March 13, 2023 • 45 mins
Silicon Valley Bank, or SVB, was a financial pillar in the tech sector. So how did a company that helped countless startups launch fail in less than two days? We look at the history of SVB, what happened, and how it relates to banks like Silvergate and Signature failing.
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Speaker 1 (00:04):
Welcome to tech Stuff, a production from iHeartRadio. He there,
and welcome to tech Stuff. I'm your host, Jonathan Strickland.
I'm an executive producer with iHeartRadio, and how the tech
are you. I don't frequently dedicate Monday episodes to the news,
(00:25):
but I feel like this time I kind of have to.
So last Friday, I was in the Atlanta airport and
I was getting ready to board a flight to Austin,
Texas so that I could participate in an iHeartMedia panel
discussion at south By Southwest, which went really well. But
that's neither here north Air. So there I am in
the airport. I'm just sitting at the gate waiting for
(00:48):
my zone to get called, and I hear a little
bit of a hubbub, perhaps even occur fuffle, not a
full blown commotion, but something is definitely going down right,
like there's some chat going on, and I had my
earbuds in I was listening to podcasts. At that point,
I popped my earbuds out just to find out, you know,
(01:08):
being snoopy, what the heck is going on? And I
hear a bunch of very well dressed people speaking in hushed,
concerned tones. And I could tell that there was something
that was going on and it had to do with money,
but that was about all I could figure out. So
I pop out my phone to check for the news
(01:29):
to see if there's something that's come up that I
should be concerned about. And I'm looking at the headlines
and I don't see anything immediately that leads me to
real concern. But whatever it was that was happening must
have been pretty bad. These folks were clearly agitated, maybe
not quite at panic level, but not too far from that.
(01:50):
And then after I scoured the breaking news some more,
I finally figured it out. These folks were really important
people who work in the tech sector. They were on
their way to the tech conference portion of south By
Southwest like that's their world, and a bank that has
been a pivotal component in the tech and startup industries
(02:12):
had just collapsed. So today we're going to talk about
Silicon Valley Bank or SVB and what happened there, because
it does end up having an impact on the tech sector.
And it also was the second bank collapse in a week,
and then after that there was a third one, which
will cover at the end of this episode. So I
(02:34):
mentioned Silvergate Bank collapsed last week. So this was a
real estate bank or a bank that mainly dealt with
like real estate loans and that sort of stuff back
in southern California, but had jumped over to become a
bank in the crypto space. Around twenty fourteen. They had
their own crypto exchange, and they served as sort of
(02:56):
a bridge between the world of you know, US dollars
and then cryptocurrencies, or the way I often think about it,
even though I know it's ridiculous to think this way,
I think of it in terms of real money and
digital money. It's all digital, none of it's real. So
I realized this is just you know, a bias talking
(03:16):
in my head. Anyway. Silver Gates issues hit when some big,
big customers cryptocompanies in fact, like I'm not talking about
like a person, I'm talking about an entire company that
has a corporate account with Silvergate. Well, some of these
big customers were withdrawing lots and lots of money from
silver Gates accounts, and Silvergate had already been on rocky
(03:40):
ground when FTX collapsed late last year, and on top
of that, the US government was starting to look into
Silvergate to see if maybe there was anything hinky going
on with silver Gate, and whether there was stuff going
on or not. And I have no reason to believe
that hinkiness of any nature was happening. It doesn't really
(04:01):
matter in the long run, because the perception that there
could be trouble spooked a lot of customers of Silvergate
and they decided to pull their funds out in case
an investigation might uncover something that could lock up their money.
So there was a run on the bank at Silvergate,
and Silvergate did not have enough funds to cover all
(04:23):
the withdrawal requests, and as a result, it ultimately shut down. Now,
Silicon Valley Bank has some similarities to Silvergate in that
what led to svb's collapse was also ultimately a run
on the bank. So your classic run the bank happens
when customers lose confidence in a bank or a savings
(04:46):
and loan company in the case of it's a wonderful life,
or maybe there's some external financial pressure that convinces customers
they need to pull all their money out. Maybe they
don't have a loss of confidence in the bank itself,
but other economic conditions make people convince that they need
access to cash right, like, it's a liquidity problem. Again,
(05:07):
the cash and wealth are two different things, so it'll
get kind of muddled as we talk about this. But
the thing that happens is customers will rush to the
bank to retrieve their cash, to pull all their cash out.
They might think that that would be safer in their
hands than rather in a bank that could potentially be
in trouble. But the problem is banks typically they don't
(05:31):
have all of their customers money, Like the money you
deposit in your bank is not necessarily at your bank anymore.
At least, banks don't have everybody's money all at the
same time because banks are businesses, and as a business
they need to make money. And the way that banks
make money, the way they generate wealth, is that customers
(05:53):
deposit money into a bank. The bank then takes these
deposits and starts to loan out some of that money
to other people who pay the loan back with interest.
So over the long haul, your money is safely stored
in the bank and the bank is making money through
interest through its loans, and everybody's happy. But you know,
(06:15):
banks have lots and lots of customers. Under normal conditions,
there wouldn't be very much of a problem. If you
decide to go to your bank and close out your
account and withdraw all of your money. Normally that would
be fine because there are tons of other customers. There's
lots and lots of money in the bank. There's plenty
of it in there for the bank to send you
your cash and close out your account. So as long
(06:39):
as the bank is keeping a careful tally of where
all those dollars are ultimately going and earmarking where they're
meant to be, everything's fine and you can just skid
at all. Depending on how active the bank is in
loaning out cash, you know, if a lot of people
come in to do the same thing, there could be
a serious shortfall. Right. If it's one person closing out
(07:02):
their account, that's nothing, but if it's say sixty percent
of your customers, that is a huge issue. And you
get into the statement that you'd hear in It's a
wonderful life, you know, Oh, well, the money's not here.
It's a Joe's house that's right next to yours. George
Bailey would say, shout out to Shay who made me
(07:23):
watch that movie. So, if the bank's customers include large companies,
like companies that depend upon massive bank accounts in order
to do stuff like pay employees, like that's the payroll account.
Things can get really really bad, right if there's a run,
Like if a company says, you know what, I don't
(07:44):
trust that this bank is going to be able to
stay in business. I've got hundreds of millions of dollars
in there. I need to pull it out. That's going
to be a massive hit to that bank, and it
ends up perpetuating the very problem that you're worried about
in the first place. So that's the too long, didn't
listen version of this story. Like you technically know what
(08:05):
happened to Silicon Valley Bank at this point, there was
a run on the bank. SVB could not cover all
the withdrawals. The us FDIC had to sweep in and
shut things down and take over. But there is a
lot more to this story, So hopefully you're going to
stick with me for the long run, and we're going
to cover the whole thing. So let's start by talking
(08:26):
about where Silicon Valley Bank even came from in the
first place. So we could go way, way way back,
but let's just start with the late seventies. You know,
disc goes on the decline. New wave is gearing up
to take over. A little movie called Star Wars changed
both film and merchandising forever. And a couple of casual
(08:46):
poker players came up with an idea for a bank
that could play an integral part in the blossoming Silicon
Valley landscape. Keep in mind the seventies, that's when we
just start seeing the very earliest stages of the Silicon
Valley flourishing, you know, that's when we started to see
the hobbyist community end up turning into the personal computer community.
(09:13):
It was an exciting time, and stuff was changing incredibly rapidly.
It seemed like the whole world was obeying Moore's law
at that point. All right, Well, one of these two
poker buddies was Robert Madeiras, a man from Kansas who
had moved to California to attend Stanford where he studied
civil engineering. Then he joined the Navy and served for
(09:36):
three years, and after that he pursued a degree at
Harvard Business School, and then after that he got into
a real estate company and moved back to California and
ultimately became a consulting professor back at Stanford, and there
he was encountering students who were facing very similar challenges.
These were students who had compelling ideas for a tech
(09:58):
based business, but how would they secure funding. They didn't
have the collateral needed to get big loans to start
a business. The tech business is a challenging one to
jump into. It has a lot of upfront costs that
are pretty darn high. And this was before the venture
(10:19):
capital community had really become a thing. So who was
going to make the risk of loaning money out to
these small startup businesses that could potentially become huge but
you don't know for sure. Most of the established banks
weren't interested in taking on that kind of risk. Robert
(10:42):
or Bob as he was often called, met Bill Biggerstaff,
a man who worked for Wells Fargo, so who had
a lot of experience in the banking industry. These two
lived in the same area. They were playing tennis together.
They're the ones who went into together on a poker
game that had a lot of movers and shakers and
(11:03):
Silicon Valley in it, and Bob decided to bend Bill's
ear about this idea that Bob had and essentially Bob's
idea was to create a financial institution, to create a
bank that primarily existed as a way to loan money
to startups and help get these concepts off the ground,
and in return, you know, they would end up getting
(11:25):
money and interest in all that sort of stuff. So
it was a key piece that was missing early in
the days of Silicon Valley. And around this time, another
important thing was happening. The Reagan administration in the United
States was easing off of regulations that otherwise would make
it challenging to start a new bank. So the thought
(11:46):
was that if you ease off on regulations, then more
local banks can form. People can actually make banks in
their local communities. These banks will support that local community
through loans, So you start to have money funneling into
(12:06):
communities and allowing those communities to grow by easing off
on the regulations that otherwise would make it difficult to
establish a bank. So the regulatory environment changed. Bob recognized
a need in the tech space, and Bill had the
banking experience. Plus Bill was apparently really really good at networking,
(12:26):
and he had already built up some strong connections throughout
Silicon Valley. You had the Stanford connections with the students
who were eager to start up their businesses fresh out
of school, I mean for ages. These tech colleges have
also acted kind of like incubators for tech startups. Now,
this was not an overnight effort. It actually took around
(12:48):
three years from the time they started talking about it
to when they were able to secure a charter for
their bank. So now we're up to nineteen eighty three.
Tom Cruise has the iconic risky business hit theaters, ensuring
that countless people over the years will copy his lip
singing style. While wearing tidy whiteis and a half unbuttoned shirt,
(13:08):
Bonnie Tyler was singing Total Eclipse of the Heart, the
song that was originally intended for a musical about vampires.
That's totally a real thing, look it up. And then
Bob and Bill brought on a third founder for the SVB.
This was a guy named Roger Smith who came from
the banking world as well, and Roger joined just as
(13:29):
the bank received its charter and became known as Silicon
Valley Bank. We got a lot more to talk about,
but before we get to that, let's take a quick break. Okay,
(13:50):
So Silicon Valley bank establishes itself in nineteen eighty three. Now,
at that time, the phrase Silicon Valley wasn't nearly as
well known as it is today. There were a lot
of startup tech companies that had Silicon in their names,
but it's not like Silicon Valley had really taken hold
(14:10):
in culture yet. So in many ways, the founders were
lucky that things went the way they did, or you
could argue they weren't lucky. Maybe they actually helped forge
the reality of Silicon Valley because now tech companies had
a bank that would cater to them that welcomed their business.
(14:30):
Tech startups that had previously found it difficult to secure
loans through traditional banks had another option. Now this didn't
mean that SBB gave out loans to absolutely anyone. They
still evaluated them, but they were much more likely to
grant a loan out to someone who seemed to have
a really strong idea and helped fund those early tech
(14:53):
companies in Silicon Valley. And of course we all know
that the tech industry would explode and grow to gargaguin proportions,
and SVB would grow along with the rest of the industry.
Along the way. It helped fuel countless startups, some of
which would grow in turn, and others would, of course
(15:16):
unfortunately flounder and fail, and more established tech companies would
continue to bank with SVB and use massive accounts to
handle stuff like payroll. So, as you might imagine, the
payroll account has to be really, really really large for
some of these tech companies. And then you had like
venture capitalists who were using the bank to help fund
(15:37):
their investments. And all of this was sort of this
mutually beneficial relationship, a symbiotic relationship, but one in which
if any party were to suffer disproportionately, it would ultimately
hurt the others in it as well. That's foreshadowing, all right.
(16:00):
So how do we go from a bank that is
a financial pillar for much of the tech industries, really
of the startup industry in particular, but for established companies too,
how do we go from that to a bank that
collapses in a matter of a couple of days. Well,
(16:20):
while there are some overlaps with silver Gate, this one
didn't have anything to do with crypto, but it had
a lot to do about interest rates. So if you're
lucky enough to never have had to worry about interest rates,
I'll give you a quick explanation. An interest rate is
the amount that's paid on top of a sum of money.
(16:42):
So we mostly talked about this in the form of loans.
I mean there's you know, like bank account interest rates too,
which goes to the opposite direction. But with loans, you know,
you have the amount that you borrowed, and the interest
rate is the amount on top of what you borrowed
that you will pay back to the lender. So we
(17:02):
usually think of this as percentages. Actually we think of
it an annual percentage rates or APR. So this tells
you how much of a percentage of the amount you've
borrowed on top of that you're going to be paying back. Right, So,
if interest rates are low, folks are more eager to
take out loans because they're not paying as much on
top of the loan amount itself. It is less expensive
(17:25):
to take out a loan. You keep more of the
money that you make using that loan to do whatever
it is you wanted to do, assuming that you know
it was being put forth in a way where it
was going to generate revenue. Otherwise, what you think of
it is it's a way to manage debt. You don't
go for a loan that has a high interest rate
because that means you're going to be owing even more
(17:46):
money in the long term. So this encourages stuff like investments. Right.
A person might take out a loan to invest money
into a project if there's a low interest rate on
the loan because they might believe, Hey, this project's to
pay out big time, and then I could pay off
the loan, I can pay off the interest, I could
pass go collect two hundred dollars. I'm in the clear.
(18:08):
I've made a profit. But when interest rates go up, well,
it becomes much more expensive to secure a loan. Right,
You've got to pay more on top of the loaned amount,
and that cuts into whatever profit you might realize with
your projects. So even if your project is a success,
you're not going to make as much money because you
got to pay that interest rate back to the lender.
(18:30):
So this kind of dampens down the enthusiasm to invest
in projects. Right. I mean, some of these projects might
take a long time to start realizing a revenue. In fact,
some of them may have no business plan to speak of,
and that the real plan isn't to make money as
a business, but to hopefully get gobbled up by some
(18:52):
bigger fish for a large payout. But all of these
things can take time, and meanwhile, you know, you've got
your loan payments at that interest rate on top of them,
and that could be a real buzzkill, so it can
really slow down investments in the space. But for a
really long time, interest rates in the US were super
duper low, and you know, more recently they were super
(19:14):
duper duper low, and you might think, oh, super low
interest rates, that means way more loans, and a bank
specializing in loans to the tech sector was going to
see a whole lot of business. And often that would
be true, except recently you were in a tech sector
where companies, including venture capitalist companies, were just flush with cash.
(19:40):
There was very little need for loans because everyone already
had the cash on hand to make investments. So, like
venture capital companies, they might invest in companies that then
go public, and as part of going public, the venture
capitalists they get paid out, so they realize a huge
return on that initial investment. So now they've got way
(20:01):
more cash than they did before, they don't necessarily need
to go and secure a loan for their next investment.
So SVB actually mentioned this in their ten K report
a few weeks ago. This is a straight quote from
that report. Quote. Much of the recent deposit growth was
driven by our clients across all segments obtaining liquidity through
(20:25):
liquidity events such as IPOs, secondary offerings, SPAC fundraising, venture
capital investments, acquisitions, and other fundraising activities, which during twenty
twenty one and early twenty twenty two were at notably
high levels end quote. So in other words, ain't no
(20:45):
one going to get a loan? They are all flush
with cash. So SBB saw bank accounts swell with deposits.
The deposit amount was growing with SVB, but the needs
for loans were dropping. So you gotta remember a bank
is a business. If the bank is not issuing as
(21:05):
many loans, how then does it make money as a business. Well,
SVB started to purchase stuff like treasury bonds and government securities.
These payout at a rate where it's you know, you're
able to redeem them for more than what it costs
to buy them, but it takes time for them to mature.
(21:25):
If you try to cash out early, you get way
less for them than if you held onto them for
the whole time. Silvergate had previously poured a lot of
money into these and part of silver gates crisis was
that it was selling off its assets for way less
than what had been planned, just to cover the withdrawals
that were happening at the time, and the cascade meant
(21:48):
that the bank was unable to remain solvent. While SVB
catered to a different, more established clientele, it suffered a
very similar fate. At the end of twenty twenty two,
SVB held on around one hundred and twenty billion dollars
worth of securities. Now it gets more complicated than that.
(22:09):
There are different types of securities, and a bank has
to say what type of security it's investing in when
it doesn't so there are held to maturity or HTM securities.
Those are ones that, as the name suggests, you hold
onto until they mature, at which case then you can
sell them off. But in the meantime they're on your accounts.
(22:32):
Whether the market values go up or down. They have
to stay there on your accounts until it's time for
them to be sold because they have matured. Now to
get into the real nuts and bolts of all this
would require a finance podcaster type that ain't me but
just know that some securities are HTM and some are
you know, you can sell whenever you like, but they
(22:54):
are subject to the fluctuations of market value, which means
at times they can be worth less than what you
paid for them. Previously, SBB had put a lot of
its assets into the HTM style of securities. However, as
long as everyone remained chill, SVB would have been fine. Right. Yes,
(23:16):
it had poured a lot of its money into these
long term securities, which meant that it was all tied up,
and that meant that they didn't have as much money
in their and their vault. You could think of it
that way. They didn't have as much money in the
vault to cover everybody's accounts. But again, if everyone had
stayed chill, things would have been okay. The only thing
(23:38):
that would really upset the apple cart would be something
like interest rates going up significantly or a run on
the bank. And then the interest rate went up significantly.
Now the reason for that was that the US federal
government was trying to counteract inflation. And again, this gets
super in the weeds and it's kind of beyond a
tech podcast, but we'll give the super oversimplified explanation. So
(24:01):
when demand is high but supply is limited, prices go up. Right, Like,
if everybody wants eggs, but there's only you know, enough
eggs for twenty percent of the people there, those egg
prices go way, way, way up. Everybody wants them, there's
not enough for everybody, and the market settles this out
(24:23):
by making them ridiculously expensive. Basic laws of supply demand, Right.
But if costs keep going up, then you have a
problem with inflation on your hands. That the purchasing power
of your money decreases and it requires more and more
and more money to buy basic stuff. And even if
you are really careful with your cash, if suddenly your
(24:46):
cash buys less because of its purchasing power, there's not
much you can do as an individual. So what the
government does is it adjusts something called the federal funds rate.
When banks lend money to other banks, they do so
using the federal funds rate. This rate, in turn influences
(25:07):
the interest rates that banks use on their loans. So
if you turn the dial on the federal funds rate,
this kind of trickles down through the rest of the
banking and loan industry. All right, So by cranking up
the federal funds rate, the interest rates across the board
start to go up, and that means it gets more
(25:28):
expensive if you want to borrow money, So that discourages
people from borrowing money, which also means it discourages people
from spending that borrowed money on stuff. That means demand
starts to go down because people are holding onto their
cash right, they're not spending it as readily. So as
demand goes down, prices go down. So hiking up the
(25:52):
interest rate convinces folks to go without. That in turn
means the price for goods and services drop and we
end up sidestepping some inflation problems. We're all in this together,
in other words, all right back to SVB. So the
interest rates go up, investment companies start to clamp down
on investments. Startups still need money to operate, but now
(26:16):
venture capitalist sources are dried up because they don't want
to overextend themselves. They don't want to borrow money with
the interest rate being so high, So now startups are
starting to have to dip into their own reserves in
order to cover operating costs. So SVB has funds in
(26:38):
its vaults, but it's also heavily invested in these securities
and it's not supposed to touch those for several more
years because they haven't matured yet. So as companies begin
to withdraw more and more money just to cover costs,
SVB with seeing its reserves depleted. Now, this could still
have been salvageable if there had not been a run
(26:58):
on the bank, but when you've got big companies that
are depending on money being there so that they can
do stuff like make payroll, stakes are pretty darn high.
So more and more customers were concerned that they wouldn't
be able to operate if they didn't withdraw all their
money because they were worried about what might happen to SVB.
(27:19):
So for SVB to cover all these withdrawals, they had
to start selling off some of those securities. But these
securities weren't mature yet, so they were selling them at
a pretty massive loss. In fact, that loss was nearly
two billion dollars. However, it gave SVB liquidity, right. They
suddenly had cash where they could cover withdrawals at least
(27:41):
for a short time, even though the business itself was
taking this massive loss in the process. Then Silvergate goes
belly up and investors freak the heck out. Now, mind you,
the issues at Silvergate were different from SVB. I mean, yes,
(28:01):
SVB and Silvergate both were dependent upon securities, but silver
gates problems were largely due to its involvement in the
crypto world. That was not something that was a big
concern for SVB. But the big players, you know, entities
that had hundreds of millions or even billions of dollars
(28:23):
in SVB started to pull out, and some fund management
companies started to tell their clients, hey, you probably want
to get your money out of SVB while you still
can before they run out of cash and things really
go south. That creates this panic, and it actually creates
the very problem that the companies were trying to escape from.
(28:44):
Right They were worried that everybody else was going to
do the thing that they were telling people to do,
Whereas if everyone had just chilled, then it's quite possible
that this collapse could have been avoided. But because everybody
was scared and they were all trying to get their
money at the same time, SVB was put into an
impossible situation. So over the course of last Thursday and Friday,
(29:10):
enough big players try to withdraw their money to that
forced SVB to shut down, and the FDIC swooped in
to try and salvage things, or really just to stop
things from getting way worse than they already were. Okay,
we'll explain more about that, but first, let's take another
quick break. All right, Now, let's finally talk about the
(29:39):
FDIC that actually stands for the Federal Deposit Insurance Corporation.
So this organization ensures deposits and most banks in the
United States. The word boast is important. Most banks are
ensured by FDIC, and the FDIC is there to provide
protection to customers and avoid a situation in which a
(30:00):
bank fails and then all the customer money goes up
and spoke right, That would be awful if you had
done nothing wrong, but you are suddenly pennyless because the
money you had deposited in a bank is gone, because
the bank itself is gone. That's why the FDIC exists.
It ensures the money you put in the bank so
(30:22):
that if the bank goes down, you still have that money.
The FDIC gives you your money, but there is a limit.
There's an FDIC limit on the amount of money it
can ensure her account, and that limit is two hundred
fifty thousand dollars in an account. Now, most of us
(30:43):
would consider ourselves incredibly fortunate if we happen to have
more than two hundred and fifty thousand dollars to put
into a bank. But when you're talking about tech companies
that are handling massive business transactions, a quarter of a
million dollars is just a drop of the bucket for
some of these companies. Going back to the example I
keep mentioning payroll being a huge one. Right, if you
(31:05):
are a sizeable company and you've got a big payroll
and you need to have a bank account to handle
the transactions, the amount of money that's going to go
into that account is going to be well in excess
of two hundred fifty thousand dollars, and anything beyond two
hundred fifty thousand dollars is uninsured. According to svb's own
regulatory filing earlier this year, about ninety percent of all
(31:30):
the deposits in SVB were uninsured. So that means like
ninety percent of the deposits were in accounts that exceeded
two hundred and fifty thousand dollars of FDIC protection, only
ten percent of deposits in that bank were in accounts
that held less than two hundred fifty thousand by December
(31:50):
of last year. That is incredible, right, So when the
FDIC stepped end, that is when I heard the other
folks destined to be on my flight to Austin, Texas
have their moment of panic. Presumably these were folks who
had accounts in SVB that were over this insured amount.
Whether they were personal accounts or part of business accounts,
(32:13):
I don't know, but that would be an enormous scary
prospect that you have massive, maybe millions of dollars in
this bank, and the bank has suddenly been seized by
regulators and only two hundred and fifty thousand dollars in
each account is insured. That could be a truly catastrophic loss.
(32:38):
Right to put it another way, SBB held one hundred
seventy three billion dollars in deposits at the end of
twenty twenty two. Total one hundred seventy three billion dollars
of customer money put into deposits in SVB. Of that,
one hundred fifty two billion was uninsured, so did one
(33:02):
hundred and fifty two billion dollars just plane disappear. Well,
SVB still held assets which can be liquidated to cover
some of the costs, but there was a lot of
uncertainty they didn't know, like how is the FDIC going
to handle this? How much of that unasured money will
be returned to depositors. On top of that, you still
(33:24):
had all these companies that needed to do stuff like
pay employees or make other big transactions, but their money
happened to be tied to accounts that were in a
shutdown financial institution, which totally throws a monkey wrench in
corporate operations. So you suddenly have these tech companies that
don't even know if they're going to be able to
do basic stuff like pay rent, pay employees. You know,
(33:49):
all the mundane, regular transactions are completely disrupted because the
financial institution at the heart of things has been seized.
That uncertainty bread a lot of fear, understandably, like even
people who weren't control of the money are scared. Like
if you work for one of these big companies, you
(34:10):
might wonder, am I going to get a paycheck this month?
How long until I get my next paycheck? How much
money do I have to be able to cover expenses
until that paycheck gets to me. It's a big, big deal.
And again, it was affecting pretty much the entire tech
sector because so many companies were making use of this bank.
(34:34):
Now the US government has stepped up and essentially announced
a bailout that the government is going to cover the
money deposited in SVB, even the uninsured amounts of money. Now,
this was done in large part to try and stop
a more general run on banks across the country. Again,
banks are not inherently in danger of collapse. Some might
(34:57):
have overextended on securities in the wake of lower numbers
of loans, and they might also be a little worried
because of interest rates. But as long as people don't panic,
things can turn out okay in the long run. So
this was a big move to try and stop a panic,
specifically within the tech sector. Right. So another thing I
(35:18):
should point out is while SBB truly was a pillar
in the tech community, it wasn't the only one. There
are other banks that tech companies use for all these
different purposes. Right, It's not like everything all the eggs
were in this one basket. That's not the case. But
then the fear was, well, we saw what happened to
(35:39):
silver Gate, and then we saw what happened to SVB,
so that might end up happening to this other bank.
We use, let's proactively remove our money from there so
that it's safe before disaster strikes. But that in turn
becomes the disaster. Right Like, if you have people saying,
let's pull our all our money out now, then that
(36:01):
creates the very problem that you're trying to avoid experiencing.
So again it becomes this self fulfilling prophecy. Now, one
of the many reasons why the government has come in
to say they are going to cover all of these deposits,
even the uninsured ones, is also because not only did
(36:22):
we have Silvergate and SBB both fail within a week,
then on Sunday yesterday, Signature Bank collapsed. Signature Bank is
not based in California. It's a New York based bank.
It is a bank that starts with the letter S,
so that's something that has in common with the other two.
But yeah, yesterday, which was Sunday, March twelve, twenty twenty three,
(36:45):
for those of you who are listening from the future,
regulators stepped into closed down signature like Silvergate, Signature was
once focused primarily on real estate loans, just in the
New York area instead of California, but it had also
become a bridge into the crypto world, so it became
kind of one of these financial institutions that connects the
(37:09):
regular financial world with the crypto financial world. And like Silvergate,
the collapse of massive crypto entities like FTX and others
really pulled the rug out from beneath Signature and left
it unsteady. So the bank tried to find a buyer
this past week in order to try and remain in business,
but it just didn't happen, and again the government had
(37:32):
to step in. Regulators are assuring all customers of Signature
that they will also get their money back, even if
it was above the two hundred and fifty thousand dollars limit,
just with SVB, and again this is sort of a
preventive measure to try and avoid a more broad panic
(37:52):
in the United States. And in order to support that,
I want to stress the problems of these three financial
institutions are not universal across all financial institutions, and further,
it is a situation that gets worse if people all
try to pull their money out it becomes that self
fulfilling prophecy I was talking about, kind of like when
(38:13):
there was a fear that at the beginning of the
pandemic that you wouldn't be able to get toilet paper,
which caused people to hoard toilet paper, which meant that
you couldn't get toilet paper. That was the self fulfilling
prophecy of that moment. We're seeing the same sort of
thing with these banks. Now what this means all in
the long term, that's very hard to say. Right now,
Chances are a lot of companies are going to struggle
(38:37):
in the short term, particularly in the tech space and
specifically in the crypto space. The crypto world in particular
is facing even more uncertainty right now because regulators are
picking up the pieces of these established financial institutions in
the quote unquote real world, and now they're giving a
massive side eye to the crypto community. Like regulars were
(39:00):
already concerned about crypto, but the failure of regular banks
who were connected to crypto has made this a much
more relevant issue for regulators at the moment. For crypto
companies that we're hoping to continue to flourish without pressure
from regulators, I suspect things are going to change rapidly
(39:22):
over the next few months. We're going to see that
dreaded interference from regulators as a result of this. I
am being a little facetious when I say dreaded. I
mean like, there are people within the crypto community who
really really want to resist any sort of regulation. But
I would argue the lack of regulation has led to
(39:47):
situations being rife for scams, for crime, and for massive
amounts of fraud, and that this in turn stands to
be a more existential threat to the crypto community than
regulations would. I think regulations are a small price to
(40:08):
pay if you want the crypto world to continue. If
you don't want the crypto world to continue, yeah, get
rid of regulations. You'll self destruct, because we've already seen
it happen, not because of the intentions of the people
who are putting the community together, but because you'll find
opportunists who say, ah, I can leverage the lack of
regulations to make a huge amount of money at the
(40:28):
expense of everybody else. Ha ha ha. So yeah, I
have very little patience for this, because if you want
the crypto world to actually establish itself and flourish. I
think regulations are absolutely required. There have to be controls,
(40:48):
or else you have the situations we've seen in the
last couple of years crop up now. I think these
events have shown how there are some inherent weaknesses in
fueling the crazy world of VC investment in the tech space,
as well as the enthusiasm around the crypto space. But
I think a lot of us already had a hunch
(41:10):
that this world was always toying with massive risk. It's
not like that's brand new news to any of us.
It does serve as a reminder that we should always
use critical thinking when we're engaged in these kinds of activities,
that we should ask tough questions. That should include asking
(41:31):
tough questions of is it right for me to hold
off on pulling my money out so that I don't
make the problem worse? Or is it a case where
you really do have to pull your money out because
if you don't, the problem is everybody else has already acted,
and then you're left holding the bag. That's what everyone's
afraid of. And unfortunately, unless everybody kind of agrees on
(41:55):
the front end, like no, we're all going to be
cool and wait this out. It's kind of unavoidable. It
sort of comes into the prisoner's dilemma scenario where no
one has enough trust and everybody else to assume that
things will be okay, so they have to act in
self interest because they're convinced that everyone else is going
to do the same thing, and if you don't do
(42:17):
it first, you're going to be the one who is
left with no money because the bank went went under.
That's why the government is trying to step in and
stop all this from escalating. So, yeah, scary time, you know,
one of the many like scary moments in tech, in
(42:38):
tech finance really that I have seen. You know, it
kind of reminds me in ways of what it felt
like when the dot com bubble was bursting and we
started to see all the enthusiasm and hype that had
built up these these startup companies into overbloated, overfunded entity
(43:00):
and then how it all came crashing down. That was
very sobering. I think that we're in a similar moment now.
It'll be easier to say when we have more distance
from it, maybe like five years from now, we won't
even think about this, But at the moment it feels
like it's pretty big. Anyway, that's it for today's episode.
(43:21):
Hope that was informative and interesting to you. I think
it is really important to understand these things because again,
without the world of money, than all the tech stuff.
Not to quote the name of the show, but all
the tech stuff we talk about wouldn't exist. The money
has to be there for these things to even become reality.
(43:44):
So I think that it's an important note to get
an understanding of that. It also helps kind of keep
us in the right headspace when we're thinking about supporting tech,
because it really reinforces that we need to be responsible
and careful in the way we do that and not
(44:05):
just try and pounce on what we see as an
opportunity to print money. I think more and more we
see those kinds of flagrant investments where it's just it's
this thought that, oh, I'm going to see a hundred
times return on this investment, so that's why I'm pouring
money into it. I don't think that's always the most
healthy approach. It's not sustainable in the long run in
(44:28):
my opinion. But I also want to acknowledge I am
not a financial expert. I'm not an investment expert. I'm
certainly not you know, a millionaire. I'm nothing. I'm none
of those things. So it's very, very very possible that
I am in the wrong here. It's just kind of
my gut feeling. But we all know that gut feelings
(44:49):
ultimately have limited reliability, so just keep that in mind.
If you have topics you would like me to cover
in future episodes of tech Stuff, please each out and
let me know. You can do that by sending me
a message on Twitter. The handle for the show is
tech Stuff HSW or you can download the iHeartRadio app.
It's free to download, free to use. Just navigate over
(45:11):
to tech Stuff use that little search field. Go to
the tech stuff page. You'll see there's a little microphone icon.
If you click on that, you can leave a voice
message up to thirty seconds in length. Let me know
what you would like me to talk about, and I'll
talk to you again really soon. Tech Stuff is an
(45:32):
iHeartRadio production. For more podcasts from iHeartRadio, visit the iHeartRadio app,
Apple Podcasts, or wherever you listen to your favorite shows.
Welcome to tech Stuff, a production from iHeartRadio. He there,
and welcome to tech Stuff. I'm your host, Jonathan Strickland.
I'm an executive producer with iHeartRadio, and how the tech
are you. I don't frequently dedicate Monday episodes to the news,
(00:25):
but I feel like this time I kind of have to.
So last Friday, I was in the Atlanta airport and
I was getting ready to board a flight to Austin,
Texas so that I could participate in an iHeartMedia panel
discussion at south By Southwest, which went really well. But
that's neither here north Air. So there I am in
the airport. I'm just sitting at the gate waiting for
(00:48):
my zone to get called, and I hear a little
bit of a hubbub, perhaps even occur fuffle, not a
full blown commotion, but something is definitely going down right,
like there's some chat going on, and I had my
earbuds in I was listening to podcasts. At that point,
I popped my earbuds out just to find out, you know,
(01:08):
being snoopy, what the heck is going on? And I
hear a bunch of very well dressed people speaking in hushed,
concerned tones. And I could tell that there was something
that was going on and it had to do with money,
but that was about all I could figure out. So
I pop out my phone to check for the news
(01:29):
to see if there's something that's come up that I
should be concerned about. And I'm looking at the headlines
and I don't see anything immediately that leads me to
real concern. But whatever it was that was happening must
have been pretty bad. These folks were clearly agitated, maybe
not quite at panic level, but not too far from that.
(01:50):
And then after I scoured the breaking news some more,
I finally figured it out. These folks were really important
people who work in the tech sector. They were on
their way to the tech conference portion of south By
Southwest like that's their world, and a bank that has
been a pivotal component in the tech and startup industries
(02:12):
had just collapsed. So today we're going to talk about
Silicon Valley Bank or SVB and what happened there, because
it does end up having an impact on the tech sector.
And it also was the second bank collapse in a week,
and then after that there was a third one, which
will cover at the end of this episode. So I
(02:34):
mentioned Silvergate Bank collapsed last week. So this was a
real estate bank or a bank that mainly dealt with
like real estate loans and that sort of stuff back
in southern California, but had jumped over to become a
bank in the crypto space. Around twenty fourteen. They had
their own crypto exchange, and they served as sort of
(02:56):
a bridge between the world of you know, US dollars
and then cryptocurrencies, or the way I often think about it,
even though I know it's ridiculous to think this way,
I think of it in terms of real money and
digital money. It's all digital, none of it's real. So
I realized this is just you know, a bias talking
(03:16):
in my head. Anyway. Silver Gates issues hit when some big,
big customers cryptocompanies in fact, like I'm not talking about
like a person, I'm talking about an entire company that
has a corporate account with Silvergate. Well, some of these
big customers were withdrawing lots and lots of money from
silver Gates accounts, and Silvergate had already been on rocky
(03:40):
ground when FTX collapsed late last year, and on top
of that, the US government was starting to look into
Silvergate to see if maybe there was anything hinky going
on with silver Gate, and whether there was stuff going
on or not. And I have no reason to believe
that hinkiness of any nature was happening. It doesn't really
(04:01):
matter in the long run, because the perception that there
could be trouble spooked a lot of customers of Silvergate
and they decided to pull their funds out in case
an investigation might uncover something that could lock up their money.
So there was a run on the bank at Silvergate,
and Silvergate did not have enough funds to cover all
(04:23):
the withdrawal requests, and as a result, it ultimately shut down. Now,
Silicon Valley Bank has some similarities to Silvergate in that
what led to svb's collapse was also ultimately a run
on the bank. So your classic run the bank happens
when customers lose confidence in a bank or a savings
(04:46):
and loan company in the case of it's a wonderful life,
or maybe there's some external financial pressure that convinces customers
they need to pull all their money out. Maybe they
don't have a loss of confidence in the bank itself,
but other economic conditions make people convince that they need
access to cash right, like, it's a liquidity problem. Again,
(05:07):
the cash and wealth are two different things, so it'll
get kind of muddled as we talk about this. But
the thing that happens is customers will rush to the
bank to retrieve their cash, to pull all their cash out.
They might think that that would be safer in their
hands than rather in a bank that could potentially be
in trouble. But the problem is banks typically they don't
(05:31):
have all of their customers money, Like the money you
deposit in your bank is not necessarily at your bank anymore.
At least, banks don't have everybody's money all at the
same time because banks are businesses, and as a business
they need to make money. And the way that banks
make money, the way they generate wealth, is that customers
(05:53):
deposit money into a bank. The bank then takes these
deposits and starts to loan out some of that money
to other people who pay the loan back with interest.
So over the long haul, your money is safely stored
in the bank and the bank is making money through
interest through its loans, and everybody's happy. But you know,
(06:15):
banks have lots and lots of customers. Under normal conditions,
there wouldn't be very much of a problem. If you
decide to go to your bank and close out your
account and withdraw all of your money. Normally that would
be fine because there are tons of other customers. There's
lots and lots of money in the bank. There's plenty
of it in there for the bank to send you
your cash and close out your account. So as long
(06:39):
as the bank is keeping a careful tally of where
all those dollars are ultimately going and earmarking where they're
meant to be, everything's fine and you can just skid
at all. Depending on how active the bank is in
loaning out cash, you know, if a lot of people
come in to do the same thing, there could be
a serious shortfall. Right. If it's one person closing out
(07:02):
their account, that's nothing, but if it's say sixty percent
of your customers, that is a huge issue. And you
get into the statement that you'd hear in It's a
wonderful life, you know, Oh, well, the money's not here.
It's a Joe's house that's right next to yours. George
Bailey would say, shout out to Shay who made me
(07:23):
watch that movie. So, if the bank's customers include large companies,
like companies that depend upon massive bank accounts in order
to do stuff like pay employees, like that's the payroll account.
Things can get really really bad, right if there's a run,
Like if a company says, you know what, I don't
(07:44):
trust that this bank is going to be able to
stay in business. I've got hundreds of millions of dollars
in there. I need to pull it out. That's going
to be a massive hit to that bank, and it
ends up perpetuating the very problem that you're worried about
in the first place. So that's the too long, didn't
listen version of this story. Like you technically know what
(08:05):
happened to Silicon Valley Bank at this point, there was
a run on the bank. SVB could not cover all
the withdrawals. The us FDIC had to sweep in and
shut things down and take over. But there is a
lot more to this story, So hopefully you're going to
stick with me for the long run, and we're going
to cover the whole thing. So let's start by talking
(08:26):
about where Silicon Valley Bank even came from in the
first place. So we could go way, way way back,
but let's just start with the late seventies. You know,
disc goes on the decline. New wave is gearing up
to take over. A little movie called Star Wars changed
both film and merchandising forever. And a couple of casual
(08:46):
poker players came up with an idea for a bank
that could play an integral part in the blossoming Silicon
Valley landscape. Keep in mind the seventies, that's when we
just start seeing the very earliest stages of the Silicon
Valley flourishing, you know, that's when we started to see
the hobbyist community end up turning into the personal computer community.
(09:13):
It was an exciting time, and stuff was changing incredibly rapidly.
It seemed like the whole world was obeying Moore's law
at that point. All right, Well, one of these two
poker buddies was Robert Madeiras, a man from Kansas who
had moved to California to attend Stanford where he studied
civil engineering. Then he joined the Navy and served for
(09:36):
three years, and after that he pursued a degree at
Harvard Business School, and then after that he got into
a real estate company and moved back to California and
ultimately became a consulting professor back at Stanford, and there
he was encountering students who were facing very similar challenges.
These were students who had compelling ideas for a tech
(09:58):
based business, but how would they secure funding. They didn't
have the collateral needed to get big loans to start
a business. The tech business is a challenging one to
jump into. It has a lot of upfront costs that
are pretty darn high. And this was before the venture
(10:19):
capital community had really become a thing. So who was
going to make the risk of loaning money out to
these small startup businesses that could potentially become huge but
you don't know for sure. Most of the established banks
weren't interested in taking on that kind of risk. Robert
(10:42):
or Bob as he was often called, met Bill Biggerstaff,
a man who worked for Wells Fargo, so who had
a lot of experience in the banking industry. These two
lived in the same area. They were playing tennis together.
They're the ones who went into together on a poker
game that had a lot of movers and shakers and
(11:03):
Silicon Valley in it, and Bob decided to bend Bill's
ear about this idea that Bob had and essentially Bob's
idea was to create a financial institution, to create a
bank that primarily existed as a way to loan money
to startups and help get these concepts off the ground,
and in return, you know, they would end up getting
(11:25):
money and interest in all that sort of stuff. So
it was a key piece that was missing early in
the days of Silicon Valley. And around this time, another
important thing was happening. The Reagan administration in the United
States was easing off of regulations that otherwise would make
it challenging to start a new bank. So the thought
(11:46):
was that if you ease off on regulations, then more
local banks can form. People can actually make banks in
their local communities. These banks will support that local community
through loans, So you start to have money funneling into
(12:06):
communities and allowing those communities to grow by easing off
on the regulations that otherwise would make it difficult to
establish a bank. So the regulatory environment changed. Bob recognized
a need in the tech space, and Bill had the
banking experience. Plus Bill was apparently really really good at networking,
(12:26):
and he had already built up some strong connections throughout
Silicon Valley. You had the Stanford connections with the students
who were eager to start up their businesses fresh out
of school, I mean for ages. These tech colleges have
also acted kind of like incubators for tech startups. Now,
this was not an overnight effort. It actually took around
(12:48):
three years from the time they started talking about it
to when they were able to secure a charter for
their bank. So now we're up to nineteen eighty three.
Tom Cruise has the iconic risky business hit theaters, ensuring
that countless people over the years will copy his lip
singing style. While wearing tidy whiteis and a half unbuttoned shirt,
(13:08):
Bonnie Tyler was singing Total Eclipse of the Heart, the
song that was originally intended for a musical about vampires.
That's totally a real thing, look it up. And then
Bob and Bill brought on a third founder for the SVB.
This was a guy named Roger Smith who came from
the banking world as well, and Roger joined just as
(13:29):
the bank received its charter and became known as Silicon
Valley Bank. We got a lot more to talk about,
but before we get to that, let's take a quick break. Okay,
(13:50):
So Silicon Valley bank establishes itself in nineteen eighty three. Now,
at that time, the phrase Silicon Valley wasn't nearly as
well known as it is today. There were a lot
of startup tech companies that had Silicon in their names,
but it's not like Silicon Valley had really taken hold
(14:10):
in culture yet. So in many ways, the founders were
lucky that things went the way they did, or you
could argue they weren't lucky. Maybe they actually helped forge
the reality of Silicon Valley because now tech companies had
a bank that would cater to them that welcomed their business.
(14:30):
Tech startups that had previously found it difficult to secure
loans through traditional banks had another option. Now this didn't
mean that SBB gave out loans to absolutely anyone. They
still evaluated them, but they were much more likely to
grant a loan out to someone who seemed to have
a really strong idea and helped fund those early tech
(14:53):
companies in Silicon Valley. And of course we all know
that the tech industry would explode and grow to gargaguin proportions,
and SVB would grow along with the rest of the industry.
Along the way. It helped fuel countless startups, some of
which would grow in turn, and others would, of course
(15:16):
unfortunately flounder and fail, and more established tech companies would
continue to bank with SVB and use massive accounts to
handle stuff like payroll. So, as you might imagine, the
payroll account has to be really, really really large for
some of these tech companies. And then you had like
venture capitalists who were using the bank to help fund
(15:37):
their investments. And all of this was sort of this
mutually beneficial relationship, a symbiotic relationship, but one in which
if any party were to suffer disproportionately, it would ultimately
hurt the others in it as well. That's foreshadowing, all right.
(16:00):
So how do we go from a bank that is
a financial pillar for much of the tech industries, really
of the startup industry in particular, but for established companies too,
how do we go from that to a bank that
collapses in a matter of a couple of days. Well,
(16:20):
while there are some overlaps with silver Gate, this one
didn't have anything to do with crypto, but it had
a lot to do about interest rates. So if you're
lucky enough to never have had to worry about interest rates,
I'll give you a quick explanation. An interest rate is
the amount that's paid on top of a sum of money.
(16:42):
So we mostly talked about this in the form of loans.
I mean there's you know, like bank account interest rates too,
which goes to the opposite direction. But with loans, you know,
you have the amount that you borrowed, and the interest
rate is the amount on top of what you borrowed
that you will pay back to the lender. So we
(17:02):
usually think of this as percentages. Actually we think of
it an annual percentage rates or APR. So this tells
you how much of a percentage of the amount you've
borrowed on top of that you're going to be paying back. Right, So,
if interest rates are low, folks are more eager to
take out loans because they're not paying as much on
top of the loan amount itself. It is less expensive
(17:25):
to take out a loan. You keep more of the
money that you make using that loan to do whatever
it is you wanted to do, assuming that you know
it was being put forth in a way where it
was going to generate revenue. Otherwise, what you think of
it is it's a way to manage debt. You don't
go for a loan that has a high interest rate
because that means you're going to be owing even more
(17:46):
money in the long term. So this encourages stuff like investments. Right.
A person might take out a loan to invest money
into a project if there's a low interest rate on
the loan because they might believe, Hey, this project's to
pay out big time, and then I could pay off
the loan, I can pay off the interest, I could
pass go collect two hundred dollars. I'm in the clear.
(18:08):
I've made a profit. But when interest rates go up, well,
it becomes much more expensive to secure a loan. Right,
You've got to pay more on top of the loaned amount,
and that cuts into whatever profit you might realize with
your projects. So even if your project is a success,
you're not going to make as much money because you
got to pay that interest rate back to the lender.
(18:30):
So this kind of dampens down the enthusiasm to invest
in projects. Right. I mean, some of these projects might
take a long time to start realizing a revenue. In fact,
some of them may have no business plan to speak of,
and that the real plan isn't to make money as
a business, but to hopefully get gobbled up by some
(18:52):
bigger fish for a large payout. But all of these
things can take time, and meanwhile, you know, you've got
your loan payments at that interest rate on top of them,
and that could be a real buzzkill, so it can
really slow down investments in the space. But for a
really long time, interest rates in the US were super
duper low, and you know, more recently they were super
(19:14):
duper duper low, and you might think, oh, super low
interest rates, that means way more loans, and a bank
specializing in loans to the tech sector was going to
see a whole lot of business. And often that would
be true, except recently you were in a tech sector
where companies, including venture capitalist companies, were just flush with cash.
(19:40):
There was very little need for loans because everyone already
had the cash on hand to make investments. So, like
venture capital companies, they might invest in companies that then
go public, and as part of going public, the venture
capitalists they get paid out, so they realize a huge
return on that initial investment. So now they've got way
(20:01):
more cash than they did before, they don't necessarily need
to go and secure a loan for their next investment.
So SVB actually mentioned this in their ten K report
a few weeks ago. This is a straight quote from
that report. Quote. Much of the recent deposit growth was
driven by our clients across all segments obtaining liquidity through
(20:25):
liquidity events such as IPOs, secondary offerings, SPAC fundraising, venture
capital investments, acquisitions, and other fundraising activities, which during twenty
twenty one and early twenty twenty two were at notably
high levels end quote. So in other words, ain't no
(20:45):
one going to get a loan? They are all flush
with cash. So SBB saw bank accounts swell with deposits.
The deposit amount was growing with SVB, but the needs
for loans were dropping. So you gotta remember a bank
is a business. If the bank is not issuing as
(21:05):
many loans, how then does it make money as a business. Well,
SVB started to purchase stuff like treasury bonds and government securities.
These payout at a rate where it's you know, you're
able to redeem them for more than what it costs
to buy them, but it takes time for them to mature.
(21:25):
If you try to cash out early, you get way
less for them than if you held onto them for
the whole time. Silvergate had previously poured a lot of
money into these and part of silver gates crisis was
that it was selling off its assets for way less
than what had been planned, just to cover the withdrawals
that were happening at the time, and the cascade meant
(21:48):
that the bank was unable to remain solvent. While SVB
catered to a different, more established clientele, it suffered a
very similar fate. At the end of twenty twenty two,
SVB held on around one hundred and twenty billion dollars
worth of securities. Now it gets more complicated than that.
(22:09):
There are different types of securities, and a bank has
to say what type of security it's investing in when
it doesn't so there are held to maturity or HTM securities.
Those are ones that, as the name suggests, you hold
onto until they mature, at which case then you can
sell them off. But in the meantime they're on your accounts.
(22:32):
Whether the market values go up or down. They have
to stay there on your accounts until it's time for
them to be sold because they have matured. Now to
get into the real nuts and bolts of all this
would require a finance podcaster type that ain't me but
just know that some securities are HTM and some are
you know, you can sell whenever you like, but they
(22:54):
are subject to the fluctuations of market value, which means
at times they can be worth less than what you
paid for them. Previously, SBB had put a lot of
its assets into the HTM style of securities. However, as
long as everyone remained chill, SVB would have been fine. Right. Yes,
(23:16):
it had poured a lot of its money into these
long term securities, which meant that it was all tied up,
and that meant that they didn't have as much money
in their and their vault. You could think of it
that way. They didn't have as much money in the
vault to cover everybody's accounts. But again, if everyone had
stayed chill, things would have been okay. The only thing
(23:38):
that would really upset the apple cart would be something
like interest rates going up significantly or a run on
the bank. And then the interest rate went up significantly.
Now the reason for that was that the US federal
government was trying to counteract inflation. And again, this gets
super in the weeds and it's kind of beyond a
tech podcast, but we'll give the super oversimplified explanation. So
(24:01):
when demand is high but supply is limited, prices go up. Right, Like,
if everybody wants eggs, but there's only you know, enough
eggs for twenty percent of the people there, those egg
prices go way, way, way up. Everybody wants them, there's
not enough for everybody, and the market settles this out
(24:23):
by making them ridiculously expensive. Basic laws of supply demand, Right.
But if costs keep going up, then you have a
problem with inflation on your hands. That the purchasing power
of your money decreases and it requires more and more
and more money to buy basic stuff. And even if
you are really careful with your cash, if suddenly your
(24:46):
cash buys less because of its purchasing power, there's not
much you can do as an individual. So what the
government does is it adjusts something called the federal funds rate.
When banks lend money to other banks, they do so
using the federal funds rate. This rate, in turn influences
(25:07):
the interest rates that banks use on their loans. So
if you turn the dial on the federal funds rate,
this kind of trickles down through the rest of the
banking and loan industry. All right, So by cranking up
the federal funds rate, the interest rates across the board
start to go up, and that means it gets more
(25:28):
expensive if you want to borrow money, So that discourages
people from borrowing money, which also means it discourages people
from spending that borrowed money on stuff. That means demand
starts to go down because people are holding onto their
cash right, they're not spending it as readily. So as
demand goes down, prices go down. So hiking up the
(25:52):
interest rate convinces folks to go without. That in turn
means the price for goods and services drop and we
end up sidestepping some inflation problems. We're all in this together,
in other words, all right back to SVB. So the
interest rates go up, investment companies start to clamp down
on investments. Startups still need money to operate, but now
(26:16):
venture capitalist sources are dried up because they don't want
to overextend themselves. They don't want to borrow money with
the interest rate being so high, So now startups are
starting to have to dip into their own reserves in
order to cover operating costs. So SVB has funds in
(26:38):
its vaults, but it's also heavily invested in these securities
and it's not supposed to touch those for several more
years because they haven't matured yet. So as companies begin
to withdraw more and more money just to cover costs,
SVB with seeing its reserves depleted. Now, this could still
have been salvageable if there had not been a run
(26:58):
on the bank, but when you've got big companies that
are depending on money being there so that they can
do stuff like make payroll, stakes are pretty darn high.
So more and more customers were concerned that they wouldn't
be able to operate if they didn't withdraw all their
money because they were worried about what might happen to SVB.
(27:19):
So for SVB to cover all these withdrawals, they had
to start selling off some of those securities. But these
securities weren't mature yet, so they were selling them at
a pretty massive loss. In fact, that loss was nearly
two billion dollars. However, it gave SVB liquidity, right. They
suddenly had cash where they could cover withdrawals at least
(27:41):
for a short time, even though the business itself was
taking this massive loss in the process. Then Silvergate goes
belly up and investors freak the heck out. Now, mind you,
the issues at Silvergate were different from SVB. I mean, yes,
(28:01):
SVB and Silvergate both were dependent upon securities, but silver
gates problems were largely due to its involvement in the
crypto world. That was not something that was a big
concern for SVB. But the big players, you know, entities
that had hundreds of millions or even billions of dollars
(28:23):
in SVB started to pull out, and some fund management
companies started to tell their clients, hey, you probably want
to get your money out of SVB while you still
can before they run out of cash and things really
go south. That creates this panic, and it actually creates
the very problem that the companies were trying to escape from.
(28:44):
Right They were worried that everybody else was going to
do the thing that they were telling people to do,
Whereas if everyone had just chilled, then it's quite possible
that this collapse could have been avoided. But because everybody
was scared and they were all trying to get their
money at the same time, SVB was put into an
impossible situation. So over the course of last Thursday and Friday,
(29:10):
enough big players try to withdraw their money to that
forced SVB to shut down, and the FDIC swooped in
to try and salvage things, or really just to stop
things from getting way worse than they already were. Okay,
we'll explain more about that, but first, let's take another
quick break. All right, Now, let's finally talk about the
(29:39):
FDIC that actually stands for the Federal Deposit Insurance Corporation.
So this organization ensures deposits and most banks in the
United States. The word boast is important. Most banks are
ensured by FDIC, and the FDIC is there to provide
protection to customers and avoid a situation in which a
(30:00):
bank fails and then all the customer money goes up
and spoke right, That would be awful if you had
done nothing wrong, but you are suddenly pennyless because the
money you had deposited in a bank is gone, because
the bank itself is gone. That's why the FDIC exists.
It ensures the money you put in the bank so
(30:22):
that if the bank goes down, you still have that money.
The FDIC gives you your money, but there is a limit.
There's an FDIC limit on the amount of money it
can ensure her account, and that limit is two hundred
fifty thousand dollars in an account. Now, most of us
(30:43):
would consider ourselves incredibly fortunate if we happen to have
more than two hundred and fifty thousand dollars to put
into a bank. But when you're talking about tech companies
that are handling massive business transactions, a quarter of a
million dollars is just a drop of the bucket for
some of these companies. Going back to the example I
keep mentioning payroll being a huge one. Right, if you
(31:05):
are a sizeable company and you've got a big payroll
and you need to have a bank account to handle
the transactions, the amount of money that's going to go
into that account is going to be well in excess
of two hundred fifty thousand dollars, and anything beyond two
hundred fifty thousand dollars is uninsured. According to svb's own
regulatory filing earlier this year, about ninety percent of all
(31:30):
the deposits in SVB were uninsured. So that means like
ninety percent of the deposits were in accounts that exceeded
two hundred and fifty thousand dollars of FDIC protection, only
ten percent of deposits in that bank were in accounts
that held less than two hundred fifty thousand by December
(31:50):
of last year. That is incredible, right, So when the
FDIC stepped end, that is when I heard the other
folks destined to be on my flight to Austin, Texas
have their moment of panic. Presumably these were folks who
had accounts in SVB that were over this insured amount.
Whether they were personal accounts or part of business accounts,
(32:13):
I don't know, but that would be an enormous scary
prospect that you have massive, maybe millions of dollars in
this bank, and the bank has suddenly been seized by
regulators and only two hundred and fifty thousand dollars in
each account is insured. That could be a truly catastrophic loss.
(32:38):
Right to put it another way, SBB held one hundred
seventy three billion dollars in deposits at the end of
twenty twenty two. Total one hundred seventy three billion dollars
of customer money put into deposits in SVB. Of that,
one hundred fifty two billion was uninsured, so did one
(33:02):
hundred and fifty two billion dollars just plane disappear. Well,
SVB still held assets which can be liquidated to cover
some of the costs, but there was a lot of
uncertainty they didn't know, like how is the FDIC going
to handle this? How much of that unasured money will
be returned to depositors. On top of that, you still
(33:24):
had all these companies that needed to do stuff like
pay employees or make other big transactions, but their money
happened to be tied to accounts that were in a
shutdown financial institution, which totally throws a monkey wrench in
corporate operations. So you suddenly have these tech companies that
don't even know if they're going to be able to
do basic stuff like pay rent, pay employees. You know,
(33:49):
all the mundane, regular transactions are completely disrupted because the
financial institution at the heart of things has been seized.
That uncertainty bread a lot of fear, understandably, like even
people who weren't control of the money are scared. Like
if you work for one of these big companies, you
(34:10):
might wonder, am I going to get a paycheck this month?
How long until I get my next paycheck? How much
money do I have to be able to cover expenses
until that paycheck gets to me. It's a big, big deal.
And again, it was affecting pretty much the entire tech
sector because so many companies were making use of this bank.
(34:34):
Now the US government has stepped up and essentially announced
a bailout that the government is going to cover the
money deposited in SVB, even the uninsured amounts of money. Now,
this was done in large part to try and stop
a more general run on banks across the country. Again,
banks are not inherently in danger of collapse. Some might
(34:57):
have overextended on securities in the wake of lower numbers
of loans, and they might also be a little worried
because of interest rates. But as long as people don't panic,
things can turn out okay in the long run. So
this was a big move to try and stop a panic,
specifically within the tech sector. Right. So another thing I
(35:18):
should point out is while SBB truly was a pillar
in the tech community, it wasn't the only one. There
are other banks that tech companies use for all these
different purposes. Right, It's not like everything all the eggs
were in this one basket. That's not the case. But
then the fear was, well, we saw what happened to
(35:39):
silver Gate, and then we saw what happened to SVB,
so that might end up happening to this other bank.
We use, let's proactively remove our money from there so
that it's safe before disaster strikes. But that in turn
becomes the disaster. Right Like, if you have people saying,
let's pull our all our money out now, then that
(36:01):
creates the very problem that you're trying to avoid experiencing.
So again it becomes this self fulfilling prophecy. Now, one
of the many reasons why the government has come in
to say they are going to cover all of these deposits,
even the uninsured ones, is also because not only did
(36:22):
we have Silvergate and SBB both fail within a week,
then on Sunday yesterday, Signature Bank collapsed. Signature Bank is
not based in California. It's a New York based bank.
It is a bank that starts with the letter S,
so that's something that has in common with the other two.
But yeah, yesterday, which was Sunday, March twelve, twenty twenty three,
(36:45):
for those of you who are listening from the future,
regulators stepped into closed down signature like Silvergate, Signature was
once focused primarily on real estate loans, just in the
New York area instead of California, but it had also
become a bridge into the crypto world, so it became
kind of one of these financial institutions that connects the
(37:09):
regular financial world with the crypto financial world. And like Silvergate,
the collapse of massive crypto entities like FTX and others
really pulled the rug out from beneath Signature and left
it unsteady. So the bank tried to find a buyer
this past week in order to try and remain in business,
but it just didn't happen, and again the government had
(37:32):
to step in. Regulators are assuring all customers of Signature
that they will also get their money back, even if
it was above the two hundred and fifty thousand dollars limit,
just with SVB, and again this is sort of a
preventive measure to try and avoid a more broad panic
(37:52):
in the United States. And in order to support that,
I want to stress the problems of these three financial
institutions are not universal across all financial institutions, and further,
it is a situation that gets worse if people all
try to pull their money out it becomes that self
fulfilling prophecy I was talking about, kind of like when
(38:13):
there was a fear that at the beginning of the
pandemic that you wouldn't be able to get toilet paper,
which caused people to hoard toilet paper, which meant that
you couldn't get toilet paper. That was the self fulfilling
prophecy of that moment. We're seeing the same sort of
thing with these banks. Now what this means all in
the long term, that's very hard to say. Right now,
Chances are a lot of companies are going to struggle
(38:37):
in the short term, particularly in the tech space and
specifically in the crypto space. The crypto world in particular
is facing even more uncertainty right now because regulators are
picking up the pieces of these established financial institutions in
the quote unquote real world, and now they're giving a
massive side eye to the crypto community. Like regulars were
(39:00):
already concerned about crypto, but the failure of regular banks
who were connected to crypto has made this a much
more relevant issue for regulators at the moment. For crypto
companies that we're hoping to continue to flourish without pressure
from regulators, I suspect things are going to change rapidly
(39:22):
over the next few months. We're going to see that
dreaded interference from regulators as a result of this. I
am being a little facetious when I say dreaded. I
mean like, there are people within the crypto community who
really really want to resist any sort of regulation. But
I would argue the lack of regulation has led to
(39:47):
situations being rife for scams, for crime, and for massive
amounts of fraud, and that this in turn stands to
be a more existential threat to the crypto community than
regulations would. I think regulations are a small price to
(40:08):
pay if you want the crypto world to continue. If
you don't want the crypto world to continue, yeah, get
rid of regulations. You'll self destruct, because we've already seen
it happen, not because of the intentions of the people
who are putting the community together, but because you'll find
opportunists who say, ah, I can leverage the lack of
regulations to make a huge amount of money at the
(40:28):
expense of everybody else. Ha ha ha. So yeah, I
have very little patience for this, because if you want
the crypto world to actually establish itself and flourish. I
think regulations are absolutely required. There have to be controls,
(40:48):
or else you have the situations we've seen in the
last couple of years crop up now. I think these
events have shown how there are some inherent weaknesses in
fueling the crazy world of VC investment in the tech space,
as well as the enthusiasm around the crypto space. But
I think a lot of us already had a hunch
(41:10):
that this world was always toying with massive risk. It's
not like that's brand new news to any of us.
It does serve as a reminder that we should always
use critical thinking when we're engaged in these kinds of activities,
that we should ask tough questions. That should include asking
(41:31):
tough questions of is it right for me to hold
off on pulling my money out so that I don't
make the problem worse? Or is it a case where
you really do have to pull your money out because
if you don't, the problem is everybody else has already acted,
and then you're left holding the bag. That's what everyone's
afraid of. And unfortunately, unless everybody kind of agrees on
(41:55):
the front end, like no, we're all going to be
cool and wait this out. It's kind of unavoidable. It
sort of comes into the prisoner's dilemma scenario where no
one has enough trust and everybody else to assume that
things will be okay, so they have to act in
self interest because they're convinced that everyone else is going
to do the same thing, and if you don't do
(42:17):
it first, you're going to be the one who is
left with no money because the bank went went under.
That's why the government is trying to step in and
stop all this from escalating. So, yeah, scary time, you know,
one of the many like scary moments in tech, in
(42:38):
tech finance really that I have seen. You know, it
kind of reminds me in ways of what it felt
like when the dot com bubble was bursting and we
started to see all the enthusiasm and hype that had
built up these these startup companies into overbloated, overfunded entity
(43:00):
and then how it all came crashing down. That was
very sobering. I think that we're in a similar moment now.
It'll be easier to say when we have more distance
from it, maybe like five years from now, we won't
even think about this, But at the moment it feels
like it's pretty big. Anyway, that's it for today's episode.
(43:21):
Hope that was informative and interesting to you. I think
it is really important to understand these things because again,
without the world of money, than all the tech stuff.
Not to quote the name of the show, but all
the tech stuff we talk about wouldn't exist. The money
has to be there for these things to even become reality.
(43:44):
So I think that it's an important note to get
an understanding of that. It also helps kind of keep
us in the right headspace when we're thinking about supporting tech,
because it really reinforces that we need to be responsible
and careful in the way we do that and not
(44:05):
just try and pounce on what we see as an
opportunity to print money. I think more and more we
see those kinds of flagrant investments where it's just it's
this thought that, oh, I'm going to see a hundred
times return on this investment, so that's why I'm pouring
money into it. I don't think that's always the most
healthy approach. It's not sustainable in the long run in
(44:28):
my opinion. But I also want to acknowledge I am
not a financial expert. I'm not an investment expert. I'm
certainly not you know, a millionaire. I'm nothing. I'm none
of those things. So it's very, very very possible that
I am in the wrong here. It's just kind of
my gut feeling. But we all know that gut feelings
(44:49):
ultimately have limited reliability, so just keep that in mind.
If you have topics you would like me to cover
in future episodes of tech Stuff, please each out and
let me know. You can do that by sending me
a message on Twitter. The handle for the show is
tech Stuff HSW or you can download the iHeartRadio app.
It's free to download, free to use. Just navigate over
(45:11):
to tech Stuff use that little search field. Go to
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If you click on that, you can leave a voice
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what you would like me to talk about, and I'll
talk to you again really soon. Tech Stuff is an
(45:32):
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