E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

David Sacks 0:00 Hey, guys, I got a little friend here.

Jason Calacanis 0:03 What? Aw.

David Sacks 0:04 Yeah. I think I'm gonna start a new podcast.

Jason Calacanis 0:06 Is that a bulldog?

David Sacks 0:07 And I'm gonna have a bulldog as my mascot.

Jason Calacanis 0:10 You brought a bulldog? (laughs)

Chamath Palihapitiya 0:12 (laughs)

David Sacks 0:12 (laughs)

Jason Calacanis 0:12 Oh my God. You got my mascot.

David Sacks 0:14 Yeah. I took over-

Jason Calacanis 0:15 Oh my God.

David Sacks 0:15 ... your mascot.

Jason Calacanis 0:16 Well, look at that. Now you're actually likable, Sax.

Chamath Palihapitiya 0:19 Sax, are you trying to improve your image? (laughs) Oh my God. I was about to say, Sax is so unlikable-

David Sacks 0:24 (laughs)

Chamath Palihapitiya 0:24 ... that he has gotten a bulldog. Oh my God, Sax. Show me his face again.

Jason Calacanis 0:27 Oh, such a good bulldog.

Chamath Palihapitiya 0:28 Is it him or her?

David Sacks 0:29 Him.

Chamath Palihapitiya 0:30 What's his name?

David Sacks 0:31 His name is Moose.

Chamath Palihapitiya 0:33 Oh my God.

Jason Calacanis 0:34 Oh my God. You got a bulldog. He's so cute.

David Sacks 0:36 Yeah, it's gonna be my mascot now, Jacob. I'm going solo with my podcast. I'm gonna call it This Week In Technology.

Chamath Palihapitiya 0:41 (laughs)

Jason Calacanis 0:41 Uh, it already exists. It's Leo Laporte's podcast. Please don't start any more trademark lawsuits.

David Sacks 0:45 (laughs)

Jason Calacanis 0:45 All right, everybody. It's an emergency podcast. Silicon Valley Bank, uh, has been taken over by the FDIC. I am-

Chamath Palihapitiya 0:52 Sorry, is this the-

Jason Calacanis 0:53 ... Twist live stream? Am I on the Twist live stream?

Chamath Palihapitiya 0:55 (laughs)

Jason Calacanis 0:55 I mean, guys, if you couldn't just interrupt me while...

Chamath Palihapitiya 0:58 (laughs)

Jason Calacanis 0:58 I'm never gonna get through this. There's a lot to get through. The world needs to hear our opinions.

Chamath Palihapitiya 1:01 If you care about us, click like and subscribe. And click like and subscribe.

Jason Calacanis 1:04 Hey, guys, hit the like and subscribe button below.

Chamath Palihapitiya 1:06 Hit the like and subscribe. (laughs)

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Jason Calacanis 1:11 ... a review. If you don't get enough J-Cal-

Chamath Palihapitiya 1:13 (laughs)

Jason Calacanis 1:13 ... you can get me four more times a week. The name of the other podcast is This Week In Startups. Thanks for the free promo, guys.

Chamath Palihapitiya 1:18 (laughs)

Jason Calacanis 1:19 It is a huge day today in Silicon Valley. We haven't seen a black swan-like event happen here in a long time, since 2008.

Chamath Palihapitiya 1:27 I thought the last time was when you published the book, Angel.

Jason Calacanis 1:30 Oh, God. I-

Chamath Palihapitiya 1:31 (laughs)

Jason Calacanis 1:32 We have to get to work, Chamath. I saved the jokes.

Chamath Palihapitiya 1:36 I'm trying to give you a cold open.

Jason Calacanis 1:38 We did that already. Okay, here we go. Three, two-

Narrator 1:40 (instrumental music plays) Let your winner slide. Rain Man, David Sachs. I'm going all in. And I said- We open sourced it to the fans and they've just gone crazy with it.

Jason Calacanis 1:52 Love you, man.

Narrator 1:53 ... queen of Kinwah. I'm going all in.

Jason Calacanis 1:56 Okay,

Jason Calacanis 1:57 everybody. It's been a wild 36 hours here. We're gonna get into Silicon Valley Bank imploding. The FDIC has shut down Silicon Valley Bank and there's many different things we have to discuss with me today, as always, the dictator himself, Chamath Palihapitiya, the Rain Man, David Sachs, and the prince of panic attacks no more, his wire's cleared, David Freiberg, the sultan of science.

Chamath Palihapitiya 2:19 (laughs)

Jason Calacanis 2:19 Welcome, boys. How is everybody, just to start this off, contextually, the last 24 hours, can you, uh, can you recall a time in our careers where it's felt this acute or insane or intense?

Chamath Palihapitiya 2:33 Uh, 2008 and COVID.

Jason Calacanis 2:36 Okay.

Chamath Palihapitiya 2:36 And I think that this is right up there, could be two, probably three, in terms of the level of panic and concern. The problem is we're in the middle of it. We don't know what's gonna happen this weekend, so there's a lot of anxiety right now, a lot of panic going on. And a lot of, like, unlike COVID and '08, really acute effects that many companies and investors are actively dealing with right now, like not just a few, thousands of companies that are really in a state of, like, distress right now. So, it is, um, potentially from a Silicon Valley perspective, worse than '08 or COVID.

David Sacks 3:12 Oh, for sure. For sure. I mean, this, this is basically a Lehman-sized event for Silicon Valley. Remember when Lehman Brothers went out of, basically, uh, filed for bankruptcy in 2008, started the whole financial crisis? The federal authorities thought that the best plan for Lehman was to file for bankruptcy. They didn't try to save it. And that basically led to a cascade where the whole financial system almost collapsed. I think that SVB, this is a Lehman-sized event for Silicon Valley and there's, there's two big things happening. One is the impact on the startup ecosystem, so you're seeing probably thousands of companies now cannot make payroll in the next few weeks because their money is trapped and tied up at Silicon Valley Bank, which is now under receivership. So, if you wired your money out yesterday, you're good, and a lot of people managed to do that, but there are a lot of people who were, had wires in the hopper, didn't make it today, logged into the website, can't log in. Their money's just frozen and we don't know when they're gonna be able to get their money out or how many cents on the dollar they're gonna get. So, basically the whole startup ecosystem is in peril. I think Garry Tan called it an-

Jason Calacanis 4:23 Extinction level event.

David Sacks 4:24 ... yes, exactly. That was a good term. And just to be really clear, this is not big tech at risk. I know there's a lot of people out there who don't like the idea of bailing out big tech.

Jason Calacanis 4:33 This is not Google. It's not Amazon.

David Sacks 4:34 Exactly. Those companies have plenty of cash. They're fine. This is small companies, companies with 10 to 100 employees and you're looking at maybe thousands of them just being wiped out for no reason, they didn't do anything wrong, because of this. This could have a very damaging effect on the startup economy and the whole United States economy. This is little tech. These are the future companies that will keep the United States competitive, uh, versus China and the rest of the world. And then the other big thing that's happening, and this is all happening in real time, is a regional banking crisis because when depositors see that their money was not safe at SVB, which was a top 20 bank that as far as everyone knows was in regulatory compliance. Nobody has said that SVB wasn't compliant. As far as we know, they had a regulator's seal of approval. And now you find out your money was not safe and it's not FDIC insured above $250,000. So, the conversations we're all seeing in our chat groups with leading investors is, why the hell would you keep your money anywhere but JPMorgan or a top four bank? And so, I think that unless the Fed steps in here over the weekend, we're gonna see potentially a, a run on the regional banking system, a cascade like we saw in 2008.

Chamath Palihapitiya 5:54 Well, Sax, let's, let's just take a step back before, because I think you're right, but we should talk about why that happens, the contagion drivers.

Jason Calacanis 6:01 And just so people know, Silicon Valley Bank is used by 50% of venture-backed startups and, I would say, the majority of venture firms.... also have their money there. So this morning, I got a note from a fund I'm an LP in. They had millions of dollars that they can't access to invest in startups. So Chamath, there are many products and services that Silicon Valley provides. One is, uh, you know, banking services to startups. Another is to venture capitalists. They do the mortgages for banker, for venture capitalists, and for founders as well. They provide those kind of white glove services. But you also mentioned in our group chat, they also provide loans to GPs, general partners, the people who run, uh, venture firms. So the impact could also hit there. Maybe you could explain what that is, and then we'll get into what happened here.

David Friedberg 6:50 Yeah. Well, I think it's important maybe actually just for Friedberg to just explain what's happening but-

Jason Calacanis 6:56 Okay.

David Friedberg 6:56 ... can, and maybe, maybe let me just do the lead in and then Friedberg can do the details. But for, for those that are far away and aren't even sure what's going on, the basic problem that we have right now is in the last 36 hours, a key part of the financial plumbing of Silicon Valley has basically been turned off. And as a result, billions of dollars of deposits have basically, um, been frozen. It means that people can't pay their bills. It means that people can't access their deposits. It means that credit lines could be in default. It means that payroll can't be met. And so as a result, we have this potential contagion on our hands. But in order to understand it and unpack it, I think it's important to explain exactly how this came to pass. So let me just hand the ball to Friedberg, and then we can talk about some of the implications, of which there are many.

Jason Calacanis 7:47 Yeah, before Friedberg starts with the why, just the what that's happened as well. This all started on Wednesday evening when Silicon Valley Bank's CEO published a letter to shareholders announcing that the bank was rebalancing its balance sheet by selling tens of billions of dollars worth of mostly US securities, I'm sorry, Treasuries. Uh, and then they announced they would raise some money and sell some shares in Silicon Valley Bank. The, then the shares in Silicon Valley Bank as a publicly traded entity dropped 60% on Thursday, then another 60% on Friday. Of course, then the entire world got focused on this, and then every venture capitalist started telling, or I would say the overwhelming majority of venture capitalists told their founders to get their money out of SVB. Then you had a classic run on the bank, a small number of venture capitalists gave advice to say, "Hey, we should support Silicon Valley Bank." I understand that, but it turned out to be really bad advice. Um, and then trading, uh, was halted on Friday morning, pending news. And then finally, the FDIC shut down Silicon Valley Bank at noon on Friday. And there's a lot of speculation of what will happen on the we- uh, over the weekend, but maybe you could walk us through technically what happened to Silicon Valley Bank and why they had this cash shortfall and this ru- yeah, we explained the run on the bank basically, but what led up to this?

Chamath Palihapitiya 9:00 The irony is, it really was, and is, prior to the, quote, "run," a financially solvent business. So I, I have a few slides, if we're on YouTube you can see it, um, that we pulled. One slide that was kind of made by us and the other set that come from Silicon Valley Bank's actual presentations. But if you look at their balance sheet, this is from the end of the year 2022, um, you can kind of look at the w- you know, stuff that they owe, their, their liabilities, which is what they owe their customers that sits in deposits, 'cause when customers give you cash in a deposit, you owe them that money back. So that sits as a liability. And then they had, uh, some other debt. So in total, Silicon Valley Bank, at the end of the year, had about $195 billion in liabilities, 173 billion of customer deposits that they owe to customers and 22 billion of other debt. And then they take those customer deposits and they invest it in, in a number of securities. And the way that a balance sheet business like this bank would operate is, you know, the customers have access to their cash, um, anytime they want, but in order for the bank to make money, they make longer duration investments, and those longer duration investments give them the ability to earn money on those longer duration investments, um, more than they're paying the customers for the deposit. So if you look at their longer duration investments, they had about $208 billion, um, of total assets sitting on the balance sheet. Uh, so compare that to the 195 billion that they owe customers and, and, and other debt holders. So, you know, the difference here between 208 and 195 is about $13 billion. That's kind of the net, what people would call book value of Silicon Valley Bank at the end of the year. And of the 208 billion of assets that they had, ni- 74 billion were loans and they've got a breakdown of the loan portfolio here in a minute, 91 billion were these h- hold to maturity securities where they don't actually adjust the value of these on a quarterly basis, and 26 billion is what triggered this panic, which is available for sale securities, mostly Treasuries. And what happened is Silicon Valley Bank's deposits came in so quickly over the last couple of years that they went out and they bought a bunch of Treasuries, you know, with, with the cash that they got. And the problem is, that very quickly-

Jason Calacanis 11:07 Friedberg, it's actually MBS.

Chamath Palihapitiya 11:08 Yeah.

Jason Calacanis 11:08 They bought a bunch of MBS, ten-year duration MBS. And important to note, of the 208 billion that they have, the book value, Friedberg, there was a, a, uh, whatever, 10% of it's in cash or something. So they do have some cash there, but-

Chamath Palihapitiya 11:21 That's right. Yeah, sorry, it's a good point. If you go back, so like, you know, let's say that of the 100, of the 173 billion of customer deposits, you know, they've got 14 billion of cash and then they've got all these Treasury securities they can sell, call it 40 billion. So if 25% of customers said tomorrow, "Hey, we want our cash back," theoretically they could just dump those Treasury securities, distribute the cash, and give it all back to customers. The problem is, if suddenly more than 25% want to get their cash back, well, now they have a problem. And that is effectively what triggers the run on the bank. As soon as some folks think that others might be pulling money out, then everyone rushes to be the first money out the door, and that's what triggers a classic run on the bank. There's a, uh, a statistic, I think, in the 1920s, there were several hundred banks that had runs every year for almost the entire decade. Um, and these, this was, like, a regular kind of occurrence that happened in the 1920s that ushered in a lot of our modern securities laws that are meant to kind of-... create the necessary liquidity provisions and how these banks are able, able to operate to make cash available to customers. But what happened is, so much so-

Jason Calacanis 12:24 So much so, by the way, Friedberg, that they made a movie, It's a Wonderful Life about the bank run.

Chamath Palihapitiya 12:29 That's right. So basically, the, one of the bigger problems that Silicon Valley Bank, they ran into two big problems. Number one is deposit decline, where, uh, VCs were not investing new money and when they were not investing new money and startups were burning more money than Silicon Valley had modeled they would be burning, because they thought everyone was going to reduce spend and reduce burn, and they didn't. So deposits were going down, while all these startups were burning money. No VCs were investing. So total deposits were on the decline. Meanwhile, their bond portfolio, the assets that they hold on the balance sheet, also declined in value. And I, and I kind of just put a really simple illustration here on why. If you have $100 kind of face value bond that earns 2%, uh, which is basically, you know, where these treasuries were a year ago, and you, and you hold that for 10 years, that 10-year bond yields $122. If the interest rate goes up to 5%, then the, that, that, that bond should yield $163. So the value of the first bond actually goes down by 25% because of the market conditions. That's how significant the value changes with just a 3% change in the interest rates. And that's effectively what happened with that available for security segment of the Silicon Valley Bank portfolio, uh, balance sheet. They had this bond portfolio that suddenly got devalued, and they had declining deposits. So when deposits start to decline, you gotta make sure you have enough assets sitting on the balance sheet. So they sold a bunch of them, said, "We're going to raise more money," and at that point everyone kind of perked their head up and said, "Oh my gosh." What's crazy is in Q4, by the way, Seeking Alpha, this website you guys know, they had actually done an analysis and said, "Is S- SVB about to blow up?" And they put together a bunch of slides that highlighted why this might be the case, because they saw that deposits were declining, that their, um, their assets that they hold were basically declining in value because of the massive and very quick rise in interest rates, and that SVB had bought a bunch of bonds that were long, long-durated bonds. So it led to a, you know, obviously, a real short-term problem. If you look at the rest of SVB's loan portfolio, there's also a question of how distressed that all is. So 10% of their 70 billion-plus dollars of loans is in venture debt, and venture debt is very questionable in this market, right? Because historically, the way venture debt makes money is that they assume that VCs are going to keep funding the companies that they're providing debt to, and if the VCs stop funding the companies, then the venture debt defaults. And so if you go to the last slide in the stack, you'll kind of see SVB's performance on their venture debt portfolio. Yeah, so look at this. This is the, the performance results on just the warrants that they get on their venture debt. So when you, when you issue venture debt, you take a write-down, um, or you get paid back, and then you also get some warrants. You get some, a right to buy shares in the, in the winners, in the, the startups that work. And so the way that SVB has made money on their venture debt portfolio historically is, hopefully they get paid back on all their loans. Some of them they don't, but then they'll make a bunch of money on selling their warrants or, or the pub- company's going public or getting bought. And in Q4 of 2022, it just fell off a cliff, and their venture debt portfolio really started to show distress. And that's 10%.

David Friedberg 15:30 Are these realized gains or these are mark-to-market gains?

Chamath Palihapitiya 15:33 This is the net gains on, on their warrants. So they don't mark to market warrants. I think this is what they actually exercised and got out. So there was e- there was obviously a ton of exits in 2021. So they made $560 million in profit on their warrants that they had in their venture debt portfolio in 2021. That number collapsed to 148 in 2022. And you better believe most of that was in the early part of 2022. Um, so, you know, they, they didn't do a quarterly breakdown on this. This was like their full-year numbers, but their venture debt portfolio, which is another $7 billion of capital, also distressed. Um, certainly wasn't going to perform as everyone had modeled. So when you kind of start to add this all up, and remember if you go back to the beginning, they only had $15 billion of true net book value, which is the difference between their assets and their liabilities. And so if you really start to adjust what are those assets really worth? Are they really worth what they're holding them at the book at? And if people start to pull money out and you got to sell them at a distressed price in order to give people their cash that they're owed on deposits, that's when you have a classic run-on-the-bank problem, and then everyone tries to be the first out the door. And that's basically like what triggered this this week.

David Friedberg 16:36 Can I give you guys my little version of all of this? I think there are three buckets, but before I go into the three buckets, I just want to say, to all of the employees at these companies, I think we, the four of us, are so truly sorry for what's going on and what you guys are going through. And then to founders that are trying to navigate this, it must be unbelievably tough. There are a few founders in our portfolio. So, you know, from all of us, just know that we're thinking of you guys and, um, hopefully everybody ends up on the other side of this by Monday or Tuesday with not a lot of damage. So let, let's just put that out there as sort of like goodwill and kind of good juju in the world for the next couple of days here.

Jason Calacanis 17:19 This is going to be a really difficult weekend for people who are trying to navigate this.

David Friedberg 17:22 Yeah.

Jason Calacanis 17:22 I think it's well said. Yeah. I mean, I, I-

David Friedberg 17:24 And who didn't get paid, et cetera, et cetera.

Jason Calacanis 17:25 I've got founders who are in really, really tough shape right now trying to figure out, "How do I make payroll?"

David Friedberg 17:30 Yeah.

Jason Calacanis 17:30 And it's a big question.

David Friedberg 17:32 Okay, so just putting a pin in that 'cause we'll come back to it. I think that this whole debacle, I guess, is the, maybe the best word. There's a little bit of blame that you can put at the feet of three different groups of actors, and I just want to get your guys' reaction to this. So group number one,

David Friedberg 17:53 and Friedberg just mentioned this, is w- we, the four of us have been talking for the last 18 months about the impact of rising rates. And, you know, we talked a lot about, for example, like in our portfolio, my partners and I walked into every company and made them have at least enough money to get through mid-2025, right? I've said this a bunch of times.And so that was about having very difficult conversations about making sure that you were husbanding cash so that you had enough to weather any storm that came on the horizon. But it turns out that there was some group of VCs and companies that just didn't get that memo and just kept spending like nothing had changed. But when other VCs have stopped giving you money and you're continuing to spend like it was 2020, that's what caused this mismatch, and it was really the spark that lit the fuse. So, I think it's a really sad commentary at some level about the lack of governance that we have inside of some of these companies where folks are just not doing the job that they're supposed to at these board levels. I think people, and we've talked about this, have made venture too much of a popularity contest where they are, you know, glad handing and smiling and not doing the hard work of holding folks accountable. And so some handful of VCs and some handful of founders just didn't get this memo and it made what could have been a slower train wreck faster unnecessarily. So, I think that that's worth talking about. Then I think if you look at what actually practically happened over the last year and a half at SVB was that they were so desirous of profits that they basically had a duration mismatch. So wh- what is that? Imagine you get a job and, you know, somebody's like, "Hey, Freidberg, I'll pay you $100,000 monthly over some number of months, right? In, in, in normal pay every two weeks, or I'll pay you 200,000 but you only get paid once a year." Well, the problem with that second thing is you still have monthly bills that you have to make up for before you get paid, and so most people wouldn't take that job even if they paid you a lot more because you have this durational mismatch. You have to pay rent every month, you have to pay bills on a monthly basis, you have credit card bills, all these things, and so you need to match the timing of your cash flows. And so I think somewhere along the way the risk folks at SVB just made a really large miscalculation. They basically went and bought 10-year risk in order to pay back money that could be called on a daily or weekly basis. That fr- obviously in hindsight was not a good idea.

Jason Calacanis 20:47 But, but more importantly, Chamath, they didn't-

David Friedberg 20:49 And then, and then-

Jason Calacanis 20:49 ... they didn't adjust fast enough.

David Friedberg 20:51 Well, they can't because they have these mark-to-market assets that were just getting clobbered in the head as rates got raised. And then the third, the third thing is around regulators. You know, after the great financial crisis, we went through a period where there was hundreds of bank failures. And then for the last decade, there've been virtually none, right? There've been like a few here or there, and the last one was just during COVID. And so the, the regulators I think have done a really good job with Dodd-Frank and all of these other things to clean up the banking laws and the reporting requirements and the capital structures so that runs on banks are more and more infrequent. But they kept this crazy loophole around the accounting treatment of assets and they allow these durational mismatches to appear in a bank's balance sheet. And so I think there's a piece here for the regulators which is here's an opportunity that's glaring and obvious now and screaming about how we need to tighten some more of the transparency that's required. It shouldn't be a group of armchair sloots on Seeking Alpha that sniffed this out three months before it happened. It should have actually been a regulator that said, "Hey, hold on a second. Something is happening here that we don't like." And so we n- I think we need to figure it out. But I think those are the three actors that are in play, and they each share a bit of the blame here.

Jason Calacanis 22:15 Freedberg, Sacks, what do you think? Who, who, who is to blame here most for this blowup or is this just the extragenous event of the rate hikes happening in such a short compressed period of time?

David Sacks 22:27 No, I mean, look, I think that SVB's risk management was terrible obviously. They signed up for these long dated securities when th- the market they serve is incredibly volatile, like Chamath says, duration mismatch. Really good point. I would also say that there's a weird regulatory treatment where apparently if you buy these 10-year bonds, these 10-year mortgage-backed securities or 10-year treasuries, you don't have to recognize the loss until you sell them which is just bizarre. So in other words, they should have been marking the, the positions to market and instead they just were allowing these losses to accrue. I don't understand how the regulators can allow that kind of system. I also don't understand how the regulators can allow a bank to take customer deposits and loan them out to startups with this venture debt that we've been talking about on the show, where 10% of their portfolio is basically being loaned out to startups who have no credit. That's crazy. We talked on the show a few months ago-

Jason Calacanis 23:32 We actually, it's a good time to play the clip here because what we saw and Sacks and I, you know, seeing at the series A level, you have a lot of times founders would get this basically free money in their minds. "I raise 10, I get five in venture debt, I can extend my runway." Um, but that money comes due. And, and here's the clip for when Sacks and I were talking about it just a couple episodes ago.

David Sacks 23:54 Whoosh. What I don't trust is whether the, the return models on venture debt that were created over the last five to 10 years will be a good predictor of what the returns will be in the next five, 10 years when a lot of the mortality that should have happened in the past now happens in the future. Whoosh.

Jason Calacanis 24:12 Yeah, I mean, this is just-

David Friedberg 24:14 ... four or five episodes ago, we kind of nailed it.

David Sacks 24:17 Startups have no collateral. They have no- there's no security for that loan. How does that make sense-

David Friedberg 24:21 No, not, not true.

David Sacks 24:21 ... to make a loan to a creditless startup?

David Friedberg 24:24 No, no, not true.

Chamath Palihapitiya 24:25 Guys, look, I, I, I disagree with you on this point. Look, if you pull up the, the slide that, that breaks down ... So, w- w- let's talk about venture debt for a second, 'cause I've actually invested in a venture debt fund and I've seen the economics on it. The way that the, the venture debt model typically works is the lender loans money to the startup, and what they underwrite is what the current VCs in the startup say they're gonna do to support the company in the future. So their ability to get paid back in the future is largely predicated not on underwriting the company and the performance of the business or the assets they have, but it's underwrited by the fact that the VCs are committed to continuing to put money in and hopefully see that this thing has a big outcome.

David Sacks 25:01 (laughs) There is no commitment.

Chamath Palihapitiya 25:02 And, no, and yeah, I, I get it, but Sachs, l- let me, let me just finish.

David Sacks 25:02 There is no commitment. I've signed 100 ... No, let me tell you, I've, as a VC-

Chamath Palihapitiya 25:06 Hold on, let me just finish. I, I get it. But the, but the asset as a, as an asset class, we can make fun of it all we want, it's actually performed pretty well. These guys have generated typically 18% as an industry, kind of returns.

David Sacks 25:18 In a bull market. In, in a bull market.

Chamath Palihapitiya 25:20 And, yeah. And, and you're right. It's the same as venture-

David Friedberg 25:22 They sold boats.

Chamath Palihapitiya 25:23 And the way those, and the way that they generate those returns is that they're loaning money to the startups. A bunch of those startups fail, they don't get paid back. And then the ones that succeed, they actually take warrants in the startups, so they have some equity upside in the startup. And that's the way the model works. We can make fun of it all we want. It actually works as an industry, and historically, they-

David Sacks 25:39 Okay, so let me tell you, let me tell you why that broke, is, um, it goes back to the point you made earlier in the show, which is the, the, the lender has this expectation that the VCs are gonna keep investing. Well, what if they don't? Now, we've been in a generally up into the right bull market since the last crash in 2009.

Chamath Palihapitiya 25:56 That's right. 2009. Yeah, 14, uh, 14 years ago.

David Sacks 25:57 So I believe that the data for all these models is, is skewed, because it assumes, again, an environment in which companies keep r- raising up rounds.

Chamath Palihapitiya 26:06 That's right.

David Sacks 26:06 And as soon as you get into a crisis, in which that breaks, then the whole asset class breaks.

Chamath Palihapitiya 26:11 That's right.

David Sacks 26:11 And I think this was completely predictable. But even if you think that this asset class is legitimate, I don't understand why banking deposits could ever be used to fund it. If you wanna be a venture debt fund, go out and raise money from LPs. Because what happens is, when you raise it with customer deposits, you're creating systemic risks for the banking system.

David Friedberg 26:31 100%. You are so-

David Sacks 26:32 And the regulators should never have allowed that.

David Friedberg 26:33 Right. Even worse, the two assets are correlated, because you're, you're loaning it to people (laughs) who are depositing it. And in every other part of the private credit market, that is exactly what you do, what Sacks said. You can't use custor- customer deposits to do some CLO deal or to do, like, you know, to back a PE play.

David Sacks 26:57 Right.

David Friedberg 26:57 These are all LP capital that goes towards that. This is the only sliver, as far as I know, where you take customer deposits to create very risky loans wrapped with warrant coverage. And by the way, this stuff is never free, right? So, they make you keep your money there.

David Sacks 27:14 Right.

David Friedberg 27:14 They make you have enough money to cover the size of the loan in the first place, so it's not even that valuable, because if they gave you $8 million loan, you have to have $8 million always on deposit. Otherwise, you violate the ... Otherwise, you've, you, you know, you breached the loan.

David Sacks 27:27 On the covers.

David Friedberg 27:27 So, there is no free lunch in venture debt. There has never been. And I still think venture debt is very much like venture capital, which is most of these gains are on paper. Most of these gains haven't really been realized. And now, we're gonna go through this sorting process when all of this stuff gets whacked. I do want, Saxy, your reaction to this though, which is the thing that started this was the fact that VCs seeing the markets imploding stopped giving companies money, but they didn't do enough work to help founders cut burn.

David Sacks 28:00 Oh my God, well, I, yeah.

David Friedberg 28:00 As SVB said it themselves, the burn stayed the same. What is going on inside of these boards?

David Sacks 28:05 Well, I think that's crazy, because listen, I mean, we started doing portfolio updates with our entire portfolio of founders in February last year-

David Friedberg 28:14 Same. Same.

David Sacks 28:15 ... saying this is a regime change, you gotta cut costs.

David Friedberg 28:17 Yeah.

David Sacks 28:17 We did another one in May. You can watch them both on YouTube, okay? And we were telling founders, "Cut your burn. Do it now. Don't wait." We were beating the drum on this so hard, and in every board meeting, and privately.

David Friedberg 28:29 Yeah.

David Sacks 28:29 And I, I, like, you know, and it takes multiple times, frankly, to get through.

David Friedberg 28:33 I think your point, Chamath, about not wanting to be unpopular with the founder crowd, uh, led some young capital allocators to maybe say, "Okay, yeah, let's try this ditch effort before we do, you know, another riff. Let's try this new product. Let's change our sales strategy." I don't think it's young versus old. I think it's experience versus unexperienced. No, I think it's experience.

Chamath Palihapitiya 28:53 Okay, that's better. I think that's more accurate. Yeah.

David Friedberg 28:55 I get it.

Chamath Palihapitiya 28:56 I do think it is experience versus unexperienced.

David Sacks 28:57 I think there is, there is an experience. Listen, if you've never lived through a bare market, you don't know how bad it can get, and tech is a boom bus cycle, and the bus are really hard.

David Friedberg 29:05 Really hard.

David Sacks 29:06 Really hard. And if you've never lived through a regime change before, like there was in 2008, '9, or in 2000, 2001 is the worst, yeah.

David Friedberg 29:13 Yeah. In 2001. 2001 to '03, yeah.

David Sacks 29:14 Then you're totally unprepared and you have no idea. And, you know, and, and I think experience does matter, and there ha- there aren't that many VCs around who lived through the dot-com crash.

Chamath Palihapitiya 29:22 Oh, probably 85% have not. By the way, if you guys pull up just that slide on the loan portfolio at SVB, I just wanna make the case. Sacks, I hear you, it's a risky, it seems like a risky investment to make. But would- don't you guys agree that a balance sheet business like SVB or an insurance company or any business that has, you know, some amount of money coming in that sits on the balance sheet and then they invest it for a period of time, there's a laddering of risk, and there's a laddering of duration that you have? And so, if you look at Silicon Valley Bank from their, from the update they did last week that triggered all of this, if you look at SVB's loan portfolio, 70% are really these asset-backed loans, which are, um, 56% of the portfolio is like, you know, prepayments on, on LP commitments, and then 14% is, is private banking loans, which is loans against, you know, public securities that people have. Only 10% of the portfolio is venture debt, which is seven billion-... and, you know, look, if the asset historically has performed at an 18% kind of rate of return, what is the venture debt portfolio gonna look like in a distressed environment? Is it negative 100%? Is it negative 50%, negative 40%, negative 30%? I mean, you guys can have a point of view on this, but look, I mean, for any business that's managing a large, um, balance sheet of assets against, you know, a short, uh, kind of liability tree, they're gonna have some riskier assets. I think, you know, the question is was 10% too much of the loan portfolio?

David Sacks 30:48 Tch.

Chamath Palihapitiya 30:48 Um...

David Sacks 30:48 I think 1% is too much.

Jason Calacanis 30:50 Yeah, and I, I'll add to that.

Chamath Palihapitiya 30:51 Yes, and it's a-

Jason Calacanis 30:51 You know, one of the issues here that we saw qualitatively, and Sax and I both saw qualitatively, is the standard for giving these and the size of them got lower and lower. In fact, the covenants went away. And this is what we kept having Hunter say to us: "It has no covenants. They offered me no covenants. I don't have to have a certain amount of cash. I don't have to have a certain amount of revenue." Those covenants were there for a reason, to filter out the people who can't afford the house, right? And this is exactly what happened in 2008 when people started giving those no recourse or no, uh, background check mortgages. Remember those, where, like, you didn't have to do a background check to get a mortgage? That's what happened in venture. They just gave these, I saw it firsthand, willy-nilly. I begged founders to not take them, and I only won that discussion, Sax, one out of five times, 'cause founders are like money.

Chamath Palihapitiya 31:38 We're having this debate, but there's no indication, and there were no losses in this portfolio to date that show that venture debt is underperforming. We're, we're, we're saying that this is stupid, and no one should do it, and I-

David Sacks 31:46 What, what's the, what's the expression? Past performance is no guarantee of future performance?

Chamath Palihapitiya 31:49 Exactly. (laughs)

Jason Calacanis 31:50 (laughs)

David Sacks 31:50 It was obvious to us on this podcast.

Chamath Palihapitiya 31:52 You guys are arguing about venture debt-

Jason Calacanis 31:54 Yes.

Chamath Palihapitiya 31:54 ... when the real loss that happened at SVB-

Jason Calacanis 31:57 No, we understand that.

Chamath Palihapitiya 31:58 ... was the fact that they bought a bunch of Treasuries-

Jason Calacanis 31:59 No, hold on.

Chamath Palihapitiya 32:00 ... and interest rates went from 2% to 5%.

Jason Calacanis 32:02 Let me, let me explain.

David Sacks 32:03 Okay, hold on, hold on. There's two things going on here, okay, Friedberg. When, when I see your chart, you're talking about laddering this and laddering that and X% and all this kind of stuff, I think about the smartest guys in the room. Okay, this is long-term capital management. This is Enron. This is the 2008 bank failure. They think they can basically do financial engineering to make this work. You know why it doesn't work? It's 'cause number one, they're not in fully liquid assets. Number two, they're not marking to market every day. If you're a deposit bank, you should be required to keep all of your assets in fully liquid securities that you mark to market every day. It's that simple. And what do they do? They put it in 10-year, uh, duration mortgage bonds-

Jason Calacanis 32:42 Yeah, we need to explain this.

David Sacks 32:43 ... that got, hold on, th- where the value got devastated with the rise of interest rates. They didn't have to mark that to market and second, they put 10% of the portfolio in basically loans to credit-less startups. So, when there is a run on the bank, you have a, what, like, roughly 30% gap between deposits and their actual, the value of their portfolio.

Jason Calacanis 33:07 Yeah, and, and listen, th- there-

David Sacks 33:08 That shouldn't be allowed. And, and the reason it's allowed is, frankly, I think regulators are completely asleep at the wheel. Where's Powell? Where's Yellen? Two days ago, two days ago, Powell was testifying in front of the Banking Committee, and they asked him, "Do you see any systemic risks in the banking system because of the rapid rise in interest rates?" He said, "No. No systemic risk."

Chamath Palihapitiya 33:27 Sax is right. I agree that this is, the rise in interest rates is the key driver here.

Jason Calacanis 33:32 Right.

Chamath Palihapitiya 33:32 It drove down venture investing. It drove down valuations. And it's driving down the value of long-durated bond portfolios, which, by the way, is the mainstay and the standard of how a lot of these businesses in- invest and operate. And it's caused distress and stress on the system. My biggest concern is the contagion effect that arises next. If you go in and you continue to assume interest rates climb, and everyone's holding onto these bonds, and they're getting written down. Meanwhile, you owe people all this money in cash. And the other thing that's happening, if you hold cash today, you'll likely want a higher interest rate to compete with Treasuries, 'cause you can invest in Treasuries today and make 4% or 5%, so...

Jason Calacanis 34:04 So, let's pause for a second here. I just want to make sure that the audience understands this.

David Sacks 34:06 And Yellen put out a statement today, J-CAL, just to finish the, the thought, that they're, they're monitoring the situation.

Jason Calacanis 34:12 Yes.

David Sacks 34:13 She's sitting there like a bump on a log. I mean, it's ridiculous.

Jason Calacanis 34:16 They need to be out front on this.

David Sacks 34:17 They don't understand, like, that this is a cascading situation.

Chamath Palihapitiya 34:21 A bump on a log.

Jason Calacanis 34:21 This, they literally are, I agree.

David Sacks 34:22 So listen, either this weekend, either this weekend, they place SVB in the hands of a JP Morgan. They do basically a Bear Stearns-

Jason Calacanis 34:30 Or a Bear Stearns or whatever. Yeah, exactly.

David Sacks 34:31 ... or a Wamu. They either do that this weekend, or this thing keeps cascading next week. And look, I could be wrong. Maybe they're working on it right now behind the scenes. If they are, kudos to them. They'll have an announcement before the market opens on Monday. But if they're not, and Yellen's just like, "We're monitoring the situation," while three days ago, she was in Ukraine, this is incompetence at work. (laughs)

Jason Calacanis 34:52 (laughs) All right, hold on. We'll figure out a way for you to dump this-

Chamath Palihapitiya 34:54 (laughs)

Jason Calacanis 34:54 ... into January 6th next.

David Sacks 34:56 Take a pause.

Chamath Palihapitiya 34:57 Yeah. He connected Silicon Valley Bank to Ukraine. It was-

Jason Calacanis 35:00 Yeah, exactly. It was beautiful. The piece here that's important for this-

David Sacks 35:02 What is our Secretary of the Treasury doing in Ukraine? I mean, seriously.

Chamath Palihapitiya 35:05 Okay, take it easy. Take it easy. (laughs)

Jason Calacanis 35:07 Here's what happened, just so people understand. US Treasuries were at 102. You get like, uh, 2% a year. They bought a bunch of those. That was actually, when you think about it, you would say that's a safe bet. The problem is those are locked up for 10 years. And nobody anticipated on the Silicon Valley Bank team that the rate hike would happen so quickly, so violently. Remember, we saw the 25, 25, 50, 75, 75, all those increases. Now, what happens to a 2% US Treasury when the interest rate goes up is they get devalued. They're not worth as much. So, if you did need to sell them, you would have to sell them at a discount. If you held them to maturity, you would get that complete return. And what happened here is they needed to sell these early, and they sold them early, and they took a massive loss, billions of dollars, and that's what lit the fuse.

Chamath Palihapitiya 35:57 That's the slide I showed. Like, the price basically goes down-

Jason Calacanis 35:59 I just want to make sure the audience understands that.

Chamath Palihapitiya 36:00 Yeah.

Jason Calacanis 36:00 If they had sold these earlier, or if they hadn't bought these-

David Friedberg 36:04 But hold on, hold on, wait, wait.

Jason Calacanis 36:04 ... they would have not had this problem. Go ahead, Chamath.

David Friedberg 36:06 Now, why, why in that meeting did they have to decide to emergency sell? It's because VCs stopped giving startups money. So, startups couldn't deposit more money into the bank-... but they kept spending at the same rate that they were spending, which means that-

Jason Calacanis 36:23 In other words, the deposits went down, yeah.

David Friedberg 36:25 In the last 18 months, not enough folks read the memo.

Jason Calacanis 36:29 Mm-hmm. Yes.

David Friedberg 36:30 And by the way, the tragedy of that is, let's just say that you did get the memo and you did make the hard cuts, right? Now, le- let's say you're working on something l- and you can fill in the blank on the thing that you care about, okay, so for the listeners. Let's say it's climate change, let's say it's breast cancer research, whatever it is. This had nothing to do with you four days ago. You had your money in the bank, you did everything you needed to do to go and, you know, figure out product market fit, you know, try to get to market, try to sell your product. And all of a sudden, because of some other set of folks and actors who couldn't get their act together, now you're on the precipice of bankruptcy in 36, 48 hours. That's

David Friedberg 37:11 crazy to me.

Jason Calacanis 37:11 This is the challenge, Sax, I think you can speak to this as well, is we did all this portfolio management over the last year. These were the troubled companies and then you had the companies, uh, a large portion of them who did the right thing. They had a big war chest and they had, uh, set the burn at the right pace, and now they, the other portion of our port- portfolio that had big war chests, they're now at risk. So if you're a capital allocator right now, you're looking at a group of companies that you tried your best to save and they're, and they're ankled, and they're wounded, and now the strong ones are wounded too. This is cataclysmic for Silicon Valley. If this does not get stopped this weekend, not only ... And I- I- I- I don't want to be hysterical-

David Sacks 37:51 You're right, this is a meteor hitting the dinosaurs, it's extinction level event. You're right, J-Cal. Listen, we have portfolio companies that had tens or, you know, millions or more in-

Jason Calacanis 38:02 Yes.

David Sacks 38:03 ... Silicon Valley Bank, and their account showed that their money was in the safest money market funds, money market funds with a publicly traded ticker symbol that were managed by BlackRock or Morgan Stanley, okay? That's what their accounts showed them they had. And then, they're told all of a sudden, "No, you're only protected up to $250,000. Everything above that, you got your- your money market fund is just an asset of SVB, which is in receivership."

David Friedberg 38:30 You get a certificate. (laughs)

David Sacks 38:31 Yeah, you get a certificate. Do you see this announcement? By the way-

Jason Calacanis 38:33 I mean, and then they kind of-

David Sacks 38:34 ... I think the California regulator made things worse. The California regulators stepped in and they froze everything. So, our companies were in the process. We have companies that submitted a wire yesterday. By the way, we spent all day yesterday on the phone with our portfolio companies trying to get them out. We had wire requests that went in before the deadline and for some reason weren't in queue.

David Friedberg 38:53 Same. They didn't get through. Yeah.

David Sacks 38:54 And they didn't get out.

Jason Calacanis 38:54 Same.

David Sacks 38:54 They didn't get through.

Jason Calacanis 38:56 Same.

David Sacks 38:56 And then the California regulator steps in this morning and freezes everything. And what do they announce? They said, "Oh, you're good. You're good for your insured amounts." How much is that? $250,000. "For your uninsured amounts," which is everything above 250, "you're gonna get a certificate." A certificate? What does that mean? That means you're a creditor in bankruptcy. So the mutual fund that you thought you owned was actually not hypothecated in your name. It was in SVB's name at BlackRock, and so our companies have been calling BlackRock and calling Morgan Stanley saying, "Hey, do you have my money market fund?" And they're like, "No, sorry, that's SVB." So now-

Jason Calacanis 39:30 So this is the crazy thing.

David Sacks 39:31 ... they're sitting in a- in a creditor line in bankruptcy.

Jason Calacanis 39:35 We got to explain this.

David Sacks 39:35 Yeah.

Jason Calacanis 39:36 These are called sweep accounts. So what Silicon Valley Bank did with, uh, some of these large portfolio hold- holders, let's say Sax and a bunch of other VCs gave you 30 million bucks. Yes. And they would s- they took your money and they said, "You know what? Just to be safe, we're gonna take your money, we'll automatically sweep it and distribute it across two other accounts." So we got this BlackRock over here for you, great. We got this Morgan Stanley over here, great. Whatever it is. You could only get to those through the Silicon Valley Bank interface. And so it was supposed to protect you, but there is no recourse, it seems. Those are frozen too, so the only thing you can do that's logical ... And I had a mentor 30 years ago when I had the magazine and we started hitting millions of dollars in revenue. And he said, I said, "How much money do we have in the bank?" He's like, "Which bank account?" And he had four bank accounts and he would load balance them, and he did it every Friday. God bless Elliott Cook. He did it every Friday for me, and I've always done that. I've always had multiple bank accounts and load balanced them. But in this case, Silicon Valley Bank did it through one interface. I have multiple startups today who did this exact thing, Sax, and they- they couldn't even log into Silicon Valley Bank today to even see where they're at. I mean, I think you can log in now-

David Sacks 40:44 Yeah, you're right, everything got frozen. And the California regulator froze them and they brought in the FDIC. So there's a couple of problems now with the working out of this. This is basically a bankruptcy proces- receivership process. It's that we've got all these companies that need to make payroll in the next few weeks, right? And so these processes don't work at startup time. If you could just figure out, like, over the weekend, "Okay, SVB lost 30 cents on the dollar and everyone's just gonna be prorated. You're gonna get 70 cents on the dollar and you're gonna get your money on Monday," it would be a hit to the startup ecosystem, but people would recover and move on. But the fact of the matter is, it's not gonna be on Monday. It could take weeks or months to figure out how many cents on the dollar you have. And that's the real problem-

Jason Calacanis 41:21 Are they liquidating Silicon Valley Bank? Are they selling the debts?

David Sacks 41:24 Oh, yeah.

Jason Calacanis 41:25 Is everybody getting laid off?

David Sacks 41:26 No, FDIC's gonna, FDIC's gonna liquidate everything.

David Friedberg 41:28 Well, you have two paths here. Path number one is y- if you actually try to sell these assets, but the problem is, who do you think the buyer is? The buyer are the sharpest sharps on Wall Street who will purposefully underbid these assets. And so that then takes you to path two, which is then the only other real solution is for the Fed to warehouse them and guarantee them. And that's an equivalent version of what they had to do during the great financial crisis, which was this thing called TARP, which is the Troubled Asset Relief Plan. It was just a backstop and a mechanism so that these, at the time, those toxic assets, which were a bunch of mortgage-backed loans, could be cleared through the system over time, which effectively meant that the Fed basically warehoused that risk. So, I think what we need to see now is, is ... Sax, it could be 50 cents on the dollar. It could be 60 cents if you want immediate liquidity. You know, a friend in our group chat was mentioning that there was one claim-... a company that had a $100 million inside of SVB was offered 60 cents on the dollar today for that claim. Now, that's a really-

Jason Calacanis 42:37 From a third party?

David Friedberg 42:38 From a third party who said-

Jason Calacanis 42:39 Wow.

David Friedberg 42:40 ... "I will take y- I will give you 60 million today in return for that certificate, plus the (laughs) 250,000 that says you're owed $100 million." Because they're willing to take the risk that they'll get, you know, 80 million-

Jason Calacanis 42:53 Wow.

David Friedberg 42:53 ... right? And then they take the difference. Now, the point is that if you're tr- if you're seeing today that kind of a discount, that's not a good sign, I think, and it does speak to the fact that regulators have to step in. Now, here's the other reason why I think it's important. I think what regulators and I think the people, and there's a lot of them in Washington that listen to this, what this does is it torches years of US innovation, and you should not let that happen.

Jason Calacanis 43:18 A decade.

David Friedberg 43:18 There are companies working on really important things for the United States and for the rest of the world, and if it's, if, if the company fails because they can't make the product work, so be it. We take that risk every day. If the company fails because customers don't wanna buy it, so be it. If the product fails because a better product comes out, so be it. But it shouldn't fail (laughs) because we can't get money that is in-

Jason Calacanis 43:46 Yeah, 'cause you forgot your pin code.

David Friedberg 43:47 ... in deposit.

Jason Calacanis 43:48 (laughs) Yeah.

David Friedberg 43:48 That should not be why we torch-

Jason Calacanis 43:51 Yes.

David Friedberg 43:51 ... hundreds of startups and what they're working on.

Jason Calacanis 43:53 This is-

David Friedberg 43:53 Maybe thousands.

Jason Calacanis 43:54 Yeah, this is a d- this would be a lost decade, a lost decade for Silicon Valley.

Chamath Palihapitiya 43:57 Jake, Kal, first of all, do you, do you guys wanna talk about second and third or- third order effects just so folks-

Jason Calacanis 44:02 We have to talk about those, yes.

Chamath Palihapitiya 44:02 ... really understand those?

Jason Calacanis 44:03 Yeah.

Chamath Palihapitiya 44:03 Because I think it's important-

Jason Calacanis 44:04 Yeah.

Chamath Palihapitiya 44:04 ... to highlight why it's not just about a couple hundred tech bros in Silicon Valley not being able to make payroll, but there's important downstream consequences. For example, there are payment processing companies in Silicon Valley that use Silicon Valley Bank to store their capital and to, to, to move money around. There are payroll companies that do payroll for many businesses, not just tech businesses, but many businesses in different parts of the economy that store their cash at Silicon Valley Bank and process money through Silicon Valley Bank. Today, it was announced that Rippling, one of those companies, could not hit their payroll cycle today because they had money tied up at Silicon Valley Bank. Fortunately, they announced that they also have money at JP Morgan and other places, so they will be able to kinda get the, the, the payroll processed early next week and, and get everyone back on track. But this is hundreds and potentially thousands of companies that use their payroll software to, to process and, and pay their employees. Um, and then there's all the payment processors. We don't know how many of them have what level of exposure and a lot of infrastructure companies that move money in and through Silicon Valley Bank. And so if they start to go down and then payroll doesn't hit the air conditioning company that's using the, the, the tool in some, you know, in Arizona and then, you know, the, the Stripe service isn't able to process e-commerce payments for a small business owner that runs a website, you can start to see how there can be very significant trickling effects. And more importantly, like we saw in '08, perhaps to a different degree but still a significant concern, is the, the, the, the contagion of panic where people say if there isn't reliability in the things that I thought were reliable before, I start to have real questions in the soundness of the system overall. And that's why it's so important, as Sax said, to step in, shore up the problem this weekend. I don't think it's about bidding 50 cents or 60 cents on the dollar. Every depositor needs to get paid 100% of their money, and that cash needs to be made available-

David Friedberg 45:55 100%.

Chamath Palihapitiya 45:55 ... to them by early next week. And if that money-

David Friedberg 45:57 100%.

Chamath Palihapitiya 45:57 ... is not available to them i- within the first 48 or 72 hours of the end of this weekend, then we are gonna have a real crisis on our hands, 'cause then you will see a lot of people trying to move money away from any institution that stores their money in some sort of security that's not 100% liquid like cash, and that's gonna cause-

David Friedberg 46:14 By the way-

Chamath Palihapitiya 46:14 That's gonna cause-

David Friedberg 46:14 By the way, it's not.

Chamath Palihapitiya 46:15 That's gonna cause a massive run, and so some- what has to happen, the only way this can happen is if someone takes over Silicon Valley Bank this weekend and that the federal-

David Friedberg 46:25 Yes.

Chamath Palihapitiya 46:25 ... government, unfortunately, as much as I hate to say it because I absolutely hate the federal government having a role in this stuff, has to say, "We will guarantee 100% of those deposits," to the company that takes over, the bank that takes over this portfolio and says, "Let the portfolio of assets run its lifetime, see what you get paid. Whatever the delta is, we'll make it up to you, but we need to make sure that there's cash here today-

David Friedberg 46:46 Fair.

Chamath Palihapitiya 46:46 ... for all of these depositors to get paid tomorrow."

Jason Calacanis 46:48 Chamath, you had something you wanted to say? If not, I have something I wanna say.

David Friedberg 46:50 Yep. The other big thing that SVB was, was an on-ramp for a lot of investors, including many US investors, to get money into China. And without commenting on whether that's right, wrong, or indifferent, the point is that China has a very complicated capital market structure which requires you to basically use an offshore bank, i.e. non-domesticated Chinese bank, and to be able to get those dollars. And so what would happen is Chinese startups that raise money would raise money from US investors and abroad using y- these bank accounts. And so this issue now doesn't just touch the United States' innovation economy. It also touches China's innovation economy which, you know, creates actually a complicated set of trade-offs for the US government and Treasury as they think about what they wanna do in this heightening great power conflict that Sax talked about last week.

Jason Calacanis 47:40 And I, I wanna just make a very important nuanced point here. I know there is no bank that the public (laughs) , specifically, you know, people who don't wanna support, you know, rich people already, like big tech or billionaires. The reason to backstop this with public money is because we have a roadmap for this. People don't know this, uh, widely, but TARP was just over $400 billion. It actually (laughs) returned a $15 billion profit to the American people. This would require maybe $25 or $50 billion, 10% maybe, five, 10% of the totality of TARP would be enough to cover what's happening here with Silicon Valley Bank and work this out. That $50 billion, for the people listening in Washington or for the people who will say, "Hey, why are we, you know, bailing out big tech?"You're bailing out small tech, as Chamath said. You're bailing out innovation on breast cancer, on, you know, uh, renewable energy. But most importantly, this can easily be structured so that the American people return 20%, 30%, maybe even double their money. You could structure this so it is senior to everything else and is exactly what the government is supposed to do when there is a crisis. That doesn't mean the people who run Silicon Valley Bank should have their equity worth a lot. They should get wiped out. They didn't do their job properly. The equity, the people who ran the management team there, if they don't get anything, that's okay, they understand that. But the people who had their money at deposit to pay the salaries and to pay for this innovation, it is unconscionable that we wouldn't backstop it. And the- I guarantee you, the US government could get some warrants on those companies or warrants in ownership in Silicon Valley Bank and make at least 50 cents on the dollar, maybe even double, and that's the way this bailout should be structured, and it has to be done this weekend.

David Friedberg 49:32 You bring up a great idea. I think- I think if the US balance sheet does step in over the weekend, I'm gonna say on behalf of the US taxpayer, you must get a piece of these companies. And the reason why is that that's the way to make it fair for everybody that's not in tech who's on the outside looking in. And if you look inside of Twitter as an example, there's a lot of negative sentiment around even the idea of a bailout happening. And it's for this exact reason, because I think people believe that it will benefit just a small sliver of people, right? So to step in and to save these companies, Jason, would still be, you know, really only helping, say, several hundred thousand or several, you know... And- and- and the thing that that gets wrong, in my opinion, is that these companies, if they're- if they're a- allowed to germinate, should be building things that actually help everybody. And so, if you can view it that way-

Jason Calacanis 50:32 Yeah, including jobs and taxes.

David Friedberg 50:34 Including... And so if you can view it that way, and if you can view a share of it... Now, obviously, look, we're very- we have a very deep incentive for that to happen, but I think it's important to present the other side of it. The other side would say, "This industry has a little bit run amok. It's not well regulated. You know, you guys push the boundaries and get away with a lot, and there haven't been a lot of consequences."

Jason Calacanis 51:01 You're saying banking- You're saying the banking industry.

David Friedberg 51:01 No, I'm saying the tech industry. No, no, I'm saying, the- the average person that's on the outside looking into the tech industry can make that claim, and now, they would be pointing at big tech, but the problem is we all get swept in together under the same thing. And then what they would say is, "I don't think it's right to- to- to step in." And I think that you have to give the US taxpayer an incentive if they are going to do it. And I think the- the incentive should be that they should just get a share in all this innovation.

David Sacks 51:26 If they take over the venture debt portfolio, then they would have that, right? The venture debt portfolio comes with warrants, so they would have that. I think there's a big risk here that precisely because tech is unpopular, and people, I think, are confusing big tech with small tech, that the government doesn't step in here and th- the dominoes start falling and we start getting all the systemic risk playing out. Remember, the beneficiaries here aren't just these- this sort of current generation of tech companies and everyone they do business with. It's also wherever the contagion goes next. And we're already seeing, I think, multiple regional banks under pressure, their stock down, people asking questions. We know people in our chat groups who are wiring money out as fast as they can. Just because, why take a chance?

Jason Calacanis 52:15 That's right.

David Sacks 52:15 You know, the... And you-

David Friedberg 52:16 And by the way-

David Sacks 52:16 You have to understand that the game theory around these bank runs, people describe them as a panic, but that implies that it's irrational. It's not irrational. It's actually rational. H-

David Friedberg 52:27 And what this- what this has really highlighted is that what you said earlier at the beginning, Sax, which is that the regulatory oversight is actually extremely pristine at the biggest banks, but the smaller and smaller you get, there's a level of opacity-

David Sacks 52:43 Right.

David Friedberg 52:44 ... and-

David Sacks 52:44 Well, here-

David Friedberg 52:44 ... a lack of regulatory follow-through that allows this stuff to build.

David Sacks 52:47 So The Wall Street Journal right now is reporting that US banks have 620 billion of unrealized losses just on Treasuries. I don't know what the unrealized losses are on these long-dated mortgage-backed securities. Like I said, I have no idea why regulators allow banks to hold these, uh, bonds at their book value instead of marking them to market every day. That's crazy.

David Friedberg 53:08 And- And on the equity side, you have to do it. Buffett talks about this all the time. The equity side, you have to mark to market the equity portfolio at the end of every quarter-

David Sacks 53:17 Right.

David Friedberg 53:17 ... and he sees these wild swings, and he complains about it, but it's the right thing to do for exactly this reason.

David Sacks 53:23 Right. So- So think about the game theory here, okay? The banking system, the banking regulators have created this opacity in the system. You've got all these assets that are being held by these banks that are not marked to market, so nobody really knows what the true level of exposure is. So what's the response? Why take a chance? Just move your money to JP Morgan. So I think there's a chance that if the- if the gov- federal government doesn't step in here, the whole regional banking system could be decimated, and you're just gonna be left with four too-big-to-fail banks. How's that benefit anybody?

Jason Calacanis 53:52 Yeah.

David Sacks 53:52 That doesn't benefit the little guy.

Jason Calacanis 53:54 Look, guys, there's a- there's a pretty good set of regulatory disclosures that happened, but I do think that the real question is, you know, are the ratios right? Do they- should they really be allowed to invest in these types of assets with depositor capital? And if so, with what percent of the depositor capital should they be allowed to do it? And maybe, you know, that seems to be where the biggest, you know, issue is. We've- we've come a long way. I mean, I just pulled up the statistic. It's insane. There were 505 banks that failed in 1921. Failures continued to rise in the early '20s and averaged o- um, 680 banks per year failed between 1923 and 1929. So obviously, you know, coming out of '08...

Chamath Palihapitiya 54:34 ... uh, there was a lot of controversy around, "Hey, banks can't make money anymore. It's too restrictive, the disclosures," and so on. The disclosures are actually quite good. You know, you guys can go to these, these sites that regulate the banks. You can go to the SEC site. You can get a very detailed schedule of every asset held by every one of these banks. It's good transparency, I would argue, but should they be allowed to invest in securities that are effectively not fully liquid, uh, that are risky, that are long dated with, uh, short dated deposits, right? It seems... It's a fundamental question about what banks are supposed to be doing.

55:04 In a world of computers that can calculate everything, the idea that you can't solve duration matching doesn't seem like one of those problems that's intractable in 2023.

Jason Calacanis 55:13 I mean, if people can make an AI version of the podcast, (laughs) they could do that, yeah.

David Sacks 55:18 I mean, Friedberger also, like, takes this... I think venture debt's the most extreme example. How do you mark to market a loan to a Series A startup? I mean, that just 100% depends on whether you're going to raise a Series B or not.

Chamath Palihapitiya 55:30 I, I, I actually... I'm a, I'm a believer you can underwrite anything. I think you can under... For the right interest rate, for the right premium, you can underwrite insurance. You can underwrite loans. I mean, there's a lot of ways that you could kind of invest.

David Sacks 55:38 But how do you mark that to market on a daily basis?

Chamath Palihapitiya 55:41 You're right. No, you cannot. You're, you're right, absolutely.

David Sacks 55:43 That's my point.

Chamath Palihapitiya 55:44 Yeah, yeah. And so from a reporting perspective, and that's why I think-

David Sacks 55:46 So you disclose it, how does that solve the problem? No one knows how to market.

Chamath Palihapitiya 55:48 No, but that's why they've got different, they've got different tiers of regulatory capital, guys. And so, you know, there are rules around what the ratios need to be and where you need to fall. And so they, they, they, they bucket this stuff up differently, right?

David Sacks 55:58 If you're a bank and you wanna p- buy securities, you want to invest in something that's not liquid and mark to market every day, you should have to package it up in some period of time and sell it. If you want to make a loan to a, you know, to a venture-backed startup, package those up and syndicate that and sell it as a security. And if you can't do that, you probably shouldn't be investing in the asset class anyway. Same thing with, like, you know, mortgage. These mortgages already get packaged up and sold, right? So, I... Just doesn't make sense to me that, like, customer deposits, that's what we're talking about, which you assume should always be 100% safe, right? This is not a source of capital where anyone's ever expecting to lose money. If you want to use risk capital to get some sort of outsized return, go raise that from LPs. But to, like, take customer deposits-

Chamath Palihapitiya 56:46 Yeah.

David Sacks 56:46 ... and use it on, on risky, non-liquid investments makes no sense.

Jason Calacanis 56:50 Yeah. I mean, it makes no sense. There's one thing I could, I could just help people frame this. The aggregate amount of dollars in these bank accounts, I would estimate, equals 10% of the value of the startups they represent. Would we all agree on that? It's about 10% of the value of those startups, maybe 20? If you were-

Chamath Palihapitiya 57:10 What? How do you, how do you calculate that?

David Sacks 57:11 I don't know if that's true.

Jason Calacanis 57:12 Well, I'm thinking about the startups who recently did a round of funding. They diluted 10%. That represents all of their treasury or half of their treasury. So, if that cash for the startup portion of this equals 10% of the value of the startups, I can guarantee you, those startups, with access to that capital again Monday, will be able to outperform the backstop that the government would provide.

David Sacks 57:33 This, this sounds like Enron math to me.

Jason Calacanis 57:35 No, i- Okay, if you... What are your startups?

David Sacks 57:38 (laughs)

Jason Calacanis 57:38 Just take any of your startups. They have 30 million in total value bank-

David Sacks 57:40 Jake Allen, we don't have time... Listen, we don't have time here for the government to figure out how to be a-

Jason Calacanis 57:44 No, no, I'm-

David Sacks 57:44 ... partner in or an investor in all these startups. I'm sorry, we don't.

Jason Calacanis 57:49 I'm not saying that.

David Sacks 57:49 They either have to step in or they don't.

Jason Calacanis 57:51 If they do step in-

David Sacks 57:51 And if they don't step in, you'll have systemic failure.

Jason Calacanis 57:54 No, no, but do the math with me here. Of one of the companies, pick one of the companies that has 20... You have a company that has 20 million there or 30 million there. What does that represent if you were to take their valuation from last year when they raised that money and cut in half?

Chamath Palihapitiya 58:05 What does it matter? It doesn't matter.

Jason Calacanis 58:07 It matters, because-

Chamath Palihapitiya 58:07 It doesn't matter who's the depositor. It does not matter who the depositor is.

Jason Calacanis 58:08 No, no, it matters for people to understand how much value is going to be lost a- and how easily recoverable it is if these companies are allowed, in aggregate, to deploy that capital. That's the point you're not getting, or I'm not explaining it to you properly. If allowed to deploy that, it's going to return a, a multiple, an, a venture multiple, two, three, four, five X. But if we destroy that money, these companies are going out of business next month.

David Sacks 58:35 But Jake Allen-

Chamath Palihapitiya 58:36 I think, I think Jason-

David Sacks 58:36 ... that money is their money. That's their deposits.

Chamath Palihapitiya 58:38 Oh, I, I agree with you. I'm trying to create-

David Sacks 58:40 That's the, that's the point.

Chamath Palihapitiya 58:40 ... a framing here for people to understand exactly how much value is gonna be lost.

David Sacks 58:44 I think the better framing is that when you put your money in a FDIC insured bank and you put it in a customer deposit that's supposed to be completely safe that's paying you a couple of percent interest, and that is reflected even as a money market fund on your account, you do not expect that money to be turned around by the bank and put in risky assets.

Jason Calacanis 59:02 So you're saying raise the FDIC limit.

David Sacks 59:03 That makes no sense.

Jason Calacanis 59:04 Yeah, raise the FDIC.

David Sacks 59:05 Like, banks should not work that way.

Jason Calacanis 59:06 Okay.

David Sacks 59:07 Look, I think it's crazy that you could set up a bank account, okay? Because you just wanna write checks. And you could lose that money because the bankers decided to loan it to some startup. That's insane. Or the bankers decided to buy a 10-year mortgage-backed security who doesn't understand interest rate risk. That's not the way the system is supposed to work. And you got all these people on Twitter pushing back with no bailouts or whatever. That's the depositor's money. I agree, no bailout for SVB. They should lose everything. All those executives, their stock options are worthless. All the stockholders of that company, their shares are worthless. But the question is, should depositors lose money? In these banks, they just thought they were signing for a checking account. I mean, are you kidding me? And if you let that happen, there will be a cascade here, because the, the logical consequence will be everybody's gonna say, "Put my money in JPMorgan or Wells Fargo or Bank of America." There'll be four banks. That's it. And all the regional banks are gonna shut down. That's where we're headed to.

Jason Calacanis 1:00:00 And that's tens, uh, tens of thousands of highly paid workers, and, and not just tech workers, are gonna be out of, uh, jobs and they don't have jobs waiting for them at Amazon or Google to bail them out. And this is the start of, uh, a contagion if it doesn't get stopped. I believe that.

David Sacks 1:00:14 Yeah, what did they do wrong, Jake L? What did they do wrong?

Jason Calacanis 1:00:15 Nothing. They used, uh, what is considered one of the most reputable banks in the world.

David Sacks 1:00:19 They used a top 20 bank that the regulators said was in compliance. So, did they do something wrong or were the regulators asleep at the, at the wheel?

Jason Calacanis 1:00:27 I don't know. Um, some way, I think, it's... This is Biden's fault or, or Zelensky's.

David Sacks 1:00:32 (laughs)

Jason Calacanis 1:00:33 Wow (laughs) It's Biden or Zelensky's fault.

Chamath Palihapitiya 1:00:36 What do you guys think this means for VC?

1:00:38 It is a killing effect. I, I talked with some LPs in the last two days in the VC world. I'll give you a couple anecdotes. Uh, I have a friend, runs a fund. He looked at his portfolio, they have $270 million, or sorry, $350 million tied up at Silicon Valley Bank. They need $27 million, uh, for cash for the next 30 days. So he's called his LPs and he's trying to get his LPs-

Jason Calacanis 1:01:05 Wow.

Chamath Palihapitiya 1:01:05 ... uh, to front him money, to wire money, so that he can front his companies money, so they can actually pay their operating expenses and, and cover their payroll. And then I spoke with a couple of LPs in the last 48 hours, um, they have gotten dozens of calls, uh, from, uh, various venture funds. Everyone is asking the same question, "Can we do a capital call? Can we get money delivered early? Can we use that money to support our companies 'cause their cash is stuck?" Coming out of this, the, the, the uncertainty that this creates in the investment environment, um, I think is gonna have a real chilling effect, not just with the GPs and their, you know, uh, proclivity to sign term sheets right now and wire new money over. But also with the LPs as they're making capital commitments and actually following through with, with, uh, capital commitments that have already been made, um, given, uh, you know, where's the capital actually gonna end up? That was never a question mark before. It was never anything that anyone even considered, that capital could be disappeared, or locked up, or tied up. Um, and the fact that this is adding this unique friction in the market, um, is, is a layer on top of an already distressed and challenged, uh, environment, uh, for fundraising, for GPs, for LPs, uh, and it seems to, um, be exactly the icing on the cake we did not need right now, uh, no matter how this gets resolved.

Jason Calacanis 1:02:20 I, I think private markets and VC could cease. I think you're gonna see people pull term sheets, maybe half as many fundings are gonna occur as people try to do triage.

Chamath Palihapitiya 1:02:29 Another VC friend of mine just sent me a text, he can't make payroll next week. He has a fund, small fund-

Jason Calacanis 1:02:33 For his VC fund?

Chamath Palihapitiya 1:02:34 His VC fund, their employees cannot... He cannot pay his employees on Monday.

Jason Calacanis 1:02:39 Oh, my lord.

Chamath Palihapitiya 1:02:40 And so, um, yes, I do think funds could shut down, uh, coming out of this. It, I, I think that companies that were, call it, you know, 75% distressed are done for now. No one's gonna step in, and bridge them, and fund them. Uh, it's gonna accelerate a lot of shutdowns, uh, because people are now cash is king, now cash is king-er. Right? It's like-

Jason Calacanis 1:03:00 Right.

Chamath Palihapitiya 1:03:00 ... uh, a big shift.

David Sacks 1:03:02 I think that was really well said. I think you're, you're right about all that. J Cal, you tweeted that you think this is gonna cause a 60-day freeze in, in deal-making activity. I think that's more or less right. You're right, because, you know, all, all the VCs out there have to think about shoring up their existing portfolios.

Chamath Palihapitiya 1:03:15 Exactly.

David Sacks 1:03:16 What if you got companies that are now in distress that are perfectly good companies? You gotta focus on maybe you're gonna make new investments in them.

Chamath Palihapitiya 1:03:21 You're picking a, you're picking a few winners.

David Sacks 1:03:22 Yeah.

Chamath Palihapitiya 1:03:22 You're picking one or two winners, you know, you're... And you're gonna focus on that and you're gonna say, "You know what? The rest of them could be good," but I can't... It's, it's gonna be a tough decision.

Jason Calacanis 1:03:29 I have three-

Chamath Palihapitiya 1:03:30 Pretty for everyone.

Jason Calacanis 1:03:30 ... open deals right now, um, that we're doing. I now have to figure out how to get those deals done, and I have four companies that are in this payroll situation in a major way. So now I've got capital and I've got to... And we're not personally affected by the Silicon Valley Bank thing, thank God. But now we have to do triage the known winners in your portfolio that did nothing wrong, or do you make the next three investments or four investments? And I'm gonna make good on those three investments, but next month, maybe not. Maybe next month I'm taking off and I'm focusing on the portfolio. And I think that's what's gonna happen writ large. We're in triage mode now, full-on triage mode if this doesn't get resolved, if they can't get those...

Chamath Palihapitiya 1:04:16 Chemath, what do you think?

Jason Calacanis 1:04:17 It's dark.

David Friedberg 1:04:18 I had a meeting three weeks ago with, uh, US LP. And, you know, you guys know how I run this business here, but it's, there's, there's like, a lot of risk management. You know, we think about this stuff a lot. And the message that came back to me was, "I don't think risk management is worthwhile in venture." I didn't understand where that was coming from, um, because if you're investing your money across a very risky asset class, you have to be always thinking about how you could lose money. And I think that venture has always romantically been described as like, buying lottery tickets. And so it doesn't matter if you lose, but when you have that kind of attitude, you just become super complacent and you don't think about left tail risk, you only think about right tail outcomes. And this is an example of like, left tail risk that came out of nowhere that could wipe out entire portfolios. So you had, you know, folks invest into funds that spent a few years, probably 2019, 2020, 2021, really, uh, misallocating money, right? Writing ginormous checks into companies at valuations that didn't make sense, who then went and burned it. And now what little cash they had left may also be gone, which means those valuations are even more impaired, which means that the LPs that gave them the money are even more underwater. And that cycle, I think, is really terrible. That'll take a... So maybe this is the wake up call where now risk management is actually en vogue and cool and it's important to know this stuff. I don't know.

Jason Calacanis 1:05:55 We have breaking news. Uh, while we're taping this, the Department of Financial Protection and Innovation of the State of California has published findings on SVB, we'll pull it up on the screen for the besties to respond to. On March 8th, 2023, the bank announced a loss of approximately 1.8 billion from the sale of investments. Uh, we've talked about that already. Uh, on March 8th, 2023, the bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9th, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits. So that would be over 20%, I think, of the, of the total deposits from the bank on March 9th, or even more, 2023, causing a run on the bank."As of the close of business on March 9th, the bank had a negative cash balance of approximately $958 million. Despite attempts from the bank, with the assistance of regulators, to transfer collateral from various sources, the bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the bank to be incapable of paying its obligations as they come due."

1:06:59 Right. This is what we said at the beginning.

1:07:02 And the bank is now insolvent. We-

Chamath Palihapitiya 1:07:02 $42 billion of withdrawals (whistles) ...

Jason Calacanis 1:07:04 42 billion.

Chamath Palihapitiya 1:07:04 ... uh, is 25% of total deposits. But $42 billion is greater than the $14 billion of cash they had on hand and the $26 billion of liquid securities that they had. So you add those two up together, you're at $40 billion. And then to get more cash, they're gonna have to sell a bunch of loan portfolios. And selling loan portfolios, you gotta package them up. It takes weeks or months to do that. Then they're gonna be sold to distress prices. So this is where a classic run-on-the-bank problem actually causes a decline in the asset value of the business, uh, and the assets that they own. Because if you have to go and turn around and sell those assets in the market super fast, you're gonna take a huge loss. You guys remember that movie, Margin Call, with Demi Moore and, um, what's his name? And they, they make this plan to go on market and they're like, "We gotta sell-"

Jason Calacanis 1:07:50 P- Patrick Swayze? (clicks tongue)

1:07:51 What's it called? No, not Patrick Swayze.

1:07:52 Patrick Swayze?

1:07:52 Uh, no, the... (laughs) Jeremy Irons. Jeremy Irons. He, he plays the best character and he's like the chairman of the bank. And they're like, "We have to sell all this, but we're gonna take a huge loss." And they, they make this big trade that happens at the beginning of the morning. But that's what happens when you have to sell a lot of assets very fast. As you guys know, you end up selling them at a discount. So the rate at which deposits are coming out of the bank can actually impact the asset value held at the bank. And that's fundamentally what a run-on-the-bank causes. And the irony is, as they point out, the company was fundamentally financially sound. They had enough assets marked at the current market value or whatever, to meet all of their obligations. But the rate at which assets started to get pulled out is what drove those m- drove the company, the bank into distress. And if you think about it, it, it's, it's an ironic point of view on Silicon Valley because Silicon Valley operates with such... We all joke about what a herd mentality, uh, and, and what an incredibly tied and deep network Silicon Valley is. We all got dozens and hundreds of texts and messages from friends, colleagues, coworkers yesterday, all relaying the news about what they were going to do. And as soon as that happened, that's how tightly intertwined Silicon Valley is. Within 24 hours, every CEO and every venture capitalist was on a chat group or on a message group with other people in the Valley. And once there was any indication of panic, the entire market flipped. And you guys saw this. We all saw this. Within 24 hours, at the beginning of the day yesterday, it was like, "They'll get through it, it'll be fine. They just took a little markdown on their portfolio. They got plenty of assets." But then it's like, "Well, Founders Fund said we should probably get out." "Okay, well, Founders Fund is getting out. Maybe we should get out before everyone else does." "Well, if we gotta get out before everyone else does, let's do it now." "I'm getting out right now. I'm telling my best friend, I'm getting out right now." And then everyone tells their second-best friend. And then all of a sudden, the whole Valley knows it, and then the whole Valley is running for the door. And this is a really interesting and unique scenario. It's not like the classic consumer run-on-the-bank, where you're trying to pull cash out. It's the Silicon Valley 24-hour cycle of we all gotta do it 'cause everyone else is doing, like what we're seeing with investing cycles (laughs) in Silicon Valley, where everyone chases and these bubbles emerge. The reverse, I think, happened yesterday, where the herd mentality drove us all to rush for the door as quickly as possible. You know, I'm not sure that... That, that might be why- I don't know.

Chamath Palihapitiya 1:10:05 ... it's, it's not as much of a contagion, you know, as you might expect elsewhere, because places, other kind of regional banks don't have the same sort of intertwined-ness, as we saw with all the, the depositors here in Silicon Valley Bank. I don't know. I mean-

Jason Calacanis 1:10:18 I don't know. So, so this is where...

Chamath Palihapitiya 1:10:19 ... I'm, I'm just theorizing live. Yeah. Yeah.

Jason Calacanis 1:10:20 Th- this is where, um, I think that describing what happened as a panic kind of misses the fundamental rationality of the response. So...

Chamath Palihapitiya 1:10:28 Both are true, by the way. Yeah.

Jason Calacanis 1:10:29 Yeah. So it, it does seem like a panic but that doesn't mean that each individual decision maker's motivation is panic.

Chamath Palihapitiya 1:10:35 Wrong. That's right.

Jason Calacanis 1:10:35 I actually think it's a rational upside/downside calculation. I mean, this is all game theory. So if you think that there's a risk of other people pulling out their assets, and in fact you're hearing that they are, you don't wanna wait and be the last one to leave. And so you think about it, there's no penalty or downside to taking your money out, right? So the, the downside of taking your funds out immediately is zero. And the upside is you might save 100% of your money. So it's a rational decision, when confidence is lost, to take out your money. And in fact, it was rational. There were a bunch of VCs, not a lot, but some of them tweeting yesterday that, you know, "SVB has been a great player in the ecosystem for 30 years. We should show our support right now by not taking our money out." Well, guess what? What happened to them? They got stuck and now their money is frozen, and they're not sure whether they'll get, you know, pennies on the dollar or not, whereas the people who rushed for the exits yesterday got their money out.

1:11:33 It's a prisoner's dilemma.

1:11:35 It is a prisoner's dilemma, but here's the thing. It's, it's not even about anymore whether the institution is solvent. It's about whether there's confidence. And I think there is a risk now of