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

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

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

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

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

(laughs)

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

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

It is indeed relevant. And so I wanna dive kind of straight into the events, because I think there's still a lot of unknowns around why this happened and essentially where we're going from here. So I want to start on why this happened. Chris, if we start with you, why did this happen, and what's the cause of SVB going bust in this way?

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