E120: Banking crisis and the great VC reset

Jason Calacanis 0:00 All right, everybody. Welcome to the All-In Podcast. And with me again this week, the Sultan of Science, the Prince of Panic Attacks, the Queen of Quinoa, David Friedberg, the Dictator, Chamath Palihapitiya, wearing a beautiful Mr. B sweater, and David Sacks, the Reign Man himself.

Chamath Palihapitiya 0:18 Thanks for coming to my Loro Piana dinner on Tuesday, J Cal. Love you for that.

Jason Calacanis 0:21 That was wonderful, thanks. Uh, at least one bestie showed up for you. Wonderful, wonderful dinner. I sat as far away from the Loro Piana people as possible in the arranged seating. Thank you for that. I guess, maybe (laughs) you were like, "I'm gonna contain the damage." (laughs)

Chamath Palihapitiya 0:35 Bernard Arnault said, "Put, put the all caps guy at the end," and I said, "Okay." (laughs)

Jason Calacanis 0:38 Yeah. He still heard me.

Chamath Palihapitiya 0:40 (laughs)

Jason Calacanis 0:40 I was like, "Chamath!"

Chamath Palihapitiya 0:41 It was so loud. (laughs)

Jason Calacanis 0:42 "What's the amuse-bouche?"

Chamath Palihapitiya 0:44 David Friedberg: J Cal's joke at, at dinner, every time he said something, he yelled like he was in all caps. (laughs) It was so funny.

Jason Calacanis 0:50 (laughs) Chamath!

Chamath Palihapitiya 0:51 He's like, "I want another butterscotch pudding!" (laughs)

Jason Calacanis 0:55 The butterscotch pudding is delightful, Sean!

Chamath Palihapitiya 0:58 Oh, my god.

Jason Calacanis 0:58 Sean's like, "I'm, I'm four feet away from you, but J Cal, y- you can take the caps lock."

Chamath Palihapitiya 1:02 Sean was so embarrassed. Chef Sean Crushed it. Chef Sean Crushed it. It was great.

Jason Calacanis 1:05 Sean Crushed it once again.

David Sacks 1:06 Were you sounding alarms when the restaurant, like, almost ran out of something? Alert, alert, alert!

Chamath Palihapitiya 1:12 (laughs)

David Sacks 1:13 Restaurant is running low on coffee.

Jason Calacanis 1:14 We're dangerously low on caviar on this white asparagus.

David Friedberg 1:19 What's going on here? Let your winners ride.

Jason Calacanis 1:22 Rain Man David Sacks.

David Friedberg 1:25 What's, what's going on here? And I said- We open source it to the fans and they've just gone crazy with it.

Jason Calacanis 1:30 Love you, bestie.

David Friedberg 1:31 What's going- Queen of Quinoa. What's going on here?

Jason Calacanis 1:35 All right, everybody. Welcome to the pod, where we, uh, you know, try to inform you. We try to make some jokes here. I just wanna make what is, uh, a little bit of an opening statement here. It's not an apology and it's not a victory lap in any way, but there has been a lot of attention, I think, on the last episode of the pod and perhaps some tweeting from two of the four besties this past weekend. I saw, and I, you know, I'll let you speak for yourself here, Sacks, and we're gonna get into the timeline of what's occurred and then what are potential outcomes here and solutions to the banking issues that we've witnessed in what is a week since the bank run on Silicon Valley Bank and the shutdown on Friday. But what I saw and again, speaking only for myself here, was absolutely terrifying up close and personally, watching people pulling money out of banks and watching people have to set up loans to hit their payroll. And this was like one of those surreal moments in a, in a movie, where like a meteor is coming towards earth and you see it in the telescope and nobody else sees it, or only a small number of people in the observatory see it. And I think part of the reason people listen to this podcast is because we are insiders and, speaking again just for myself, I'm always trying to be exceptionally candid and transparent with the audience. Additionally, I make jokes. (laughs) So sometimes you might laugh during this podcast, or you might laugh when you're reading my tweets. And, uh, that's part of what I do. Now, I also realize that we have an audience now that is larger than I think any of us expected for this podcast. Uh, certainly magnitude larger than I expected. And frankly, I didn't know if this podcast was gonna make it past 50 or 100 episodes. And my Twitter following count doubled since we started this podcast, and I think it's 80% due to this.

Chamath Palihapitiya 3:13 Well, that's because you tried, that's because you tried to ruin the pod.

Jason Calacanis 3:15 (laughs)

David Sacks 3:16 (laughs)

Jason Calacanis 3:16 I think it was because of the caps locks. But anyway, putting all that aside, what I would like to say as well is like we are living in a situation that is unprecedented. I think the alarm bell I sounded, you know, was because I saw a fire. We'll get into the timeline here. But I sounded that alarm bell after Silicon Valley Bank was put into receivership and when I saw additional bank runs occurring. I wouldn't change it. I think these were the right, the right thing to do was to inform folks. Now, I did use all caps perhaps a little too much. That was a little bit of a bit. If people didn't understand that, maybe I need to adjust my communication style now that this thing is so popular. But I stand by my mode of operating in the world, which is, I always want to be candid with people. I always want to tell the truth. And yeah, sometimes I, I make jokes about life and, you know, dealing with these stressful situations. That's it. It's not an apology. Uh, it's more of an explainer. And yeah, maybe I need to adjust the caps lock or, or how I deliver stuff. But I stand by the message of what I said. And I think it's important for us to maybe look at the series of events and misinformation that has spread, because there are people literally blaming venture capitalists for the bank run that is now systematic and the, the balance sheets of multiple banks around the world. And I think, Sacks, it'd be great for you to maybe just comment on the week that was and the timeline of events.

David Sacks 4:39 Yeah.

Chamath Palihapitiya 4:39 So as usual, you're not apologizing.

Jason Calacanis 4:41 No, absolutely not apologizing. But will recognize that this platform is bigger and that maybe on the margins I could adjust my communication strategy. But, Chris, there's a lot of people who don't know that I make jokes and maybe people don't understand when I'm joking and when I'm serious. Right? And so-

David Sacks 4:56 Right.

Chamath Palihapitiya 4:56 Jason, what would you change?

David Sacks 4:58 (laughs)

Chamath Palihapitiya 4:58 Was there anything you'd change?

Jason Calacanis 5:01 Chamath, I think I might not have used a Mad Max image and gif about the end of the world, 'cause people are too stupid to understand that's a joke in a fictional movie.

Chamath Palihapitiya 5:12 (laughs)

David Sacks 5:12 (laughs)

Chamath Palihapitiya 5:12 I see. So you find yelling effective?

Jason Calacanis 5:15 It depends.

David Sacks 5:16 Well, J Cal, I agree that I don't think you have anything to apologize for in terms of the substance of what you're trying to get across. I personally could have done without the all caps.

Jason Calacanis 5:25 It was a bit. (laughs)

David Sacks 5:27 Well, yeah. What you're basically saying is nobody should listen to you because you're not that important and I wholeheartedly agree with that.

Jason Calacanis 5:34 (laughs) No, I'm saying understand I might make a joke. Consider me more in the-

David Sacks 5:37 Yeah. Of course, of course.

Jason Calacanis 5:38 ... Bill Maher category.

Jason Calacanis 5:39 Yeah.

David Sacks 5:39 All right. Let's, let's go back, let's go back and look at the timeline, 'cause there are now serious accusations, and I would call it really scapegoating of- and it wasn't just you, it was me and Bill Ackman. In fact, the Wall Street Journal editorial board, which I respect a lot, mischaracterized what me and Ackman were trying to do in terms of drawing attention to a regional banking crisis in progress, a run on the banks. They called it spreading panic. I don't know how you tweet or publicly discuss-... a run on the bank that's currently happening that needs to be addressed with an immediate federal intervention. I don't know how you can discuss it without then having someone else mischaracterize it as trying to spread a panic. But J-CAL, the, the Wall Street Journal editorial board didn't mention you, so you're off the hook.

Jason Calacanis 6:25 Okay, good. Fair enough.

David Sacks 6:26 I don't... They, they didn't know who you were, but-

Jason Calacanis 6:27 Thank you. Thank you (laughs) . Thankfully.

David Sacks 6:29 But, uh, but no, but seriously, so I went back and looked at the timeline of all of this. And so first of all, we have to understand that this banking crisis now has, uh, swept in five banks, five bank failures. First, there was Silvergate, but everyone dismissed that because it was some weird crypto bank. Then it was SVB, but everyone sort of dismissed it 'cause they said it was based on panicky VCs rather than a systemic problem in the banking system. Then it was Signature Bank, which got seized on Sunday, which I think utterly refuted the idea that this was just a Silicon Valley problem. Then you had the Feds step in and backstop, um, First Republic, which would have been the next domino to fall if it wasn't backstopped. And then five, you had Credit Suisse basically a- again avoid an outright failure because they got backstopped by the Swiss government. So, we now have five banks in roughly a week, and these are not small banks. They're... Credit Suisse is a, is a GSIB, a Globally Systemically Important Bank, and the other ones are top 20, top 30 type banks. We're talking about hundreds of billions of dollars in deposits. So clearly, there's a larger phenomenon going on here. And frankly, it's being caused not by like anything VCs did because VCs are just depositors. We're just one class of depositors. And depositors are not to blame for what's going on here. What's going on is that these banks have huge unrealized losses on their balance sheet and the losses have come from the sudden spike in interest rates. That's what's going on. The sudden spike in interest rates is because we've had the most rapid Fed tightening cycle in our lifetimes. In the last year, the Fed funds rate's gone from roughly 0 to almost 5%. That has broken a lot of things. And the banks which have broken first are the ones that had preexisting problems and they had horrible risk management, but that's who gets broken first in a stress test, right, is the most poorly run banks, the ones with preexisting issues. But just because they went first doesn't mean that others don't have similar kinds of issues. Now, I'm not saying this in any way to be panicky, maybe those banks will be fine, but there are larger issues in the banking system that are worth talking about. And to the point about-

Jason Calacanis 8:36 And if you work backwards-

David Sacks 8:36 ... whether VCs could have spread this, J-CAL-

Jason Calacanis 8:38 Yeah.

David Sacks 8:38 ... you're absolutely right about the timeline. I mean, I went back and checked. I personally never tweeted anything about SVB until Friday afternoon-

Jason Calacanis 8:46 Yeah.

David Sacks 8:47 ... when SVB was already in receivership and the run on the bank had already started with Signature and First Republic and we could see it with our own eyes. And then this pod didn't drop, the one where we talked about this problem, didn't drop until Saturday morning when the banks were already closed. And by Sunday night, the Fed had acted and basically implemented our recommendations, which was to basically intervene. So, I don't know how you can blame... Uh, this search for scapegoats, I think, is getting out of control, and it's just not factually accurate.

Jason Calacanis 9:14 And, you know, the, it's convenient to make tech, which is hated right now, Chamath and Friedberg, y- you know, the scapegoat, venture capitalists, obviously the, the part of tech that people might hate the most or the easiest target. But let's talk about the Fed raised those rates because of inflation and inflation happened because of out of control spending due to COVID and then th- the second administration. So you had a Republican administration that spent a lot of money and then a Democratic administration, Chamath, that spent a lot of money. So maybe we could even go backwards from Fed fund rate going, you know, (laughs) what looks like parabolic when you look at the chart. Maybe you could speak to what got us to the Fed making those decisions, Chamath or Friedberg?

David Friedberg 9:55 Maybe I can just do a little cleanup on what Sacks said. I think-

Jason Calacanis 9:59 Sure.

David Friedberg 9:59 ... the issues at Credit Suisse are different than the issues at First Republic. And the issues at First Republic are different than those other three banks. The other three banks, David, that you mentioned, Signature, Silicon Valley Bank, and Silvergate, all had very traditional liquidity crises, right? We talked about this last week, which is duration mismatching where you have depositors who want their money today, but you have assets that mature in 10 years. And as a result, you have huge unrealized losses if you all of a sudden cash them out today versus waiting 10 years. I think what's happening at First Republic is really just about making sure that that loan book and the depositors can get parked into a combination set of banks that can take care of the balance sheet so that there are no more liquidity issues. At Credit Suisse, they have an enormous amount of liquidity. What that was, was I think a lot of speculation around whether they would default on their bonds or whether they would theoretically need more liquidity. But the balance sheet itself was not only liquid, but also very solvent. So I think that was just more of a panicky reaction to comments from a 9.9% shareholder who just said that they can't put in any more equity. But even then, I went back, this is the chairman of the Saudi National Bank. He was asked on Bloomberg, "Would you give Credit Suisse more money?" And he had a very reasonable answer, but it was snapshotted in a very awkward way. The first sentence was, "Under no circumstances." Would he do that? Okay. Now if you stop there, you could be panicked, but the rest of it made a lot of sense, which is he said, "Look, in Saudi Arabia, if we go above 10%, we have to go through regulatory approvals domestically and there are regulatory approvals abroad. That's a big hill to climb and all of a sudden it no longer becomes a financial investment, it becomes a somewhat political investment. And so we're very happy at 9.9%." That was the totality of his statement, but if you just cherry pick the first 45 seconds and ran with it, which people on the internet did, this is sort of what caused that second level wave panic at a GSIB. And then the Swiss National Bank stepped in and I think that that panic has largely gone. Okay, so-What is the real issue? The issue, again, is I think we have had a bit of supervisory failure here, right? Because w- we all know this in any industry, if you let capitalism go totally unchecked, shareholders will demand immediate profits today. It happens in every industry, except in ones where you can basically gamble on future profits, and that's what tech does. But every other shareholder in every other asset class demands money today, and that's the same for banks. The problem is, the banks are a highly regulated business. They are supposed to be supervised by the regulators, and this is a very clear example where, why is there not a real-time spreadsheet? I mean, this is not complicated stuff where assets and liabilities and duration mismatching can be known on a real-time basis, where the San Francisco Fed, Mary Daly, should have a report that's escalated to her when SVB got over their ski tips, which they did in Q4 of 2022. So I think the real question that has to be examined is, where were these folks for the last four months when they could have done something, not just about this, but rules in general for all banks that are not the G-SIBs? And I think that's a very-

Jason Calacanis 13:31 Okay.

David Friedberg 13:31 ... important question that politicians need to get to the root of.

Jason Calacanis 13:34 Friedberg, we, uh, discussed this article from Seeking Alpha, which came out on, let me get the exact date here, December 19th. Title of this Seeking Alpha story is, "SVB Financial: Blow-Up Risk." And the summary, in three bullet points, says, bullet point one, "Potential losses in loan portfolios could severely impair book equity." Number two, "Unreal- unrealized losses in hold-to-maturity portfolio already equal to book equity." Number three, "Funding environment for startups with pressured deposit base adding even more pressure to the balance sheet," in other words, startups spending money to cover their burn rate. Friedberg, and obviously we had the Dodd-Frank rules lessened or loosened, uh, under the previous administration, and that specifically was driven by Silicon Valley Bank. They had a big part in that. So looking back on this, and, and people do want to place blame, let's talk about the effects that occurred, 'cause this was hiding in plain sight, literally in December, in an article that looks like it was written by somebody who went into a time machine and said, "How do I warn people in December about this?" Maybe you could talk about the Fed's interest rates, the spending, and what led up to this-

David Sacks 14:47 Look-

Jason Calacanis 14:47 ... issue with the banks.

David Sacks 14:48 You guys remember when we started this podcast three years ago? We were like, "They're gonna shut down the economy. There's gonna be crazy second and third-order effects of doing that. No one knows what they're gonna be." Here they are, and I think that's, like, the root of what is a rippling effect. You can't shut down the global economy and stop trade and stop people and have the government step in to write a giant check, and not expect that you're gonna have to cash that check at some point. That's effectively what I think we've been kicking down the- the road here. The way we initially tried to resolve the problem was to drop rates to zero, and then spend our way, you know, back to a growing, supported economy, and then overshot, ended up with, you know, too much stimulation, too much stimulus, too-low a rates for too long, responded too quickly, whiplashed back. At the end of the day, there was a giant gaping hole blown into the global economy when we shut down the world from COVID. There's no blame. It's just what happened. And when that happened, there was a massive cost that had to be borne at some point. And it's gonna get borne at some point. And the rippling in a pond, you don't know where the ripple is gonna hit, what part of the pond, what leaves it's gonna hit. That's what's going on still. And it's such a dynamical system, it's so hard to say with linear certainty, "This is what should be done and what could have been done and what they should have done at the time." No one had that predictive capacity back then. They did what they needed to do. People thought that they should have stim- dropped rates. They said we should have written all these big stimulus checks. Some people said you shouldn't. Some people said you did. Certainly, some people are being proven right, and some people are being proven wrong. But at the end of the day, the economic loss that was realized at that period of time, we're still trying to get out of it, and we're still recovering from. And I think that's a big part of what's being eaten up right now. And you're gonna see it in the wipeout of certain equity. You're gonna see it in the wipeout of these banks, of the assets that they hold and, and these portfolios. And the effects of that are obviously, you know, still being felt.

Jason Calacanis 16:58 Sax, do you agree that mistakes, that th- this, uh, there isn't somebody to blame? Because it is clear that the Fed said, "Inflation is transitory," that was wrong, and then they went faster than in history to raise the rates. Those seem like two glaring mistakes. And then the Todd- the Dodd-Frank loosening under Trump and with Silicon Valley Bank pushing them, that seemed like a really big mistake.

David Sacks 17:26 By the way, I wasn't saying the Fed's not to blame for not raising rates fast enough.

Jason Calacanis 17:29 Okay.

David Sacks 17:29 That- that was, 'cause you guys remember, I was the first person to talk about-

Jason Calacanis 17:32 Sure.

David Sacks 17:32 ... what Stan Druckenmiller had said, that they're not raising rates fast enough, that we've got massive inflation. We should have been raising rates. I was the first person on the show to be, you know, barking that. So don't- don't forget, like, I was there-

Jason Calacanis 17:43 Okay.

David Sacks 17:43 ... like pretty early. What I was pointing out was like, we shut down the economy during COVID, the global economy.

Jason Calacanis 17:47 That is the main, yeah, I gotcha. So that's the main cause-

David Sacks 17:50 And that is the big-

Jason Calacanis 17:50 Yeah.

David Sacks 17:50 That is the cannonball that got blown through the ship.

Jason Calacanis 17:52 Got it.

David Sacks 17:52 And everything else is plumbing and patching and work to try and keep the ship afloat, and we're still dealing with that. And at the same time, as you guys know, we've been loading the ship up with debt, the global ship, the global economy with debt, 360% global debt-to-global GDP ratio right now. And as that ship has gotten heavier and heavier, to have a giant hole blown in the side while you're trying to do all this patchwork with all this debt weighing on it, it's a critical challenge. And-

Jason Calacanis 18:17 The ship is sinking.

David Sacks 18:17 ... a form that we're feeling acutely here. They're feeling it in Europe now, and we're certainly gonna see the global ramifications as we try and fix this economic...

David Friedberg 18:25 ... catastrophe that was caused by COVID at the same time that we've been spending our way into a happier future that it turns out we have to pay the bills for at some point.

Jason Calacanis 18:35 Sachs, your response.

David Sacks 18:36 The question of who you blame for this banking crisis has really become a political Rorschach test. And I've seen that there are six different parties that people want to blame in this situation. And there's some merit to all of them, but the degrees are very different. Number one-

Jason Calacanis 18:51 Let's do it.

David Sacks 18:51 ... you've got the bank-

Jason Calacanis 18:52 Let's go through them.

David Sacks 18:52 Okay. Number one, the bank management of all these different banks. Clearly, very poor risk management, didn't do a good job, they are to, to blame. However, and, and Chamath is right about these banks, they differ in the details. But the point is that they're all operating under conditions of extreme stress. Where did that come from? Number two, the Fed's rapid rate tightening cycle. Clearly, I think that the b- the combination of poor risk management with the spike in interest rates, that basically has precipitated this larger problem. Number three is, I think the Biden administration's spending, which in fairness started with COVID before Biden, but Biden really intensified it. And then I think it really compounded the problem in the summer of 2021 by claiming that inflation was transitory when it wasn't, that allowed them to keep spending and keep printing money and kept QE going for another six months. That created the bubble of 2021. Everything got super frothy, and then that made the rate hike cycle even more vicious, because you started six months later. They could have started six months earlier and it could have been more gradual. And I think that really was a disaster for the economy. Okay, number four, the de-reg in 2018. I think Elizabeth Warren and Ro Khanna have made what I would call a compelling case that the de-reg in 2018 have contributed to this problem. I think, in hindsight, creating a two-tier system of banks where one tier are the systemically important banks, who are completely guaranteed and back stopped by the federal government, and then a sort of lower tier or second tier of regional banks was a poison chalice for the regional banking system. Because in the short term, it meant they were more lightly regulated, which may be appropriate for, you know, smaller banks that aren't these mega banks. However, it has also now, I think, created a situation where people are less confident about them. And so the money flows are going from the regional banks to the systemically important banks, the SIBs. So like I said, it might be a double-edged sword, and I think we're gonna have to look at those regulations and figure out what's the right regulatory regime to create confidence in the regional banking system. We want a thriving regional banking system. And so the question is, what's the right regulations that get us there? And then th- the final two that we can talk about later are, I'm hearing wokeness getting blamed, which listen, I think that wokeness was a distraction. There were a lot of crazy programs happening at these banks. But listen, if wokeness was the key factor, the whole Fortune 500 would be out of business-

Jason Calacanis 21:17 (laughs)

David Sacks 21:17 ... because, because-

Jason Calacanis 21:18 Yeah.

David Sacks 21:18 ... they all do this stuff. They all do this stuff.

Jason Calacanis 21:20 Yeah.

David Sacks 21:20 So I think, I think we're going back to the well a little too often on that critique. And I don't wanna-

Jason Calacanis 21:23 I like the idea.

David Sacks 21:24 ... I don't wanna burn that critique out, because I think that wokeness is bad. But it's not the key reason why this stuff happened. And then the last group that gets-

Jason Calacanis 21:32 And for wokeness, we could also maybe frame it as ESG more broadly-

David Sacks 21:36 Yeah.

Jason Calacanis 21:36 ... as the distraction, 'cause wokeness is charged, ESG is real.

David Sacks 21:40 Yeah. Yeah, what I would, what I would say for sure is that if these banks had spent as much time on risk management as they did on ESG or on woke, then this crisis wouldn't have happened.

Jason Calacanis 21:48 Yeah.

David Sacks 21:49 So definitely a distraction, but not, not the thing that, like, specifically caused it. And then just the final thing is VCs. And I just can't fathom at this point, given the multiple bank failures, given that we see the larger problem of unrealized losses on bank balance sheets, that somehow any class of depositors would be blamed for this. That just makes no sense to me.

Jason Calacanis 22:08 Chamath?

David Friedberg 22:08 I think the VC, the critique is specific to Silicon Valley Bank, because I think, and this article was in the Wall Street Journal, but what it shows is a really complicated intertwined relationship between VCs and Silicon Valley Bank, where, you know, VCs were given very cheap interest rate loans, they were given GP call lines of credit, they were given LP lines of credit, and then those same VCs would be directing their companies to put their deposits inside of SVB, who would then take those deposits-

Jason Calacanis 22:37 Perhaps.

David Friedberg 22:37 ... and buy-

Jason Calacanis 22:37 Perhaps.

David Friedberg 22:37 ... and buy risk.

Jason Calacanis 22:38 Yeah.

David Friedberg 22:39 And well, the reality is all of this stuff will come to light, because I think it will get exposed as we go through congressional hearings on all of this. But I think the, I think pointing the finger at VCs in this specific case is somewhat warranted, because there was a little bit of people working in lockstep together, and there was a, a lack of functional responsibility around how to be a true fiduciary. So if you come to a board and your founder is 22 years old and you give that person $15 or $20 million, I think it makes a fair amount of sense that you are supposed to be the more sophisticated financial person in that room. And if you have incentives that aren't properly disclosed to that CEO, and now a set of decisions are made, I think that that, there should be some accountability for that, or at least some exploration of why that happened.

Jason Calacanis 23:29 I just want to make sure the audience understands this, because it is a bit in the weeds, and it's a bit inside baseball. What you're saying, Chamath, is, if I can summarize it, there are people who are the adults in the room, venture capitalists, they have deposits at Silicon Valley Bank, they also might have loans that are fantastic with Silicon Valley Bank. I had a, a mortgage for this office from Silicon Valley Bank, and I talked about how, on the last episode, how great it is. They come, they open wine with you, it's white glove service that you wouldn't get at another bank. And then they might have loans against what's called the GP carry or the GP share, or they might have mortgages, and so there's a conflict there. If you're a venture capitalist and you're directing a 22-year-old CEO to Silicon Valley Bank, maybe you're doing that is... I guess you're saying could be explored-

David Sacks 24:16 No, the bigger conflict of interest-

Jason Calacanis 24:17 Yeah.

David Friedberg 24:17 And in some cases, Silicon Valley Bank is a limited partner in all of these funds. My point is that-

David Sacks 24:22 Ah, that's the bigger conflict of interest.

David Friedberg 24:22 ... all of these things-

Jason Calacanis 24:23 Okay, hold on. We have to explain that.

David Friedberg 24:25 So imagine a situation...You go and start a fund. Silicon Valley Bank comes to you-

Jason Calacanis 24:30 A venture fund, yeah.

David Friedberg 24:31 ... and says, "Let me be a limited partner and invest with you. Let me give you some amount of money." I don't know where that money comes from from Silicon Valley Bank, but they-

Jason Calacanis 24:38 A million dollars, yeah, yeah.

David Friedberg 24:39 Well, let's be realistic. More like 25, 50 million, 100 million. Okay? This is a lot of money.

Jason Calacanis 24:44 Okay.

David Friedberg 24:44 So a million kind of is whitewashing this problem. So you give them-

Jason Calacanis 24:47 Okay.

David Friedberg 24:47 ... a reasonable amount of money. They're like, "Wow, I'm- I have tremendous loyalty for you. Thank you." "Well, do you need anything else? Do you need personal loans? Do you need lines of credit for your business?" "Sure, why not? I'll take those too." And invariably, on the backend now, your loyalty obviously builds up. Again, nothing, none of this is wrong, but this is what's happening. And then you tell your companies to keep your deposits there. Maybe the cash management program is not as strong as it would have been if you were more circumspect and you didn't have those incentives to direct people to one institution only. In any other part of the market, so in the public markets as an example, there is such a bar for disclosure. Okay? And I cannot stress this to you enough. Related party transactions, all of this stuff, we have to tell everything. Not just for us, but even if our, like, sister or brother or mother may have a transaction with an entity that we're doing a deal with. And it just isn't the case in private markets. And so it's not to say that anything untoward happened, but when people point the finger at VCs, I think they are pointing to this whole set of issues and asking the question, shouldn't there have been more disclosure and transparency around it? And now that this has come to pass, shouldn't we explore it? And I think that's what the Wall Street Journal did. They started pulling on this sweater thread. And my guess is that you're gonna find a whole ball of yarn at the end of it.

Jason Calacanis 26:07 Sax, what do you think of this?

David Sacks 26:08 I think Chamath makes a fair point that if VCs have SVB as an investor and then they're directing startups to use SVB, that is a conflict that should be disclosed. By the way, we never did either one of those things. We never had SVB as a limited partner and we also never directed our startups to bank at SVB. I don't know why we'd ever do that. Moreover, I always try to talk founders out of taking venture debt, whether from SVB or elsewhere. So, listen, I-

Jason Calacanis 26:35 Yeah, we've been clear about that.

David Sacks 26:36 Yeah, we've been super clear on-

Jason Calacanis 26:36 And to be clear, I never directed anybody to a specific bank.

David Sacks 26:39 I know, like-

Jason Calacanis 26:39 I always told people to get two or three banks and have redundancy.

David Sacks 26:42 Totally, totally. I-

Jason Calacanis 26:44 The obvious advice.

David Sacks 26:44 Yeah, totally. And look, founders have multiple VCs typically on their boards, so the idea that like any one VC directs them which bank to use is just not, that's not realistically what happens at these startups. But look, I think Chamath is right that when there is a bank failure or any kind of failure this big, then all the practices are gonna be under a microscope and there's gonna be some scrutiny of this.

Jason Calacanis 27:04 Here we go.

David Sacks 27:05 And maybe there should be. But my larger point is, we're now operating in an environment in which clearly there's a larger set of stresses on the banking system. We've already had now five bank failures or near failures. Moreover, do any of us believe that this is over? Or do we believe there are more shoes to drop? If we believe that there are more shoes to drop, we may not know exactly what they are, but, but I think all of us probably believe (laughs) -

Jason Calacanis 27:29 Well-

David Sacks 27:29 ... that we're not at the end of this. But, but, but just to finish the thought, if we believe there will be more shoes to drop, then clearly the issues cannot just be limited to Silicon Valley. They have to be a larger set of issues.

Jason Calacanis 27:40 No, that- They're, they're not limited here.

David Friedberg 27:40 I think that it's important to understand the facility that the Fed created. So, what the Fed did this weekend is essentially create a buyer of last resort again. Now how did they do this? So all of these banks basically had assets that they bought for a dollar and are now worth 95 cents, and that's what's creating this whole issue. Or 80 cents, or 85 cents. You, you pick the number. But they're not worth the dollar that they bought it for. What the Fed basically said is, "Okay, give me that asset, give me that bond. I will value it at a dollar and I will give you a dollar as a loan, and you will pay me interest." And the interest rate I think is what's called OIS, and they added 10 basis points on top. So I think it's about 4.9%. So what it allows all of these banks, and if you take all of the banks that are not the top four in America, so the top four are JP Morgan, B of A, Citi, and Wells, so just ignore those for one second. The other end banks, if you look at all of the assets that are underwater because of all the rate hikes that Sax talked about, and you add up all those losses, that is about two trillion dollars. And the Fed didn't announce that there was a beginning and an end to this program other than saying these would be one-year loans. And so, I think the exposure for the American banking system, at a minimum, is gonna be this two trillion dollars because now the incentive, if you're a banker right now running one of these banks that has not gone under, is to immediately go to the Fed, put all of those assets to them, get a loan, and now take that and buy different assets, different bonds, different US treasuries that are yielding much more than what your old treasuries were yielding. And I think that's the arbitrage that we've unfortunately created. And the other question now though however is, what does that mean for the top four banks? Right? Because if it's two trillion for everybody else but the top four, what's the gap for the top four? That looks like it's at somewhere between a trillion and two trillion, so that's another amount of money we're gonna have to, or the Fed will have to backstop. And then, as Friedberg said, "These checks always come due," what do we do in a year? Because in a year, the problem is the only way to make the banks in a position to repay this much money in one year is to cut interest rates so massively that these assets massively inflate, and now all of a sudden you're in a position to cover this. So it's a very-

Jason Calacanis 30:20 So describe what that delta is, 'cause it's about, they're down 15%, 10% in book value these longer-term treasuries?

David Friedberg 30:27 It depends on the security. Again, it depends on what they bought. We don't really know-

Jason Calacanis 30:30 Yeah.

David Friedberg 30:30 ... enough details, so I don't wanna guess. But if you own these 10-year treasuries you could be off 10 or 15%. If you own-Mortgage backed securities, it could be off a little bit more. If you own short term securities, they're off a little bit less.

Jason Calacanis 30:41 But these are with the government.

David Friedberg 30:43 You get a loan collateralized by these assets, so you're still holding them, right?

Jason Calacanis 30:47 Yes, and they mature.

David Friedberg 30:49 So if the Fed takes an emergency posture and says, "Okay guys, we want to avert a crisis in a year from now, and we're gonna cut rates," these assets that these banks own will be worth more, which will allow them to repay the loan. As far as I can tell, all we've done is we've kicked the can down the road for a year. But I-I do think it's important for people to realize this doesn't solve the problem. It just means that, mark your calendar for a year from now, we have-

Jason Calacanis 31:18 Freeburg?

David Friedberg 31:18 ... a problem on March 15th, 2024. Because all those-

Jason Calacanis 31:22 Perfect.

David Friedberg 31:22 ... folks that took money, what do we do?

Jason Calacanis 31:25 Yeah. And so a year to work it out, Freeburg, would seem like a good idea because the Fed is fighting inflation. They seem to have gotten some portion of it under control. It's not out of control, right, inflation. And maybe if they can slowly s- you know, either start rate cuts or pause. So let's m-shift the discussion to, hey, what are the changes we need to make to the system and how do we think this plays out over the next year, Freeburg? Chamath had one suggestion, which was all of these banks should have a disclosure statement, mark to market, every day, week, month, quarter, whatever it is. Just like Circle's USDC, their stablecoin, has a page with their disclosures of all their holdings. So that seems to be a very productive one. We should have them mark to market, the, the Dodd-Frank stuff, as Sacks said. You know, Elizabeth Warren probably correct, we need to reverse that. So those are two very tangible suggestions. What are your suggestions?

David Friedberg 32:20 We need to have a real-time dashboard. We need to have a real-time dashboard at every single Fed that allows them, for every bank that they supervise, to know in real time. They should choose to ignore it-

Jason Calacanis 32:33 Should the public see that?

David Friedberg 32:34 I'm not sure that should be true, but they are their supervisors. They should see it.

Jason Calacanis 32:39 Right.

David Friedberg 32:39 They should choose to ignore it, but they should not not have it.

Jason Calacanis 32:43 Freeburg, what are your suggestions going forward as to how we can learn from this situation? Forget about the cannonball, a-as you vividly expressed there, I think very well, uh, great analogy.

Jason Calacanis 32:55 But just going forward, how do we keep the ship from taking on water if we do have a cannonball hit it again?

David Sacks 33:03 Oh, we got a hard, that's a hard equation to solve. We got a lot of demands-

Jason Calacanis 33:08 Clearly, that's why I'm asking you. That's why I'm asking you what your suggestions are. (laughs)

David Sacks 33:10 We got a lot of demands. We got a lot of, a lot of demands for money. You guys see, I, I think there's a lot of things that are, seem unrelated that are all pretty related right now. There's a massive protest underway by labor in France. There's a massive protest underway in the Netherlands. There's strikes on the Underground in London. When we talk about global debt and US debt, we often, I don't think, account for all the debt, which also includes promissory obligations made to a workforce, a global workforce that's been working for decades. Individuals that have spent their whole lives committed to some company or to some government working, with the expectation that they're gonna retire and have some benefits paid to them. And there's this massive underfunding of those benefits and those pools of capital. We very quickly talk about unfunded pension liabilities, but when you actually kind of account for the number of people and the amount of capital that those people are expecting, that the workforce, the global workforce is expecting to be paid to them in retirement, both public and private, it's a massive amount of money that's not funded today. And you start to see the cracks in the system when that population says, "My pension payments are not keeping up with interest, with inflation," or when there's a threat that pension payments or retirement benefits are gonna kick in at a later age, or you're not gonna get them fast enough, or you're not gonna get as many as you thought you were gonna get. We have that problem in the United States in the form of Social Security and these underfunded pension liabilities. That is the critical macro tension in this equation that I think drives the real problem that's gonna come to a head at some point. We blew a hole in the, in the, in the boat, but we're also forgetting that there's, like, a massive amount of weight that's gonna drop on the boat. And I think that it's a really hard equation, uh, to solve. We can talk about keeping banks solvent and all this sort of stuff. At the end of the day, the central bank, it appears, in the United States and probably globally, it's gonna be one big bank, right? They're basically (laughs) gonna take on the whole balance sheet themselves and, and at the same time, you've got a lot of folks saying, "I want to get paid more. I have obligations due to me." And guess what? You know, Jason, to your important statements historically about the importance of democracies, ultimately, you know, the members of that democracy are gonna say th- this, this is a benefit that, that the majority are owed, and that's gonna pull things out. I think the only stopgap, l- I'll just say one thing, the only stopgap in the next decade is gonna be significantly higher tax rates in the United States. I, I don't see how you're gonna fulfill the tension gap that's underway right now with respect to where productivity is going and where capital markets are going and where the demands are on the system from people requiring additional capital to come out to them without taxing assets away from the asset holders. So this would be corporations and high net worth people, and I think that's why you see this Biden proposal. We may not like it, but at the end of the day, it's gonna be the only way to create a stopgap that's, that's, that's gonna avoid-

Jason Calacanis 36:22 Well-

David Sacks 36:22 ... massive inflation in the near term.

Jason Calacanis 36:24 Reducing spending-

David Friedberg 36:24 I, I see the Biden proposal.

Jason Calacanis 36:26 Hold on. Hold on one second.

David Sacks 36:27 Let me just say, the only other way, the only... I'll just say one more thing, Jake, I'm gonna go. The only other way besides, you know, a massive long-term tax regime to fill the hole would be some extraordinary productivity gain. And this is where we can all have a hope and a dream and an investment and e-effort around technology.... AI automation, people think that they're threats-

Jason Calacanis 36:46 Energy.

David Sacks 36:47 ... ... job. Energy. But if you can get energy down below, uh, three cents a kilowatt hour and you can scale its production by tenfold, if you can automate a lot of, uh, labor, if you can get AI to do a lot of stuff that we do today, productivity will go through the roof. The economy will grow fast enough to get out of the debt bubble and meet all of these liability obligations.

Jason Calacanis 37:05 So there are-

David Sacks 37:05 So that's why-

Jason Calacanis 37:06 ... three ways-

David Sacks 37:07 Yeah, so-

Jason Calacanis 37:07 ... just to summarize.

David Sacks 37:07 ... that's why I think, I think, uh, to me, to me, that's the long term. The medium term is going to be this tax stopgap, this very high tax stopgap. And then the short term is going to be all the shenanigans that we're talking about.

Jason Calacanis 37:17 Okay, I'll go to you in a second, Sacks. So just to recap, there is actually a third way too. There are three ways productivity, as you very astutely point out, and we, we just highlighted some of the ways productivity could help, whether it's energy, AI, et cetera. The second is, of course, increasing taxation on the people who are at the top of the pile, uh, would be the likely solution. The third is also austerity, cutting spending in some way. But let me also propose one thing here. As we look forward to what do people want out of a bank and how should startups or just individuals deal with bank runs and their trust in banks, to Chamath's point, I've been- I was thinking about this over the weekend and in this discussion that we would have based on a lot of things you said, Sacks, which was people just deposited their money and they don't have the ability to assess if a bank is solvent because the FDIC can't do it and it's their full-time job. It's their mandate to make sure these banks are solvent. So how is a consumer going to be able to do that or even a startup founder or even a sophisticated investor like Ackman or any of us-

David Sacks 38:18 Yes. Yes.

Jason Calacanis 38:18 ... if we're, in fact, sophisticated. So let me pause for a second here and posit something. We don't want a bank. We want a bank vault. Consumers do not want their deposits to be used for shenanigans, just like many people would rather pay for a social network than have their privacy data sold. So I think we should bifurcate banks into bank vaults and banks. Banks can do what they want with your deposits, you get free checking. But what I want in a bank, what I want my startups to use, what I want my venture firm to use is I want to pay the bank for services. Whether it's 10 basis points, 25 basis points, $500 a month, I would rather see my startups pay $1,000 a month in banking fees, $2,000 a month on banking fees for $2 million, whatever it is, and pay for each check, pay for wires, pay for white glove service, whatever they choose, but not allow the banks to take that money and loan it out or do things with it. I just want a vault. And I think a vault service is what the majority of consumers want. And given what we're seeing with two insane bank run bailouts in our lifetimes as adults, for those of us who are in Gen X, 2008 and now, we would rather pay for services, and I, I leave it to you, Sacks. Is this a potential solution? 'Cause I don't hear anybody saying, "Give me a bank vault." And why does that service not exist in the world?

David Sacks 39:41 Yeah, look, what people really want are, they want a service provider who gives them the ability to make payments, which if you're a small business is payroll and payables, things like that. They want a money market fund to basically earn interest and, um, and they want all that to be safe. I mean, it's, it's very simple. The idea that when you go open a checking account at a bank that you are making an unsecured loan to that bank, that is not something that any consumer or small business understands. That whole model I think is completely obsolete and outdated. And what I heard so many people say, and I think this is not sincere, I think it's just because they hate tech, is that depositors should take it on the chin because somehow they made a stupid decision when they opened a checking account. It's like, are you kidding me? Listen, what, what do you want the process to be? You want consumers and small businesses when they open a bank account to have to review the financial statements of that bank, try to figure out all of their disclosures, where their assets are, whether they have toxic assets on the books, and if they don't do a good enough job doing that, if they're not smart enough to do that, then you want them to be disciplined. This is the word that I kept heard being used, is we need to discipline-

Jason Calacanis 40:54 The punitive, yeah.

David Sacks 40:55 ... the depositors.

Jason Calacanis 40:56 Yeah.

David Sacks 40:57 The depositors are not in a position to evaluate the balance sheet of these banks. That's what the feds are supposed to do. That's what the regulators are supposed to do. That's what Moody's-

Jason Calacanis 41:06 Yes.

David Sacks 41:06 ... is supposed to do. And you're telling me that a bank that had an A rating from Moody's the week before and had an FDIC seal of approval, that somehow they got it wrong and the feds got it wrong, but the customer-

Jason Calacanis 41:18 In related news.

David Sacks 41:18 ... is supposed to get it right? I mean, come on, that's ridiculous.

Jason Calacanis 41:21 In related news, Chamath, I would like an airbag in my cars to protect my family, but I don't want to evaluate the airbag technology and unpack it and make sure that it's got the right-

David Sacks 41:32 Right.

Jason Calacanis 41:32 ... CO2 crunches in it.

David Sacks 41:33 Yeah, well, yeah, JCal-

Jason Calacanis 41:34 Yeah, please.

David Sacks 41:34 Let me finish the point. It's about consumer protection here. And I don't care who the depositor is. If the banking system is going down because the feds haven't done their job... I mean, Powell, two days before the bank failures, was testifying that he didn't see stress in the banking system. So either he was lying or asleep at the wheel.

Jason Calacanis 41:52 Asleep at the wheel, like in scenario, yeah.

David Sacks 41:53 And like I said, the feds had given the seal of approval to SVB and all these other banks, they had all passed the regulatory exams. And so to now put it on the depositor when the fed screws up and the regulators screw up and Washington screws up by printing all of this money and creating this inflation that we've had, again, out of all the six parties that you could blame, I just think it's the, the least culpable.

Jason Calacanis 42:16 Chamath, should there be a service that provides no interest but is just a custodian of money that is absolutely protected? Where is the bank vault product in the world? Does it exist? 'Cause I can't seem to find it. Some people seem to say, I think Friedberg, you alluded to this maybe in the group chat, that if you have a brokerage account, that's kind of similar to what I'm saying, but it doesn't have it. I don't want any interest. I don't need any interest for putting this money in the bank for a startup. They're not in the business of making one to 5% and optimizing for that. I have founders who are now sending me-... five page memos-

David Sacks 42:49 If they can't-

Jason Calacanis 42:50 ... with-

David Sacks 42:50 If the bank, if, yeah, if the bank can't use your money, they're gonna charge you.

Jason Calacanis 42:54 Yeah.

David Sacks 42:54 So remember-

Jason Calacanis 42:55 I want to be charged. That's the service I want.

David Sacks 42:57 I know, but, but I, I think, this is a, this is an important point. A bank is a service provider. They spend a lot of money building technology, having people that work there-

Jason Calacanis 43:04 Yes.

David Sacks 43:04 ... providing service and infrastructure. So for the services that they're offering, if you're not gonna let them use your money to make investments with your money and they can participate on that gain-

Jason Calacanis 43:13 They have to charge you.

David Sacks 43:14 ... with you, they charge you. And I think that's really worth it.

Jason Calacanis 43:16 I want that.

David Sacks 43:16 But, but Freeburg-

43:17 But I think that's-

43:17 Freeburg-

43:17 Yeah.

43:17 ... are not a service provider under the current laws. You understand how it works now is th- that what we're being told is that when you went to the bank thinking you were just getting a service provider and frankly, largely a commodity service provider-

43:29 You're get, yeah, you're getting a fund manager.

43:30 ... you're being told-

43:30 You're getting an asset manager. Yeah.

43:31 Yes, yes, and you're being told that you actually made a risky investment decision. Think about that.

Jason Calacanis 43:36 Yeah.

David Sacks 43:36 When you opened a checking account, you weren't just trying to, you know, again, use a vendor. You were actually making a risky investment decision, that's what they're trying to say. And you deserve to lose your money if you chose poorly, even though nobody else could figure it out. None of the experts could figure it out-

43:51 By the way, you should go talk-

43:51 ... none of the regulators could figure it out.

43:52 You should talk about the, the, the challenges of your system to someone who lives in Argentina. It's far worse in other parts of the world and we've come a long way in the last 100 years. We talked about 500 or 600 bank failures on average per year in the 1920s. So I'm not saying that, hey, that's not the case, but there's always been, to some degree, risk when people are giving their capital over to someone else. Um, and we've certainly made huge strides and progress. But I think, J Cal, to your point, you know, there is a, a point of privilege now that people are saying, "I wanna have a position where I know that my money's not gonna get used, not gonna get moved, gonna be completely safe." In a democracy-

Jason Calacanis 44:23 And what would you pay for that? What's the price, Freeburg? What would you pay for that? 'Cause right now we're basically giving every crypto entrepreneur (laughs) and zealot, you know, basically the high ground, 'cause they could make this product. I would pay 10 basis points, literally $10,000 a year per million. Is that right? Yeah.

David Sacks 44:38 Remember when you thought Jeff Bezos was gonna be president?

44:41 (laughs)

Jason Calacanis 44:42 I still think it's a distinct possibility. Anyway.

David Sacks 44:44 I don't remember any of that.

Jason Calacanis 44:44 What, what did you pay for this product-

David Sacks 44:46 I'm just-

Jason Calacanis 44:46 ... uh, Chamath or-

David Sacks 44:47 (laughs)

Jason Calacanis 44:48 ... like Bloomberg or Bezos?

David Friedberg 44:49 I don't wanna speculate on new products. It's kind of a dumb tangent. I think the thing that you're bringing up though is-

Jason Calacanis 44:57 Dumb tangent, okay.

David Friedberg 44:59 ... why doesn't a product like this exist? And I think that-

Jason Calacanis 45:03 Yes.

David Friedberg 45:03 ... it was very well explained. It's that every for-profit business is in the business of making money and there are physical costs that you have to bear. In the case of a bank, there is physical infrastructure, literally bricks and mortar that go into making the branches. There are lots of people. There is lots of software. There's lots of complex back office and middle office things that banks have to do in order to accept money. That has a cost. So, I don't see how it will be very easy for somebody to create a bank that just stores your money for you without you being charged quite a lot of money, unfortunately. I think that there has to be a different way to solve this problem and I think that what we did after the great financial crisis was the regulators wrote down all kinds of new rules. But the crazy thing in 2008 were those rules were written on paper and now we're in 2023 and these rules can be written in software. And so I think what it requires is some amount of tactical, real-time intelligence that regulators need to have over those that they regulate. And I don't know why we're so afraid of demanding that the next time some of these complicated, real-time laws are written in law that they also need to get written in code. And I think that that's a practical solution. It should be the case that every bank that's supervised by the Fed has a dashboard that has all of the key levers that allows what you said, Jason, to happen, which is a real-time mark-to-market. Should those or should those be dis- should or should they not be disclosed to shareholders? That's a different discussion. But the regulators should have 100% transparency into how these organizations run, because as Sax said, they are an enormously critical institution that at best case after this fiasco what we've realized is very poorly misunderstood by consumers. And that at, at the worst case, is being mismarketed to us. And I think-

David Sacks 47:09 We're also-

David Friedberg 47:09 ... that that shouldn't be allowed.

David Sacks 47:11 We're, we're also missing the other side of the balance sheet. We, we haven't talked about it at all. But banks play a really critical and important role as lenders. Banks act as the channel for lending capital to small businesses, for lending capital to individuals to buy homes. It's the primary place where capital is provided to help fuel economic growth and prosperity, uh, particularly in the United States where we have such a liquid, fluid, and available mortgage market to support home buying in America. And the absence of, you know, Jason, what you're talking about, having the ability to use deposits to make loans and have what banks have fundamentally been in this country for over 100 years, which is taking short-term deposits to make long-term loans and making sure that there's some degree of balance and availability of liquidity to support transactions, and ultimately, mortgage securities came out of the need to generate more liquidity by banks to support depositors. And obviously, there was all these inflationary things that happened in that market and bubbles that happened, but it's an important role that banks play. And the lending aspect of banks, if it gets stifled too much because we swing too far the other way, it can actually have a really adverse effect on economic growth and prosperity and the ability for people to, to afford homes in this country. So that's the other side of the coin and where things can go bad.

48:25 So, this is where I find, like, the, the current banking model to be sort of, like, weird and maybe obsolete, and definitely not what consumers expect. So for example, if you go to a bank and you put your money in a deposit account and then they loan it out to make mortgages, do you realize that you're an investor in those mortgages as the, as the depositor? I don't think you do. I mean, what, what-

David Friedberg 48:46 No, because what, what they, what they do is they take those mortgages, Sax, they package them up, they sell them, and they get an origination fee and they get the money back.

David Sacks 48:54 Right.

Jason Calacanis 48:54 Not always, no.

David Friedberg 48:55 So they're not taking-

David Sacks 48:55 No, not always.

David Friedberg 48:55 They're not always, but maybe they should be, maybe they should have to-

David Sacks 48:58 Look at First Republic. B of A, Wells Fargo do not. Exactly. So B of A, Wells Fargo, for example-They, they do a lot of that, but if you look at First Republic, they have a $90 billion loan portfolio on their balance sheet that they've not packaged up and sold. So the, the packaging and selling of mortgages generated the liquidity that the banks needed, but there's a cost to that, so a lot of banks will try and balance out their loan portfolio where they'll package some of it up and sell it. But when they do that, they take a loss. They take, or they, they pay a fee-

49:21 But maybe they should be required to do that because-

49:23 Yeah, that might be, yeah.

49:24 ... because, because I mean, look, to the point about mark-to-market assets, it's very hard to mark an asset to market unless it's liquid and publicly traded.

49:32 Let me give you an economic point. I think that there's about $7 trillion in deposits in banks. So if what you guys are saying happened, you're basically sucking $7 trillion out of the system that's being used to fuel purchasing in the form of loans. And you're taking that, or call it a 10% discount to that, so about, call it $6 trillion. And you're saying, "We gotta go find a market for $6 trillion of loans, and then we're gonna have $6 trillion of cash sitting in a bank account doing nothing." And that ch- that challenge is the way that the-

49:59 No, that cash would go into money market funds. So in other words, like, you'd package up all those mortgage bonds, you create a mortgage bond security, and then if consumers, if depositors want that product, they'll just buy it-

Jason Calacanis 50:09 But what is a money-

David Sacks 50:10 They'll just-

Jason Calacanis 50:10 But, but, but Zach-

David Sacks 50:10 They'll just buy... Hold on. They'll just buy the ticker symbol.

50:11 What is a money market? Yeah, but what is a money market? It's, it ends up being the same thing, where money is p- You, you earn interest on cash that's being used to make investments elsewhere.

50:19 Right, but-

50:19 So ultimately, if you wanna earn interest on your cash, it has to be loaned out somewhere to someone.

50:24 I understand, but what I'm saying is, uh, uh, look, I'm just brainstorming here. I don't, you know, I don't-

50:28 Yeah. Yeah, yeah.

50:29 I don't have the answer. I don't have the answer, but-

Jason Calacanis 50:30 So, you know, it's whiteboarding, spitballing, and-

David Sacks 50:31 Yes, exactly. I'm not saying this is what should be done. I'm just kinda asking whether it might make more sense. What if, on the depositor side, all of the things you put your money in are money market funds? And then when the bank goes out and does its lending business, it does ultimately, at some point, have to package those up and they get turned into securities, you know?

50:48 But Sachs, but money market funds, you know where that cash goes? So when you, when you invest in a money market fund, you're, you're giving that money-

50:55 Sure, like-

50:55 ... to someone who's using it to make a loan. Like, it is also, you know-

50:58 I understand, but then the depositor would never be at risk.

Jason Calacanis 50:59 But it would be mark-to-market is Sachs' point 100%-

David Sacks 51:02 The deposor would never be at risk. It would never be at risk of bank failure.

Jason Calacanis 51:04 I, I just wanna give-

David Sacks 51:05 You're shifting the risk equation to the fund manager, the money market instead of the manager of the bank. And, and at the end of the day, that money has to be loaned out by someone.

51:11 Yeah, but then just the owners of those... Just the owner of that security, that money market fund, th- that would take the hit.

Jason Calacanis 51:17 Okay. Just as we wrap here, 'cause I wanna talk on some other issues as well, there, there's two things that are super tangible that founders can do right now, or people who want to mitigate against these kind of issues. The, there's something called ICS, in, insured cash sweeps. These are accounts that automatically, you know, will put your money into multiple FDI insured institutions, 250K at a time. We talked about this previously. There's a bunch of folks doing that in fintech. I won't give any of them free plugs here, but y- you can just go look and search for ICS. There is also maybe some thought here that the FDIC 250K limit, maybe that's outdated, certainly for businesses it is, so maybe that should double or triple. And obviously that cost would be spread out. Uh, and then finally, you can go to treasurydirect.gov right now and buy short-term government debt. And I literally have startups doing this who have major treasuries. They're going there and buying short duration stuff themselves, holding it themselves, so they don't have to worry-

David Sacks 52:15 Wait, who's Treasury Direct?

Jason Calacanis 52:15 This is part, this is provided by the government is my understanding. And, uh, people are buying direct from the government.

David Sacks 52:22 I personally am not a fan of startups buying T-bills because of the duration mismatch problem. They always underestimate when they're gonna need their cash.

Jason Calacanis 52:32 Yeah.

David Sacks 52:32 And so I don't like tying up cash in, in bonds-

Jason Calacanis 52:35 This is if you had a giant treasury.

David Sacks 52:37 Yeah, I agree with you, but this is for giant treasuries and a small point- But they always, they always get it wrong. I see this all the time.

Jason Calacanis 52:41 Okay.

David Sacks 52:41 Whenever they try to... Well, let me just say, when startups try to create laddered bond portfolios, they end up needing the money sooner than they thought. What I'd much rather see a startup do-

Jason Calacanis 52:49 Yeah.

David Sacks 52:49 ... is buy 100% US T-bill backed money market fund-

Jason Calacanis 52:54 Okay.

David Sacks 52:54 ... run by the absolute biggest of the big financial institutions-

Jason Calacanis 52:58 Sure.

David Sacks 52:58 ... because you can get in and out of it at any time you want and without paying a fee. And that's so much better than trying to manage your own bond portfolio. Let a professional fund manager do it.

Jason Calacanis 53:07 Well, there are people who do provide these kind of bond ladders. I'm just telling you what-

David Sacks 53:10 Yeah, but what-

Jason Calacanis 53:10 ... the best practice advice going around is.

David Sacks 53:12 Why don't you just buy a ticker symbol through, like, a brokerage account?

Jason Calacanis 53:15 Sure. Or multiple ones, right? And, and but now this is, I think, speaks to Chamath, the fact that we have startup founders and people having to measure, manage a treasury this granularly. Is this a failure or is this what should be happening? Should we have to have treasuries in the $10 million or $20 million range be this granularly managed, or should this just be FTI- FDIC rates, you know, should be just 10Xed? Well, in the absence of regu- regulatory changes that protect this money, you need to have a financially sophisticated actor on the board. And again, I go back to that should be your venture capitalist. And that person-

David Sacks 53:59 Mm.

Jason Calacanis 53:59 ... should not have conflicts of interest with the banks that they direct you to. But I mean-

David Sacks 54:05 Yeah.

Jason Calacanis 54:05 ... I don't think that that's a very controversial statement. Uh, yeah, it's just not happening, and I, I, I am just flabbergasted that people are not even doing the basic blocking and tackling here of having three or four accounts. I, I've always had three or four banking relationships, always had it,

Jason Calacanis 54:20 uh, split up. Should we move on to some of the other pressing issues? There was, uh, a really interesting Founders Fund story about them breaking their, uh, latest fund in half, and then there is Stripe closing their funding. Which one would you gentlemen like to go to, or a different story on the docket?

David Sacks 54:35 I think there are, there are four things that are very interrelated-

Jason Calacanis 54:38 Okay.

David Sacks 54:39 ... in startup land. So Founders Fund took their... Just to make the math simple, 'cause I'm gonna get the numbers not exactly right, but like, a $2 billion fund that they're gonna break into two $1 billion funds. So I think that's one story.

Jason Calacanis 54:51 It's a $1.8 billion fund. They're gonna break it into two $900 million funds. It's their eighth fund. It's being cut in half, and it'll become eight and nine.

David Sacks 54:59 I think what that speaks to is valuations and the marks that we think we have for existing companies and the future value that smart investors like to see.

David Friedberg 55:10 All roads lead to, it's as, we're in for a slog and so trying to put a $2 billion fund to work doesn't seem to make a lot of economic sense to some of the smartest people in the room. So that's, that's that. The second thing is-

Jason Calacanis 55:23 And just one note there, it says according to Axios, Peter Thiel led this charge and he is, uh, the, the contrarian's contrarian. He was the one, according to Axios, that led that cut of the fund size with some at, uh, Founders Fund, according to the reports, opposing him.

David Friedberg 55:37 I'll say the, I'll say the more important thing, which-

Jason Calacanis 55:39 Uh.

David Friedberg 55:39 ... and Peter and I are on the same... We're the largest LPs in our funds. And so, you know, as the largest LPs in our funds, I think this is a no-brainer decision. Number two, Stripe basically takes a 50% haircut, which is the single best run, most highly valued company in Silicon Valley. Again, that's going to eviscerate-

Jason Calacanis 55:58 Private company, yeah.

David Friedberg 55:59 ... a lot of TVPI in a lot of people's portfolios, a lot of theoretical money that LPs were gonna get. I think the third thing is, there's a person that went and filed a FOIA request at UC Berkeley to get Sequoia's returns and it turns out that the best investor in the game, quote unquote, since 2018 has not really done that well. And I think in the University of California invested over $800 million in Sequoia since 2018, and I think has returned, what? Some 40 million bucks on that number. And then the fourth, which just came out today, is that Tiger wrote down the value of their private book by 33% for 2022. And so, you know, I think Tiger's AUM basically has gone from 100 billion to 50 billion in a year.

Jason Calacanis 56:56 There's one more note to add to that. YC basically let go of their growth team this week, Y Combinator. Uh, for people who didn't know had, what was called the Continuity Fund, they were doing late stage investing and that got cut.

David Friedberg 57:08 Oh my gosh.

Jason Calacanis 57:08 Which is a signal, uh, and, and the 17 employees are gone now. And Gary Tan, I think is making the right decision. You know, they have to focus on what they're great at, which is the earliest stage of the company, and they had conflicts with this one.

David Friedberg 57:19 Well, this is... Look.

Jason Calacanis 57:19 Yeah.

David Friedberg 57:20 This is the most interesting thing for me in the following way. I think the Y Combinator unicorn hit rate is 6%, right? So every 100 companies that come out of YC, which costs only about $10 million to seed, right? Six of them become worth a billion dollars or more, and obviously some become worth much, much more. And so if you see how difficult it is, even for a growth fund that's attached to that funnel, to be successful and make money, because obviously if this thing was turning cash, you would not have cut it. That, I don't, I don't think anybody would do that. So I think it was a very challenging strategy at a challenging moment in time. And so I applaud these guys for having the discipline to do it. But if you take them all in totality, it is a complicated place in venture capital and startup land. Holy mackerel, like-

Jason Calacanis 58:10 It's a reset.

David Friedberg 58:11 A, it's tough to make money. B, a lot of folks may not know exactly what they're doing. C, a bunch of valuations are totally wrong. And D, we're gonna have to start doing the cleanup work now of resetting all of it, which just takes years, as you guys remember in 2000.

Jason Calacanis 58:26 Hard reset.

David Friedberg 58:26 It took us, it took us five years to fix this.

Jason Calacanis 58:30 Yeah, it's a hard reset. Sax, what, what do you, when you look at these in totality-

David Sacks 58:33 Yeah.

Jason Calacanis 58:33 ... what would you say?

David Sacks 58:34 Well, I agree with what Chamath just said. I mean, it is gonna be a hard period with a lot of resets, a lot of restructuring, a lot of cap tables. There's a lot of mess to clean up. All of that being said, I think I'd rather be an investor today than an investor two years ago or one year ago, because at least the valuations have corrected to some degree. And then also we have this really interesting AI wave happening now, and there's a lot of opportunities to invest in that new, you know, cycle. So at least there's like an interesting product cycle that's getting me excited to go to work and see these new demos from all these different companies. Whereas, you know, you go back a year or two and just the product innovation doesn't seem as world changing as it does now. So I think that as bad as things are, my guess is that the new vintages of VC are gonna be better than, you know, call it 2021 for sure.

David Friedberg 59:29 That's not gonna be a high bar. (laughs)

David Sacks 59:31 (laughs) It's not a high bar, but still.

Jason Calacanis 59:32 Well, I-

David Friedberg 59:33 But that's the thing. But, uh, actually, Chamath, Chamath, this is the contradiction.

David Sacks 59:36 But that vintage is trash.

David Friedberg 59:37 Trash.

David Sacks 59:38 This is the contradiction, is that it felt better to be a VC in 2021, but in hindsight, we know that the vintage is gonna be not good. Whereas today-

David Friedberg 59:47 David, how many-

David Sacks 59:47 Hold on. But today, it feels not great to be a VC.

David Friedberg 59:51 Of course.

David Sacks 59:51 But I think the vintages will be a lot better.

David Friedberg 59:53 But anybody would tell you that at some point you're gonna have to divorce yourself from emotion to be a reasonably good investor over long periods of time. How many data points do we need to realize that too many people were put into this game that may not have known what they were doing? And we're gonna have to go and work through all of those excesses. And I think it's just gonna take a lot of time. US limited partners are in a really difficult spot. European investors, I think, are probably in a pretty difficult spot. There are a couple of bright, bright points around the world of folks that are still optimistic and doing well. I think Middle East is one. Southeast Asia is another. But other than those, it's just a whole group of folks that just have to get completely re-underwritten from first principles. Even when you have an incredible platform like Sequoia, five years of no returns on $800 billion for somebody like UC Berkeley, what it really means without commenting on Sequoia's performance is that UC Berkeley is effectively out of business in being a limited partner for the foreseeable future.

Jason Calacanis 1:00:58 Well, in fairness-

David Friedberg 1:00:58 Right? And I think that that has, that has implications. So even if you think these vintages are great, I don't think they're open for business. And, and frankly, if even if they wanted to be open for business, how do you go to an IC when they look at all of the totality of those dollars that have not made anything, how do you justify the next 800 million? I just think it's very hard.

Jason Calacanis 1:01:18 While I agree that LPs are out of it, I think the story was garbage because i- all funds go through a J-curve and they're literally talking about the majority of the funds in that vintage, 2008, 2019, 2020, '21, they're all in literally the definition of the J-curve, the third, fourth, fifth year.

David Friedberg 1:01:33 One of the most important things you need to be able to do is measure how long does it take, the delta T, to 90% of calling committed capital? And how long does it take, the delta T, to return 1x DPI? I can tell you, Jason, if you're a reasonably good fund, those numbers should be between five and seven years for both.

Jason Calacanis 1:01:53 Which none of those funds have hit.

David Friedberg 1:01:54 The average for a normal venture fund is around five to seven years to call 90% of the capital and around five to seven years to return 1x DPI. I'm just telling you that's what the average is. And if you talk to firms-

Jason Calacanis 1:02:11 Right.

David Friedberg 1:02:11 So all I'm saying is, there is a period of time where, in the absence of getting money back, again, this is not a Sequoia thing.

Jason Calacanis 1:02:18 Yeah.

David Friedberg 1:02:18 It just means that there was an entire cohort and years of capital allocation that is not necessarily in a J-curve, it's impaired. Because if after five years you've-

Jason Calacanis 1:02:30 Oh, that is possible.

David Friedberg 1:02:30 ... if after five years you've returned nothing, sometimes you just have to see the writing on the wall.

Jason Calacanis 1:02:35 Sacks, explain the J-curve one more time for folks, and then what is your analysis of that Sequoia story?

David Sacks 1:02:41 Well, the J-curve, the theory behind it is that when you start deploying a new fund, you're drawing fees down to pay for the firm and the investments you've made have not been marked up yet. So the value of the fund is actually going down because some of it's getting eaten up in fees and you haven't really had a chance for any of those investments to be successful. And then what happens-

Jason Calacanis 1:03:00 And shutdowns happen early, right? You know, the shutdowns.

David Sacks 1:03:02 ... I don't even know about that, I just, I just think it's they haven't had a chance to get marked up. But then what happens is you start getting markups and now, at least on paper, the value of the fund goes up and then hopefully those markups eventually turn into distributions-

Jason Calacanis 1:03:13 Yes.

David Sacks 1:03:13 ... or DPI, like Chamath is talking about. Yeah, we have a vintage 2017, 2018 fund that's actually fully returned at this point.

Jason Calacanis 1:03:22 You exited some secondaries or acquisitions?

David Sacks 1:03:25 No, we just had some, we just had some exits. But look, I think that is a little bit on the earl- early/lucky side. But we haven't really seen much of the J because, you know, you should be getting markups within two years, I think, on your investments if the companies are looking good. At least historically, that was the case.

Jason Calacanis 1:03:42 Freeburg, any, any thoughts on this collection of stories with venture basically having the great venture reset? The end of the supercycle, the beginning of the next.

David Sacks 1:03:53 It's happening.

Jason Calacanis 1:03:55 Okay. We're in the thick of it.

David Sacks 1:03:56 But by the way, I would just, I would just go back to the point that with all the problems Chamath is, is talking about, the reset and the wipeout that needs to occur, I s- think this is still... I think that's part of what makes this a better time-

1:04:08 A good cycle, absolutely.

1:04:09 ... to be an investor.

1:04:10 This is what I'll say about that, Sacks. I think I agree with you. I disconnect asset values and asset prices from fundamental business value being created. So the market bid stuff up, prices went up. That doesn't really mean that businesses aren't fundamentally good, that there aren't amazing technology businesses being built today that are going to affect billions of lives tomorrow. If you are tracking a public company stock and you like the business, you spend time with management, you see what they're building, you see their revenues growing, their profits are growing, they're making great products, people are happy with what they're doing, but the stock's really expensive, you don't want to buy the stock. Suddenly the stock drops by 80%. Nothing about the business has changed. It's just that the market is paying less to own shares in that company. That's a great time to buy that stock. I think that's the moment we're in in Silicon Valley. Everyone's like, "Oh my God, it's over. Uh, things are terrible." Just because the asset prices of the shares in companies has gone down does not mean that the quality of the businesses has changed or that there isn't fundamental value being created in Silicon Valley. In fact, the contrary point to Sacks' comment is that it is a great time to be buying these shares and it is a great time to be investing and it is a great time because, as we've talked about countless times, there are extraordinary technologies, from AI to biotech becoming software to fusion to novel applications with AI and SaaS and on and on and on. Many of the amazing things we've talked about that I think can and will affect many industries and billions of lives are being built today and they're not gonna stop being built. And you can now buy the stock at 80% off. So, you know, if you're investing today and if you're a builder today, as long as the capital keeps flowing to support the building work, which I think to some degree it will because there's still enough of it sitting there, you're not gonna have a lot of these crazy growthy rounds with high prices and all the nonsense that went on the last couple of years. But there's certainly a lot of opportunity to create real business value. And right now, an opportunity to buy shares pretty cheap and participate meaningfully in that value creation.

Jason Calacanis 1:06:18 I'll tell you the thing I'm seeing on the field and, like, playing the game on the field is something we've been talking about for the last year. We started a program called Founder.University and it's basically like a 12 week course on, like, how to build your MVP. We had 350 people join the last one-

David Sacks 1:06:31 What's, what's the discount code people can use to access it?

Jason Calacanis 1:06:33 ... that's no discount code. It's, it's, it's free for founders basically if they... It's free for founders if they come to the 12 weeks. But anyway, what I did was-

David Sacks 1:06:40 Go to WWW.

Jason Calacanis 1:06:42 No, it's Founder.University 'cause it's an extension. But (laughs) uh, let, uh, in the words of, uh, of Sacks, let me finish. Uh, please let me finish. What we did was, we just said, "Anybody who gets to an MVP and it's two or three builder co-founders, we'll give them a 25K check." And I did 20 or 30 of these 25K checks in the last couple of months of just the founders right now who have been laid off by other companies, they're dogged, pragmatic, absolutely customer-centric, product-centric founders, whereas the last five years have been filled with theatrics and white papers and ICOs and just nonsense and ri- absurd valuations and people wanting credit for work not done. And now people are actually building MVPs and they're dogged, product-driven founders, customer-centric, mission-driven founders, and it feels to me like 2010 all over again.

David Sacks 1:07:35 That first part is so...

David Friedberg 1:07:35 That first part is so well-said. People wanted all this credit for work not done and for progress not achieved. That game is over.

Jason Calacanis 1:07:44 Finished.

David Friedberg 1:07:45 Finished.

Jason Calacanis 1:07:46 Which means if you are a product-led CEO and you're a mission-driven CEO who actually builds something, you stand out so much in this ecosystem. And I have people begging for money, sending me long emails, and decks, and total addressable market. And I'm just like, "Can you just build a product and show me that you can actually deliver a product?" And then we'll start the process of the rewards-based system here. You know, the, the, the, the reward-based system in Silicon Valley is so magical when it works. You, you get money from Founder University or, you know, Techstars or Y Combinator, then go to a seed fund, then go to a series A fund. That milestone-based funding was so broken, and now it's back, and it's so functional when it's working. It's just a magic of Silicon Valley is when people work and get rewards, work and get rewards, and it just creates this great pace and dynamic that I'm glad to see. Just as we wrap here,

Jason Calacanis 1:08:36 everybody's been begging for a science corner. Enough about the chaos in the world. Everybody wants the sultan of science to tell us and educate us about something. And, uh, Sax needs to use the loo anyway, so let's do a science corner here. Room temperature superconductors. You sent me a link. I read the abstract of this paper, and, uh, I ch- I don't know which language I need to put this into Google Translate (laughs) , but I couldn't understand any of it. So please (laughs) ... I literally read the abstract, and I was like... I, I couldn't get through the first two sentences without having to start doing searches.

David Sacks 1:09:12 Okay. I'll start with just, like, the simple explainer on superconductors.

Jason Calacanis 1:09:15 Please.

David Sacks 1:09:15 Um, you know, materials that conduct electricity are called conductors. So conductors, electrons move through them, like a copper wire. That's how electricity flows. And all conductors have some amount of resistance, meaning not all the electrons kind of flow through at a perfect rate. They bump into the atoms in the material, in the wire, and they generate heat. You know, if you've ever felt a wire while electricity is flowing through it, it gets hot, right? So that's because the conductor has some resistance, which means the electrons bump into the walls of the atoms in the material. They generate heat, and you lose electricity. You lose energy. You lose power. And so in 1911, it was discovered when mercury was reduced to a very, very cold temperature that there was a point at which the material conducted electricity with absolutely no resistance. So the electrons flowed through the material, completely unbounding, un... You know, not bouncing into the material, not generating any heat. And having no resistance mean you're losing no power in transmission of that electricity, but a number, number of other super interesting effects occur. Number one is that magnetic fields now reflect off of that metal perfectly. So if you put a magnet... Have you ever seen that image of a... And, Nick, we could probably pull one up in the YouTube video. We put a magnet on top of a superconductor. It actually floats because the magnetic field, like, the north and the north push against each other, and it floats up. So superconducting materials kind of became this fascination in the early 20th century that, oh my god, if we can actually make materials that superconduct, there are all these amazing benefits. One of the benefits is you could have no loss in electricity being transmitted. Today, 15% of power is lost in the transmission from the power station to your home. You could also do interesting things like create maglev or frictionless trains that float, you know, like magnets floating off the ground on top of a superconducting track. And by having no friction, you could push the tra- the train once, and you wouldn't need to use any energy to move it along. So you could have basically powerless transportation. You could have really powerful new microprocessors. So if... A superconductor microprocessor instead of a traditional semiconductor microprocessor would use just 1% of the energy of a semiconductor microprocessor. Think about that. All the AI stuff we're talking about, all the chips that we're talking about, dropping the energy needs by 99% if those chips were made from a superconducting material. And one of the more interesting applications of superconducting materials could be infinite battery storage. So you could take a superconductor, turn it into a coil, and the electricity would just flow through it infinitely because it would never turn into heat. And then when you're ready for that power, you just plug in, and you get the power out. The actual loss of energy in a superconductor battery, less than 5%. And that's compared with, you know, significantly more energy loss used in chemical systems. And you wouldn't need to kind of get all the materials that we're struggling to get now to generate batteries. So the idea of generating, like, superconductors in industrial scale has always been super interesting. Today, the way that we generate superconducting materials is we have to make a material super, super cold. In 1987, a physicist named Qu developed one of the first ceramic superconductors where they discovered a new way of generating superconductivity. It wasn't just taking a metal and cooling it down very, very cold 'cause when you get it very, very cold, the atoms stop moving and the electrons inside pair up, and it's called Cooper pairing, and they flow through. And he said, "We could actually do this with a hotter temperature," and he demonstrated this in a ceramic, yttrium barium copper oxide, super confusing name. But basically, he took a bunch of materials and baked them in an oven, and they turned into this really interesting material that became superconducting. And then the race was on 'cause what he did is he made a superconductor that could superconduct at the temperature of liquid nitrogen. And liquid nitrogen is really cheap, so we can just use... And that's actually how all MRI machines run today is you have superconductors that reflect the magnetic fields in the super- in the MRI machine, and they're using liquid nitrogen to stay cool. And so there's a lot of industrial applications today that use superconducting materials using liquid nitrogen. But in order for us to do all the stuff I mentioned, like maglev trains and infinite battery storage and superconducting microprocessors, we have to get superconductors... We have to discover a material that can superconduct at room temperature so that we can sit with it in a computer on our desktop, or we can have it run