and parcel with bank employees to do their jobs. So in the case of SVB, for example, the team at SVB has signed four-week contracts with the FDIC so that they are now being employed by the FDIC, and they are doing the work to be able to pull data in the systems, be able to count up deposits, so they could be prepared before a Monday morning opening to announce what their plan is on how they are going to release cash to depositors. So there's actually an order of repayment. Um, it's the FL- FHLB, then they pay admin expenses, then they pay out insured deposits up to 250,000 for accounts. So if it's a consumer couple they get $500,000, and then they're able to go through this process of disposing of the assets minus the liabilities that they're able to pay off. So that is the waterflow- waterfall of funds. So they come in and they basically do the analysis of what they find, and then they are not an investor. They immediately start selling. And so I would not be surprised if on Friday they weren't sitting in there making massive sales so that they could do what's called an advance dividend.So, in addition to the depository amount of 250,000 per account, they have the ability to do this advance dividend. They go in, they calculate what they think is super liquid, immediately sold, right? And then they can make a judgment about how much they're gonna release above the 250. And so that is the number that I think people are waiting to see on Monday. Is it 50%, as been speculated all across Twitter? Is it more or less? And that way, at least, they can try to make depositors immediately liquid so that they can gain access to their accounts at a level greater than SVB. So SVB also was uniquely concentrated in terms of larger deposits. I think only 2% of their, uh, depositors were below the 250,000 amount per account. The rest were above, and so you could see that the 250 doesn't really get you very far, and they will go in and try to release as much funds as they can that's immediately liquid, and then they will go in and start to go through this process to mark things to market and do the dispositions. Chris should take it from here because she is the person who's done the biggest one ever...

   3. NANarrator25:33

      (laughs)

   4. JRJackie Reses25:33

      ... in American history and has spent 10 years working on that.

   5. KDKris Dickson25:37

      With a team of incredibly talented people at Lehman. Um, so it's a, it's a long process to get... If, if it goes that path, if there isn't another buyer that steps in, and w- we could talk about that or I'll let Jackie talk about that in a moment, if there isn't another larger bank that can step in and buy SVB or at least buy parts of SVB, um, the liquidation process can be extensive. Lehman filed for bankruptcy in September of 2008. Here we sit in March of 2023. It's not done. Um, they've distributed almost $130 billion. There's still multiple nine figures, at last estimate, still multiple nine figures to be distributed. So that's, that is what I would call an extreme case and one that's likely not, not in SVB's d- SVB's depositor's future, um, but that's how long it could take to wind it all down. Now, if a quick look at their and SVB's balance sheet as of year end, um, if you take the market value of their investment portfolio, both the AFS securities and the held-to-maturity securities, uh, plus their loan portfolio, which should be saleable, um, it's more than their deposits. So there should be enough to cover most of their deposits, um, ultimately over time, um, but it just may

6. 26:55 – 30:56

   Will depositors have their deposits guaranteed?

   1. KDKris Dickson26:55

      take some time.

   2. HSHarry Stebbings26:56

      So can I ask, sorry, I- I'm deliberately asking kind of very base questions, but I think also what a lot of founders are thinking is, "I'm the founder of a company in whatever space. I have no idea what all of this means. So I'm gonna get 250K back on Monday, and then, and then I get 50% back hopefully next week, and then what happens?"

   3. KDKris Dickson27:19

      And then as the FDIC, as the primary liquidator of the bank, goes through and actually liquidates all of the assets, uh, primarily being the investment portfolio and their 74, 75-ish, uh, billion dollar loan portfolio, then they can actually go through and make additional payments. And one would like to think since their investment portfolio as a regulated bank is pretty conservative, um, those investments should be relatively easy to sell. So it should not be anywhere near as a- as extensive a time period as it was for Lehman, which had far more complex assets.

   4. HSHarry Stebbings27:54

      J- I know it's impossible to say, and I'm just wondering, is it like six months? Is it like three years? Five years? Like...

   5. KDKris Dickson28:03

      Again, the- the assets are pretty straightforward. What you don't want to have happen is anybody come in knowing that these things need to be sort of fire sales-ed off. You don't want anybody to pick it off at a low rate, so they, they have to make sure they sell it and to maximize the value back.

   6. HSHarry Stebbings28:18

      Right.

   7. KDKris Dickson28:19

      Um, but it shouldn't be an incredibly extensive process of the likes of Lehman.

   8. JRJackie Reses28:23

      But they are going through a sale.

   9. KDKris Dickson28:24

      Yeah.

   10. JRJackie Reses28:25

       Like, that is their job.

   11. KDKris Dickson28:26

       Of course.

   12. JRJackie Reses28:26

       Their job is not to sit there and say, "Wait, if I held it for another month, maybe I could-"

   13. KDKris Dickson28:32

       Yep.

   14. JRJackie Reses28:32

       ... "get a better buyer." Immediate sale. So-

   15. KDKris Dickson28:35

       ... pretty... Yep.

   16. JRJackie Reses28:36

       There are actually, the best outcome that would happen is if someone were to come in and take over the deposits or b- quote, "buy the company," right? Buying the company is buying whatever's left. And so you could have a buyer or a group of buyer, buyers who come in and immediately take over the deposits to do a continuation of operation. That would be the best outcome. And frankly, given the quality of Le- of Lehman, duh, given the quality of SVB's client base, you can absolutely see a situation where buyers like Morgan Stanley, PNC, JP Morgan, Goldman Sachs would really want to have the client base of Silicon Valley Bank. And you are seeing some messages go out on Twitter that are trying to instill that confidence in a buyer such that venture capital firms and companies are publicly stating, "We will stick with SVB if there is a buyer. We want to work with SVB. They've been a partner to us. We will be a partner to them." And so you actually are seeing that very purposefully as a message to a buyer because a buyer has to pay that deposit and what happens is, though, the amount above the insured amount and the total amount of the deposit base, unless it is funded with the l- liquid assets by what's available there, that's the liability hole that could be left in a typical scenario, and that liability hole is what the buyer has to assume. Now, as Chris said, given the asset base that's there, you would assume that the deposits actually have the capital to fund the 100% of the deposit base, but I'm describing the alternative scenario if the money is not, uh, significant enough to support the entire deposit base.

   17. HSHarry Stebbings30:23

       If this-

   18. KDKris Dickson30:24

       And I would add to that, that, uh, in the at least, sorry, in, at least in...

   19. JRJackie Reses30:28

       ... uh, most bankruptcies, and using Lehman as an example, if there is going to be a protracted liquidation process and folks are given receivership certificates that they have to wait to get their dividends and wait to be made whole, at least in the case of Lehman, very quickly, um, after the filing, a market sprung up, a, a very efficient market sprung up, to trade those claims in the bankruptcy case. And I imagine a similar thing would happen here, where you could actually-

7. 30:56 – 34:14

   Why doesn’t a big bank buy it?

   1. JRJackie Reses30:56

   2. HSHarry Stebbings30:56

      Do- Sorry, I'm, I'm just intrigued. Given the lack of liabilities, uh, given the customer-

   3. JRJackie Reses31:01

      Can I-

   4. HSHarry Stebbings31:01

      ... base of SVB being so high-quality, is this not an, actually an extremely strategic and good acquisition for a potential buyer like JPM or Goldman Sachs or, o- or anyone else?

   5. JRJackie Reses31:12

      So, that's a judgment, right? I mean, I personally think it is. I think SVB is a very, very unusual, super high-quality, uh, set of customers that many banks would want to have. They're making an economic choice about whether they could do it. There is a significant LTV to these customers. Um, they also have to look at their own regulatory issues, and I'm sure many of them are negotiating with the FDIC over whether they can buy it. And so, there's lots of dynamics around that, that cause someone to either pause or pursue it aggressively. But it's not like the situation we had in '08, where you'd say there's a time bomb ticking on the, you know, on the client base, or... In this situation, it's a pretty healthy set of venture capital firms, um, you know, the innovation economy across the United States, that I think anyone would want to have if nothing else mattered. There's, I don't think there's a bank that wouldn't want to have the clients of SVB at their fingertips.

   6. HSHarry Stebbings32:16

      I, I, I do want to ask, though, 'cause I, I actually tweeted, like, "JPM, if you want the love of an ecosystem forever, it's the best $6 billion you will ever spend." Um-

   7. JRJackie Reses32:25

      But it's net 6 billion.

   8. HSHarry Stebbings32:26

      Or what- whatever the price could be.

   9. JRJackie Reses32:28

      Yeah. Yeah.

   10. HSHarry Stebbings32:29

       Um, so it, like, is the best money you'll spend. But I got a load of responses that are like, "Yes, agreed, but regulation will prevent it because it exceeds the 10% deposit limit." Will regulation get in the way of an acquisition?

   11. JRJackie Reses32:45

       I, so, I think all different banks have all different issues and they're looking at financial metrics, their own, their own challenges around how they deal with some of these, how they deal with their own balance sheet and what it looks like combined. But the regulators are highly incented to get a buyer for this business this weekend. And so, going back to '08 as the example, they're, they're, they will pull out all the stops in order to get it to the likely and best outcome possible for American insurers. You know, when you walk into the FDIC's office in Washington DC, there's a gigantic gold circle that highlights the mission of the FDIC, which is, you know, on, it's working on behalf of the American people to insure the depositors and create stability in the financial system. They take that job really seriously. And so, you know, you've often heard fintechs complain about regulation and the work they need to do on compliance, or you did many years ago. Now, I think people come, have come to appreciate it. You gotta take that seriously, and the regulators and the folks who work at the FDIC take their job pretty damn seriously. Many of them have worked there for 20, 30, 40 years. They understand how to deal with these, they have seen, deal with these, they have seen cycles. They go in there laser-focused on how to analyze, take apart a balance sheet, focus on liquidity, and make sure they get to a good outcome with a buyer.

   12. HSHarry Stebbings34:12

       I, I, I have to ask, and

8. 34:14 – 41:23

   Will there be more bank runs?

   1. HSHarry Stebbings34:14

      I, I think one of the biggest problems is kind of fearmongering but, you know, important to cover. On the back of everything we've discussed, you know, some people suggest subsequent bank runs on, on different banks. How likely do you think alternate bank runs are, and what type of companies get impacted?

   2. JRJackie Reses34:30

      So, Chris commented on the $600 billion of mismarked assets if everything were to be, uh, priced to, uh, mark-to-market on Monday. That is in totality across the US banking system. I think, um, the bigger issue to focus on is that around the impact of psychology and whether a bank has issues around concentration within an industry or a customer base in particular. And so, there are some banks that have been named that are digital asset-focused, or they might have an, an imbalance in their customer base versus being diversified. And I do think those banks will start to see deposit pulls just out of panic, even if they have a very strong balance sheet. You know, there was one bank in the West Coast, First Republic, very strong bank, they put out a notice on, on Friday that said, "Only 15% of our securities are," or, uh, "Of 15, 15% of our, um, assets are, you know, securities, 9% of our deposit base is tech," you know, broadly diversified. And what they're basically saying to you is, "We're not SVB. We're highly diversified. Our balance sheet looks good. Don't pick on us and create this dynamic around us. We are in a very different situation from a balance sheet point of view."

   3. HSHarry Stebbings35:58

      Does that make a difference? I'm really sorry, Jackie. I'm just trying to understand.

   4. JRJackie Reses36:03

      Well, hopefully. Um, you know, I, I think there is, again, lots of rumormongering around some of these banks. There's, like, a list of names that people are looking at. They're creating a pretty negative cycle around looking at it, as we talked about earlier. But I think, you know, you really have to go back and look at the fundamentals before you go into a mad panic, is what I would say to the, the folks who are trying to drive this type of psychology and movement in their own personal trades. And so, uh, you know, you have to look at the, the, the-... the combination of psychology and balance sheet and health, and make your own personal decisions.

   5. KDKris Dickson36:44

      I would say that the danger though, is that not everybody has the financial literacy, um, to do that sort of deep dive. And then as, as Jackie had said earlier, no one wants to be the last man standing. Even if you do get it, um, and you do feel safe, if everyone else jumps ship, you're still sunk too if the ship goes down. So, I think that that psychology impact, um, is massive. And it's a big part of what the FDIC has to manage through, leading into whatever it is they announce tomorrow.

   6. JRJackie Reses37:12

      Part of the reason why they wanna get it sold is to provide confidence. And, uh, the more they instill confidence before Monday morning, and frankly, Tokyo opens this afternoon, at, uh, 4:00 PM, and so you, you'd wanna see an outcome so that the trading days are less sloppy. You are about to see a lot of slop because Asia's gonna open and no one knows what's gonna happen. By tomorrow morning in, you know, before the market opens, they will hopefully have made an announcement about finding a buyer.

   7. HSHarry Stebbings37:49

      Jackie, what can they do to instill confidence? Like, if you were in charge today, what, what can you do now to instill that confidence?

   8. JRJackie Reses37:58

      So, I would wanna see an announcement that a buyer has taken over the depository accounts, and two, those depository accounts will be paid out at par. That's optimal, right? All... And Monday morning, people will have immediate access to liquidity. Those are the three things that really matter. And so Monday, people will definitely be able to pull capital out. The question is, how much? It depends on this addition of the insured amount plus the advanced deposit, assuming they do in fact do this advanced deposit, and I'm almost certain they will. And then the third thing is, is someone standing behind my deposit 100%? And when... You know. And so if they're able to do all three things, that really goes a long way to giving, uh, depositors confidence, and that would delay a lot of the immediate panic that could happen, because the, the broader amount of contagion across different industries that's unintended is pretty extreme. You know, you don't think about companies in all different states who also work with SVB, you think of schools, you think of clubs, you think of all kinds of institutions. It's not a one percenter problem. There are employees at those companies that do all kinds of jobs. And those companies, it's the wine industry, so farm growers across Northern California. And so as much as we wanna think of SVB and its clients and then its clients' clients as being impacted, that is a broad swath of the economy right there. And because they had such a heavy concentration of small companies, they don't have the multiple banking relationships that big Fortune 500 companies would have to be able to a- as agilely move money. Um, and so a lot of these companies are more, uh, limited in their liqui- immediate ability to demand liquidity and move assets all over the place to keep an ordinary course of operation. And that's what's really important for next week.

   9. HSHarry Stebbings39:56

      You said, you said the best outcome there being that buyer, the guarantee of deposits. I think it's important that people do also know the worst. If that's the best, what's the worst?

   10. JRJackie Reses40:06

       So, the worst is they don't announce a buyer. They announce a, you know, percentage of advanced dep- advanced deposit that people aren't happy with. That scares the daylights out of people. Companies announce they can't make payroll. They can't, you know, keep their operating. You start to see little companies try to find immediate liquidity, and people are doing that now. You saw some great announcements by Ramp, by Brex, um, by, um, by anyone who can do payroll financing to try to, uh, immediately finance some of these companies. There's great lists going around of different companies that are doing, uh, payroll financing for folks. VCs are trying to line that up for their portfolios. Um, I don't think everybody has access to that though, and they don't have access to it immediately. And so you will start to see these companies who actually can't make payroll. Um, you know, think about, I saw one company on Friday say they were gonna do a layoff, but they can't pay severance. You have companies that pay their payroll into SVB. And so it'll have a broader market effect, but that's in the worst case scenario. I do think we are not gonna get to that point on Monday. And so I think the FDIC is working pretty

9. 41:23 – 44:35

   Is it okay to deposit money into neobanks?

   1. JRJackie Reses41:23

      hard to try to not have that happen.

   2. HSHarry Stebbings41:26

      Can I just ask a couple just for founders who listen and, and, uh... You know, I've seen a lot of questions in groups, and a couple of questions from founders is like, "Okay, should I... I, I wanna move money as fast as possible from w- whichever institution." Just say whichever institution. Um, and there's like, "Is it okay to move it into a, a startup account, being one of the, you know, rising neobanks?" I don't wanna name names 'cause I don't wanna pick any out specifically, but is it okay to do that or that, that not okay and I shouldn't do that?

   3. JRJackie Reses41:56

      So, I think you can do that. And the, those startups have beautiful abstraction layers on top of underlying banks, meaning they're beautiful, they're easy to use. The account opening process is probably super easy to use. And so I think that might be a great option-

   4. HSHarry Stebbings42:14

      Uh-huh.

   5. JRJackie Reses42:14

      ... for Monday. But then I'd actually go and I'd look at what's the underlying bank that supports that entity and decide whether you wanna have your money sitting at that bank. And so I actually, um, I think it's worth doing whatever you can to create a, account diversification. My- me personally, I would move to a systemically important bank or a strong regional bank. Um, or if you have local accounts that you need at, at different local banks, like we run a bank in Kansas City.You know, our depositors are really sticky, our client base is super sticky at Lead Bank. And so we look at our situation, our liquidity situation, and you know, I'm not worried about our local clients in Kansas City, you know, reading Twitter and having like a, "You're too invested in tech" bank run on Monday morning, um, because of the way we're highly diversified and, um, and what they're invested in and the way that our, our loan portfolio looks. But I do think it's worth looking at your account structure and saying, having diversification of accounts and just having 'em open and having funded for, in a small amount is a great option. Working with one of those abstraction layer companies might be a great option to have it immediately available and super easy to use. But, you know, if it were me, I would be moving money to, uh, Citigroup, JP Morgan, Truist, you know, those kinds of companies. Yeah, but that's me personally.

   6. HSHarry Stebbings43:41

      I, I totally get you. Okay, so we've got those accounts. The other question is, Harry, shit, what if withdrawals got halted before I can withdraw my money out? Is there a chance that withdrawals get halted before people can move money in whatever bank from McRob?

   7. JRJackie Reses43:58

      So there is. I think we saw that on Thursday, uh, and Friday with SVB. Um, you know, people have wires that said approved, and then the money never came out. Having said that, there are payments coming out of SVB, it could be ordinary course bills, it could be payroll movements. And so there was money moving on Friday, and so there is probably billions of dollars that were in process before the FDIC kind of struck the chalk line in the moment when they took over. And so you can get stuck, and that's what the FDIC is trying to unstick.

   8. HSHarry Stebbings44:34

      A

10. 44:35 – 47:13

    Is it okay to move money into a personal account?

    1. HSHarry Stebbings44:35

       final one on the like founder must asks. I've had a couple of founders be like, "Hey, is it okay to move to my personal accounts because I haven't been able to open accounts," and they've been told that on trust, I, I don't quite understand, I'm not a lawyer, but like on trust, it's okay for a split amount of time to move money to your personal accounts. Is that okay?

    2. JRJackie Reses44:58

       So I would work like hell on Monday to open up an account somewhere. I wouldn't find that to be okay, but, uh, you know, there are a lot of dynamics around moving money out of a corporate entity into a personal entity, um, that I would be very cautious about and I would work my damn best to get the money into an account. Like, you actually can get a account set up in a day. You know, we've been doing it this weekend for folks with our team sitting in Kansas City opening up some corporate accounts for people that we have worked with and are, you know, in process with. And so you can actually get banks to open up accounts so that you can move money or, you know, BlackRock and, and any kind of account that might be a money market account, things like that. But I would try to keep your, the corporate corpus whole and managed from a corporate entity point of view.

    3. KDKris Dickson45:51

       Neither Jackie nor I are lawyers, but no doubt that, uh, the, their auditors, any founders auditors and their tax advisors would, uh, highly recommend against intermingling their corporate monies and their personal monies.

    4. HSHarry Stebbings46:07

       Chris, I'm sorry, your face when I said that-

    5. KDKris Dickson46:08

       (laughs) .

    6. HSHarry Stebbings46:08

       ... that was like this, that like a ghost had really gone in the room.

    7. KDKris Dickson46:12

       (laughs) .

    8. JRJackie Reses46:12

       (laughs) .

    9. HSHarry Stebbings46:13

       That said it all honestly. Um, when your advisor looks like that, you're like, "Okay, that was a bad idea."

    10. KDKris Dickson46:18

        Well- And my p- face (laughs) .

    11. JRJackie Reses46:19

        I mean, imagine saying, "I kept my money at, uh, you know, PacWest or Signature or First Republic and nothing happened, but I moved it into my personal checking account," and I'm sure the person would take a screenshot, take another screenshot, move it back. But like, you'd have to sit there in retrospect and say, "Really? You're moving corporate money out of your account into your personal account?" Like, uh, and so I would open up an account immediately at s- at some other bank. I'd open it up at like an abstraction layer kind of company, like a neobank. You know, something that gets you immediacy around account openings that's a little bit more contained and trusted and managed than a personal account.

    12. HSHarry Stebbings47:06

        Is there anything here that I've missed or you think is a misconception the public has that founders have

11. 47:13 – 52:42

    What is the best and worst case scenario?

    1. HSHarry Stebbings47:13

       that should be recognized or acknowledged?

    2. JRJackie Reses47:16

       There are tons of rumors out there. There are three groups of people who know what's happening. The FDIC, the folks at F- SVB, and a- at the banks, the people who are buying and looking at the assets of these companies. I can't imagine any of those three people are sitting on Twitter and WhatsApp rumormongering about what is happening. And so I'd be very thoughtful about what you're hearing, who you're hearing it from, because all of those folks are really contained in rooms on Tasman Drive in Santa Clara, and they are working their butts off right now, and I highly doubt they're out chatting it up with their friends. And so I would be very cautious about all the rumors that are out there. Um, you know, I spoke to someone at the FDIC yesterday, and he's very senior at the FDIC, and even he is not familiar with the depths of what is happening, nor would he ever cross a fiduciary line as a regulator and tell me anything that breaches the confidence of his job, right? And so, uh, you can imagine that this is a group of people sitting there, and I, I would just caution everybody amongst these rumors of like, "I'm chatting to so-and-so, I'm chatting to so-and-so," because I think these guys are highly professional in doing their jobs, and you know, there's a very small group of people who actually knows what's going on.

    3. HSHarry Stebbings48:41

       Final, final one. Where do you think we are Wednesday next week if you were to put a bet on?

    4. JRJackie Reses48:47

       I think other banks feel significant challenges. Well, first of all, I'm gonna say I think there's a buyer, so I'm gonna give you my hypothesis.

    5. HSHarry Stebbings48:55

       Okay.

    6. JRJackie Reses48:55

       I think there's a buyer.

    7. HSHarry Stebbings48:56

       Oof. (laughs)

    8. JRJackie Reses48:57

       Um, I would- I would've bet on Morgan Stanley, um, maybe, uh, because I think it's core and strategic to their business, but I- I've heard through the rumor mills that that's not the case. Maybe it's PNC. But, uh, again, like, I wouldn't trust that data. I- it's- it's made up from rumor mills. But that's my gut, just based on strategic fit and, like, who needs it and who's the right size, who could do this. Um, I think other banks get pressured. I think massive amounts of money moves as people do the evaluation that we talked about on this call, and massive amount of money moves and people really take stock of where they are banking. I think VCs, um, and institutions make board-level decisions about what kind of risk controls they have around how capital is managed. So CFOs are scurrying around looking at all of their banking relationships, how they manage money. People are reading disclosures in a way that they never have before. There's a whole series of funds around sweep accounts that sits at BlackRock and people are now, for example, reading their disclosures at SVB around, like, "Wait, how do I get access to my money at BlackRock, uh, in some of these accounts?" And they can't figure out whether they have an account at BlackRock or not. Um, and so I do think, for example, people are, people are looking at that, um, and they're gonna have a game plan around how they manage this stuff. The other thing that's interesting, that when companies... Like, we used to do this at Square, when you do backup contingency planning, you have to ask the question of, like, what do you have that's printed? What can you access? I told someone last night, very simply, go into his First Republic Bank account and take a screenshot of all of his, all of his balances so that he had it today, just to be safe, so that... 'cause he can access it in his account. Like, go take your screenshots. Like, what do you have written and what do you have on paper and how do you access it? You know, there are a lot of, there's a lot of planning around California where data centers sit, how people manage things in places where, um, you know, you can't access wifi or your accounts. And I think the, the amount of analysis around info sec and bank failures and bank access becomes more and more important for boards and companies to look at. You know, um, Alex Samos and Chris Krebs have a consulting firm. Uh, they do security consulting. I d- you know, th- they just happen to be friends, so, y- you know, I talked to them this weekend and, you know, that's the kind of company that all of a sudden you go, "Oh, shoot, I need to do some reviews of, like, do I have info sec problems?" Because if people can't access their bank account and this is what they're freaking out about, let me go through that planning overall and make sure I know how to look at it. That's-

    9. HSHarry Stebbings51:49

       But your p-

    10. JRJackie Reses51:49

        ... a scary answer.

    11. HSHarry Stebbings51:51

        But your bet is that there's a buyer and that depositors are made whole?

    12. JRJackie Reses51:56

        Yes. That's the, that's the good news. That's my bet.

    13. HSHarry Stebbings51:59

        Chris-

    14. JRJackie Reses51:59

        The rest of what I said is, like, a backup plan, BCP planning that everyone should be doing anyway.

    15. HSHarry Stebbings52:05

        Chris, do you agree with that?

    16. KDKris Dickson52:07

        I'm in complete agreement because I think the FDIC is fully aware that the potential crisis of confidence among depositors is something that must be avoided at all costs, and the simplest and most elegant solution to that is orchestrating, um, continuity through a buyer.

    17. HSHarry Stebbings52:24

        Dear Lord, I hope you are both right. Um-

    18. KDKris Dickson52:27

        (laughs)

    19. HSHarry Stebbings52:27

        ... I can't thank you enough for doing this at such short notice. Uh, it's been such a joy, so, um, I'm sorry for the actual situation that happens, but it's, uh, a thrill to chat and to meet you, Chris, and Jackie, as always, your staff.

    20. JRJackie Reses52:39

        Oh, good to see you. Good to see you.

    21. KDKris Dickson52:41

        Thanks for having us.

Episode duration: 52:42