All-In with Chamath, Jason, Sacks & Friedberg - E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

Hey guys, I got a little friend here.

What?

Yeah, I think I’m going to start a new podcast.

Is that a bulldog?

And I’m going to have a bulldog as my mascot.

You bought a bulldog?

Oh my god, you got my mascot!

Yeah, I took over your mascot.

Well look at that, now you’re actually likable, Sax.

Sax, are you trying to improve your image?

Yeah, I was about to say,

Sax is so unlikable

that he has gotten a bulldog.

Oh my god, Sax, show me his face again.

Is it him or her?

Him.

What’s his name?

His name is Moose.

Oh my god, you got a bulldog, he’s so cute!

It’s me and my mascot, Jake.

I’m going solo with my podcast,

I’m going to call it This Week in Technology.

It already exists, it’s Leo LaPorte’s podcast.

Please don’t start any more trademarkal updates.

Alright everybody, it’s an emergency podcast.

Silicon Valley Bank has been taken over by the FDIC.

Sorry, is this the Twist livestream?

Am I on the Twist livestream?

I mean guys, if you couldn’t just interrupt me while

I’m never going to get through this, it’s a lot to get through.

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It is a huge day today in Silicon Valley.

We haven’t seen a Black Swan

like event happen here in a long time

since 2008.

I thought the last time was when you published the book Angel.

Oh God.

We have to get to work.

Chamath, save the jokes.

I’m trying to give you a cold open.

We did that already. Okay, here we go. Three, two…

Rain Man David Sackett.

Okay, everybody. It’s been a while.

36 hours here. We’re going to get into

Silicon Valley Bank imploding.

The FDIC has shut down Silicon Valley Bank.

And there’s

many different things we have to discuss

with me today. As always,

the dictator himself, Chamath Palihapitiya,

the Rain Man David Sacks, and

the prince of panic attacks no more.

His wires cleared, David Freeberg,

the sultan of science. Welcome, boys.

How is everybody, just to

start this off, contextually,

the last 24 hours,

can you recall a time

in our careers where it’s felt

this acute or

insane or intense?

2008 and COVID.

Okay, and I think that this

is right up there. Could be two,

probably three, in terms of the

level of panic and concern. The problem

is we’re in the middle of it. We don’t know

what’s going to happen this weekend, so

there’s a lot of anxiety right now, a lot of panic

going on. And a lot

of, like, unlike COVID and

08, really acute

effects that many companies

and investors are actively

dealing with right now, like not just a few,

thousands of companies

that are really in a state of, like, distress

right now. So it is

potentially, from a Silicon Valley perspective,

worse than 08 or COVID.

Oh, for sure. For sure.

I mean, this is basically a Lehman

sized event for Silicon Valley.

Remember when Lehman Brothers went out to

basically file for bankruptcy in 2008,

started the whole financial crisis.

The federal authorities thought

that the best plan

for Lehman was to file for bankruptcy. They

didn’t try to save it. And that basically

led to a cascade where the whole

financial system almost collapsed. I think

that SVB, this is a Lehman sized event

for Silicon Valley. And there’s two

big things happening. One is

the impact on the startup ecosystem.

So you’re seeing

probably thousands of companies now

cannot make payroll in the next few weeks

because their money is trapped

and tied up at Silicon Valley

Bank, which is now under receivership.

So if you wired

your money out yesterday, you’re good.

And a lot of people managed to do that.

But there are a lot of people who

had wires in the hopper,

didn’t make it today,

logged into the website, can’t log in.

Their money is just frozen.

And we don’t know when

they’re going to be able to get their money out, or

how many cents of the dollar you’re going to get.

So basically, the whole startup ecosystem

is in peril.

I think Gary Tan called it an… Extinction level

event. Yes, exactly. That was a good term.

And just to be really clear, this is

not big tech at risk. I know there’s a lot of people

out there who don’t like the idea of bailing out

big tech. This is not Google.

It’s not Amazon. Exactly. Those companies have

plenty of cash. They’re fine. This is small companies.

Companies with 10 to 100

employees. And you’re

looking at maybe thousands of them just

being wiped out for no reason.

They didn’t do anything wrong because of this.

This could have a very damaging effect

on the startup economy and the

whole United States economy. This is little

tech. These are the future

companies that will keep the United States

competitive versus

China and the rest of the world.

And then the other big thing that’s happening,

and this is all happening in real time, is

a regional banking crisis.

Because when

depositors see that their money

was not safe at SVB, which

was a top 20 bank,

that, as far as everyone knows, was in regulatory

compliance. Nobody has said

that SVB wasn’t compliant.

As far as we know, they had a regulator

deal of approval.

Now you find out your money

was not safe and it’s not FDIC insured

above $250,000.

The conversations we’re all seeing

in our chat groups with leading investors

is, why the hell would you keep

your money anywhere but

JP Morgan or a top four bank?

I think that unless

the Fed steps in here over

the weekend, we’re going to see

potentially a run on

the regional banking system, a

cascade like we saw in 2008.

Well, Sax, let’s just take a step back

before, because I think you’re right, but we

should talk about why that happens,

the contagion drivers. And just so people

know, Silicon Valley Bank is used

by 50% of venture-backed

startups, and

I would say the majority of venture firms

also have their money there.

So this morning I got a note from

a fund I’m an LPN. They have

millions of dollars that

they can’t access to invest in startups.

So Chamath, there are

many products and services

that Silicon Valley provides.

One is, you know, banking

services to startups. Another is to

venture capitalists. They do the mortgages

for banker,

for venture capitalists, and for

founders as well. They provide those kind of white

glove services. But you also mentioned

in our group chat, they also provide

loans to GPs, general partners, to people

who run venture firms.

So the impact could also hit there. Maybe you

can talk a little bit about what that is,

and then we’ll get into what happened here.

Well, I think it’s important maybe actually

just for Friedberg to just explain

what’s happening.

Maybe let me just do the lead-in and then

Friedberg can do the details. But for

those that are far away and

aren’t even sure what’s going on,

the basic problem that we have

right now is in the last 36

hours, a key part

of the financial plumbing of Silicon Valley

has basically been turned off.

As a result, billions of dollars

of deposits have basically

been frozen.

It means that people can’t pay their

bills. It means that people can’t

access their deposits. It means

that credit lines could be in default.

It means that payroll can’t be

met. And so as a result, we have

this potential contagion on

our hands. But in order to understand it

and unpack it, I think it’s important to explain

exactly how this came

to pass. So let me just hand the ball to

Friedberg, and then we can talk about some of the

implications, of which there are many.

Yeah. Before Friedberg starts with the why,

just the what that’s happened as well.

This all started on Wednesday evening when

Silicon Valley Bank’s CEO published a letter

to shareholders announcing that the bank

was rebalancing its balance sheet

by selling tens of billions of dollars

worth of mostly U.S. securities

I’m sorry, treasuries. And then

they announced they would raise some money and sell

some shares in Silicon Valley Bank.

Then the shares in Silicon Valley Bank

entity dropped 60% on Thursday,

then another 60% on Friday.

Of course, then the entire world got focused

on this. And then every venture

capitalist started telling, or

I would say the overwhelming majority of venture capitalists

told their founders

to get their money out of SVB.

Then you had a classic run on the bank. A small number

of venture capitalists gave advice to say, hey, we should

support Silicon Valley Bank. I understand that,

but it turned out to be really bad advice.

And then

trading was halted on Friday

morning, pending news. And then finally, the

FDIC shut down

Silicon Valley Bank at noon on Friday.

And there’s a lot of speculation of what will happen

over the weekend. But maybe you could

walk us through technically

what happened to Silicon Valley Bank

and why they had this cash shortfall

and this run. We explained the run on the

bank, basically. But what led up to this?

The irony is, it really was

and is, prior to

the quote run, a financially solvent

business. So I have a few slides

if you’re on YouTube, you can see it.

We pulled one slide that was kind of made

by us and the other set that come from

Silicon Valley Bank’s actual presentations.

But if you look at their balance sheet,

this is from the end of the year, 2022.

You can kind of

look at the stuff that they owe,

their liabilities, which is what they owe their

customers that sits in deposits.

Because when customers give you cash in a deposit,

you owe them that money back.

So that sits as a liability. And then

they had some other debt. So in total,

Silicon Valley Bank at the end of the year had about

$195 billion in

liabilities, $173 billion

of customer deposits that they owe

to customers and $22 billion of other debt.

And then they take those customer

deposits and they invest it

in a number of securities. And the way that a balance

sheet business like this bank would operate

is, you know, the customers have

access to their cash

anytime they want. But in order for the

bank to make money, they make longer duration

investments. And those longer duration

investments give them the ability to earn

money on those longer duration investments

more than they’re paying the customers

for the deposit. So if you look at their longer

duration investments, they had about $208

billion

of total assets

sitting on the balance sheet.

So compare that to the $195 billion

that they owe customers

and other debt holders. So

the difference here between

$208 and $195

is about $13 billion. That’s kind of the

what people would call book value

of Silicon Valley Bank

at the end of the year. And of the $208

billion of assets that they had, $74

billion were loans, and they’ve got a breakdown

of the loan portfolio here in a minute.

$91 billion were these hold to maturity

securities, where they don’t actually adjust

the value of these on a quarterly basis.

And $26 billion is what triggered

this panic, which is available for sale

securities, mostly treasuries.

And what happened is Silicon Valley Bank’s

deposits came in so quickly

over the last couple of years that

they went out and they bought a bunch of treasuries, you know,

with the cash that they got. And the problem is

that very quickly…

Freedberg, it’s actually MBS. They bought a bunch of MBS.

10-year duration MBS.

And important to note, of the $208

billion that they have, the book

value, Freedberg, there was a

whatever, 10% if it’s in cash or

something. So they do have some cash there.

That’s right. Yeah, sorry.

It’s a good point. If you go back, so like, you know,

let’s say that of the

$173 billion of customer deposits,

you know, they’ve got $14 billion of

cash, and then they’ve got all these

treasury securities they can sell, call it

$40 billion. So if 25%

of customers said tomorrow, hey, we want

our cash back, theoretically, they

could just dump those treasury securities, distribute

the cash, and give it all back to customers.

The problem is, if suddenly more than 25%

want to get their cash back, well

now they have a problem. And that is

effectively what triggers the run on the bank.

As soon as some folks think that others

might be pulling money out, then everyone

rushes to be the first money out the

door. And that’s what triggers a classic

run on the bank. There’s a statistic

I think, in the 1920s,

there were several hundred banks that

had runs every year for

almost the entire decade. And

this was like a regular kind of occurrence that happened

in the 1920s that ushered in

a lot of our modern securities laws that are meant

to kind of create the necessary liquidity

provisions, and how these banks are

able to operate to make cash available to

customers. But what happened is

So much so, by the way, Freeberg, that they made a movie

It’s a Wonderful Life about a

bank run. So basically,

one of the bigger problems that Silicon Valley

Bank, they ran into two big problems. Number one

is deposit decline

where VCs

were not investing new money.

And when they were not investing new money, and startups

were burning more money than Silicon

Valley had modeled they would be burning, because

they thought everyone was going to reduce spend and reduce burn, and

they didn’t. So deposits

were going down while all these startups were burning

money. No VCs were investing.

So total deposits were on the decline.

Meanwhile, their bond portfolio,

the assets that they hold on the balance sheet

also declined in value.

And I kind of just put a really simple illustration

here on why if you have $100

kind of face value bond that

earns 2%, which

is basically, you know, where these treasuries were

a year ago, and you and you hold that for 10 years

that 10 year bond yields

$122. If the interest

rate goes up to 5%, then

that that that bond should yield

$163. So

the value of the first bond actually

goes down by 25% because

of the market conditions. That’s how significant

the value changes with

just a 3% change in the interest rates.

And that’s effectively what happened with that

available for security segment

of the Silicon Valley Bank portfolio

balance sheet. They had this bond

portfolio that suddenly got devalued

and they had declining

deposits. So when deposits start

to decline, you got to make sure you have enough

assets sitting on the balance sheet. So they sold a bunch

of them said we’re going to raise more money. And at that

point, everyone kind of perked their head up and said,

Oh my gosh, what’s crazy is in q4

by the way, seeking alpha

this website, you guys know, they had actually

done an analysis and said is

SVB about to blow up and they put together a

bunch of slides that highlighted why this might be the

case because they saw that deposits were declining

that their their assets

that they hold were basically declining

in value because of the massive and very

quick rise in interest rates. And that

SVB had bought a bunch of bonds that were long

long durated bonds. So

it led to a, you know, obviously a real short term

problem. If you look at the rest of SVB

his loan portfolio, there’s also

a question of how distressed that all is.

So 10% of their 70

billion plus dollars of loans

is in venture debt. And

venture debt is very questionable in this market,

right? Because historically, the way venture

debt makes money is that they assume

that VCs are going to keep funding the companies

that they’re providing debt to. And if the

VCs stop funding the companies, then the venture debt

defaults. And so if you go to the last slide

in this deck, you’ll kind of see SVB’s

performance on their venture debt portfolio.

Yeah, so look at this. This is the performance

results on just the warrants

that they get on their venture debt. So when you

when you issue venture debt, you take a write

down or you get paid back.

And then you also get some warrants,

you get some right to buy shares

in the winners in the startups at work.

And so the way that SVB’s made money

on their venture debt portfolio historically

is hopefully they get paid back

on all their loans, some of them they don’t.

But then they’ll make a bunch of money on selling

their warrants or the companies going public

or getting bought. And in Q4

of 2022, it just fell off a cliff

and their venture debt portfolio really

started to show distress. And that’s 10%.

Are these realized gains or these are mark

to market gains? This is the net gains

on their warrants. So they don’t mark to market

warrants. I think this is what they actually exercised

and got out. So there was

there was obviously a ton of exits in 2021.

So they made $560 million

in profit on their warrants that they

had in their venture debt portfolio in 2021.

That number collapsed to 148

in 2022. And you better believe most of that

was in the early part of 2022.

So, you know, they

didn’t do a quarterly breakdown on this. This was

like their full year numbers, but

their venture debt portfolio, which is another $7

billion of capital, also

distressed, certainly wasn’t

going to perform as everyone had modeled. So when you kind

of start to add this all up, and remember, you

go back to the beginning, they only had $15 billion

of true net book

value, which is the difference between their

assets and their liabilities. And so

if you really start to adjust, what are those assets really

worth? Are they really worth what they’re holding them at the

book at? And if people start to pull money

out, and you got to sell them at a distressed price

in order to give people their cash

that they’re owed on deposits, that’s

when you have a classic run on the bank problem.

And then everyone tries to be the first out the door.

And that’s basically like what triggered

us this week. Can I give you guys my little

version of all of this, I

think there are three buckets. But before I go into

the three buckets, I just want to say,

to all of the employees

at these companies, I think

we, the four of us

are so truly sorry for

what’s going on, and what you guys are

going through. And then to founders that are

trying to navigate this, it must be unbelievably

tough. There are a few founders

in our portfolio. So

you know, from all of us, just know

that we’re thinking of you guys, and

hopefully everybody

ends up on the other side of this by Monday

or Tuesday, with not a lot

of damage. So let’s just put that out there

as sort of like goodwill

and kind of good juju

in the world for the next couple of days here. This is going to be a really difficult

weekend for people who are trying to navigate this.

I think it’s well said, yeah.

I’ve got founders who are

in really, really tough shape

right now trying to figure out how do I make payroll?

And it’s a big question.

Okay, so just putting

a pin in that because we’ll come back to it.

I think that this

whole debacle, I guess,

is maybe the best word.

There’s a little bit of blame

that you can put at the feet

of three different groups

of actors, and I just want to get your guys

reaction to this. So

group number one, and Freeberg just

mentioned this, is

we, the four of us,

have been talking for the last 18 months

about the impact of rising rates.

And, you know, we

talked a lot about, for example, like in our portfolio,

my partners and I

walked into every company and made

them have at least

enough money to get through mid

2025, right? I’ve said this

a bunch of times.

And so that was about having very

difficult conversations about

making sure that you were husbanding

cash so that

you had enough to weather any storm

that came on the horizon.

But it turns out

that there was some group of

VCs and companies that just didn’t

get that memo and just kept

spending like nothing

had changed.

But when other VCs

have stopped giving you money

and you’re continuing to spend like

it was 2020,

that’s what caused this mismatch

and it was really the spark that

lit the fuse. So

I think it’s a really sad commentary

at some level about the lack of

governance that we have inside of some of these

companies where

folks are just not doing the job that they’re supposed

to at these board levels. I think

people, and we’ve talked about this, have

made venture too much of a popularity

contest where they are

you know, glad-handing

and smiling and

not doing the hard work of holding folks

accountable. And so some handful of

VCs and some handful of founders

just didn’t get this memo

and it made what could have

been a slower train wreck

faster unnecessarily. So

I think that’s worth talking about.

Then, I think

if you look at what actually practically

happened over the last

year and a half at SVB was that

they were so

desirous of profits

that they basically had a duration

mismatch. So what is that?

Imagine you get a job

and, you know, somebody’s like, hey,

Freeberg, I’ll pay you $100,000

monthly over

some number of months, right, in normal

pay every two weeks, or I’ll pay you

$200,000 but you only get paid once a year.

Well, the problem with that

second thing is you still have monthly bills

that you have to make up for before you get paid.

And so most people wouldn’t

take that job even if they paid

you a lot more because you have this

durational mismatch. You have to pay rent

every month, you have to pay bills on a

monthly basis, you have credit card bills,

all these things. And so

you need to match

the timing of your cash flows.

And so I think somewhere along

the way, the risk folks

at SVB just

made a really large miscalculation.

They basically went and bought

10-year risk

in order to pay back money that could

be called on a daily or weekly basis.

That, obviously in hindsight,

was not a good idea.

But more importantly, Chamath, they didn’t

adjust fast enough. Well, they can’t because they

have these mark-to-market assets that were just getting

clobbered in the head as rates got raised.

And then the third

thing is around regulators. You know, after

the great financial crisis, we went through a

period where there was hundreds of bank failures.

And then for the last

decade, they’ve been virtually none.

They’ve been like a few here or there.

And the last one was just during COVID.

And so the regulators

I think have done a really good job with

Dodd-Frank and all of these other things

to clean up

the banking laws

and the reporting requirements and the capital

structures so that runs on banks

are more and more infrequent.

But they kept

this crazy loophole

around the accounting treatment of

assets, and they allow

these durational mismatches

to appear in a

bank’s balance sheet.

And so I think there’s a piece

here for the regulators, which

is here’s an opportunity that’s

glaring and obvious now

and screaming about how we need

to tighten some more of the transparency

that’s required. It shouldn’t be

a group of armchair

sleuths on Seeking Alpha

that sniffed this out three months before

it happened. It should have actually

been a regulator that said, Hey, hold on a second.

Something is happening here that we don’t like.

And so we, I think, need to figure

it out. But I think those are the three actors that

are in play, and they each share

a bit of the blame here.

Freeberg, Sachs, what do you think?

Who is to blame here most for

this blow up? Or is this just the

extrogenous event of

the rate hikes happening in such a short,

compressed period of time?

No, I mean, look, I think that

SVB’s risk management was

terrible, obviously. They

signed up for these long-dated securities

when the

market they serve is incredibly

volatile. Like Jamal says, duration mismatch.

Really good point. I would also

say that there’s a weird

regulatory treatment

where apparently if you buy these

10-year bonds, these

10-year mortgage-backed securities

or 10-year treasuries, you don’t have to

recognize the loss

until you sell them, which is just

bizarre. So in other words,

they should have been marking the positions

to market. And

instead, they just were allowing

these losses to accrue.

I don’t understand how the regulators can allow that kind of

system. I also don’t understand

how the regulators can allow

a bank to

take customer deposits

and loan them out to startups

with this venture debt that we’ve been

talking about on the show, where 10%

of their portfolio is basically being loaned out

to startups who have no credit?

That’s crazy. We talked on the show a few

months ago. Actually, it’s a good time to play the clip

here because what we saw,

Sachs and I, seeing at the Series A

level, you have a lot of times

founders would get this

basically free money in their minds.

I raise 10, I get 5 in venture

debt, I can extend my runway.

But that money comes due

and here’s the clip for when Sachs and I

were talking about it just a couple episodes ago.

What I don’t trust

is whether the

return models on venture debt that were

created over the last 5 to

10 years will be a good predictor

of what the returns will be in the next 5 to 10 years

when a lot of the mortality

that should have happened in the past

now happens in the future.

Yeah, I mean, this is just

4 or 5 episodes ago

we kind of nailed it. Startups have no collateral

there’s no security for that loan.

How does that make sense to make a

loan to a creditless startup?

Not true. Guys, look, I

disagree with you on this point. Look, if you

pull up the slide that breaks down

so let’s talk about venture debt for a second

I’ve actually invested in a venture debt fund

and I’ve seen the economics on it. The way that

the venture debt model typically

works is the lender

loans money to the startup

and what they underwrite is what the

current VCs in the startup

say they’re going to do to support the company in the future.

So their ability to get paid back

in the future is largely predicated

not on underwriting the company and the performance

of the business or the assets they have, but it’s

underwrited by the fact that the VCs are committed

to continuing to put money in and

hopefully see that this thing has a big outcome.

There is no commitment.

No, let me tell you.

Hold on, let me just finish.

I get it, but the

asset as an asset class

we can make fun of it all we want.

It’s actually performed pretty well. These guys

have generated typically 18% as an industry

kind of returns.

You’re right.

It’s the same as venture.

And the way that they generate those returns

is that they’re loaning money to the startups.

If the startups fail, they don’t get paid back.

And then the ones that succeed, they actually

take warrants in the startups.

So they have some equity upside in the startup.

And that’s the way the model works. We can make fun of it all we want.

It actually works as an industry.

Let me tell you why that broke.

It goes back to the point

you made earlier in the show, which is

the lender has this expectation

that the VCs are going to keep investing.

Well, what if they don’t?

We’ve been in a generally up and to the right bull market

since the last crash in 2009.

So I believe that the data

for all these models is

skewed because it assumes

again an environment in which

companies keep raising up rounds.

And as soon as you get into a crisis

in which that breaks, then the whole

asset class breaks. And I think this was

completely predictable. But even if you

think that this asset class is legitimate,

I don’t understand why

banking deposits could ever be

used to fund it. If you want to be a

venture debt fund, go out and raise money

from LPs. Because

what happens is when you raise it with

customer deposits, you’re creating systemic

risk for the banking system. 100%.

And the regulators should never have allowed that.

Even worse, the two assets are correlated

because you’re

loaning it to people

who are depositing it.

And in every other part of the

private credit market, that is exactly

what you do, what Zach said.

You can’t use customer

deposits to

do some CLO deal

or to do like, you know, to back a

PE play. These are all

LP capital that goes towards that.

This is the only sliver, as

far as I know, where you take customer

deposits to create very risky

loans

wrapped with warrant coverage. And by the way,

this stuff is never free, right? So

they make you keep your money there.

They make you have enough money to cover the

size of the loan in the first place. So it’s

not even that valuable because if they gave you

$8 million loan, you have to have $8 million

always on deposit. Otherwise, you violate

the, otherwise, you know,

you breach the loan. So there

is no free lunch in venture debt. There has

never been. And I still think

venture debt is very much like

venture capital, which is most of these

gains are on paper. Most

of these gains haven’t really been realized.

And now we’re going to go through

this sorting process when all of this stuff gets

whacked. I do want, Zach,

your reaction to this, though, which is

the thing that started this

was the fact that VCs, seeing

the markets imploding, stopped

giving companies money, but they didn’t

do enough work to help

founders cut burn.

SVB said it themselves. The

burn stayed the same. What

is going on inside of these boards? Well, I think that’s

crazy because, listen, I mean, we

started doing portfolio updates

with our entire portfolio

of founders in February last

year, saying this is a regime change.

You got to cut costs. We did another

one in May. You can watch them both on YouTube.

Okay? And we were telling founders

cut your burn. Do it now. Don’t

wait. We were beating the drum on this

so hard in every board meeting

and privately. And I

like, you know, and it takes multiple times, frankly,

to get through. I think your point,

Chamath, about not wanting to be unpopular

with the founder crowd

led some young capital

allocators to maybe say, okay,

yeah, let’s try this ditch effort before we do

another riff.

Let’s try this new product. Let’s

change our sales strategy. I don’t think it’s

young versus old. I think it’s

experienced versus unexperienced. No, I think it’s

experience. Okay, that’s better. I think that’s more accurate.

I do think it’s experience.

Listen, if you’ve never lived through a bear market,

you don’t know how bad it can get. And

tech is a boom-bust cycle, and the busts

are really hard. Really hard.

Really hard. And if you’ve never lived through a regime

change before, like there was in 2008,

2009, or in

That was the worst.

2001 to 3. Then you’re totally unprepared and you have no

idea. And I think experience

does matter, and

there aren’t that many VCs around who live

through the dot-com crash. No, probably 85%

of not. By the way, if you guys pull up

just that slide on the loan portfolio

at SVB, I just want to make the case.

Sax, I hear you. It’s a risky, it

seems like a risky investment to make.

But don’t you guys agree

that a balance sheet business

like SVB, or an insurance company,

or any business that has

some amount of money coming in that sits

on the balance sheet, and then they invest it for a period

of time. There’s a laddering of

risk, and there’s a laddering of duration

that you have. So if

you look at Silicon Valley Bank from

the update they did last week that triggered all of this.

If you look at SVB’s loan portfolio,

70% are really these

asset-backed loans, which are

56% of the portfolio

is like prepayments

on LP commitments, and then

14% is private banking

loans, which is loans against

public securities that people have.

Only 10% of the portfolio

is venture debt, which is $7 billion.

And look, if the asset

historically has performed at an 18%

rate of return, what is the

venture debt portfolio going to look like in

a distressed environment? Is it negative 100%?

Is it negative 50%? Negative 40%?

Negative 30%? I mean, you guys can have a

point of view on this. But look,

for any business that’s managing a

large balance sheet

of assets against, you know, a short

kind of liability tree,

they’re going to have some riskier assets.

I think, you know, the question is, was 10%

too much of the loan portfolio?

I think 1% is too much.

Yeah, and I’ll add to that. You know, one of

the issues here that we saw qualitatively,

and Saxe and I both

saw qualitatively, is the

standard for giving these and the size

of them got lower and lower. In fact,

the covenants went away, and this is what we

kept having hundreds say to us, it has no

covenants, they offer me no covenants, I don’t have to have

a certain amount of cash, I don’t have to have a certain amount of

revenue. Those covenants were there for a reason

to filter out the people who can’t afford

the house, right?

And this is exactly what happened in 2008

when people started giving those

no recourse or no

background check mortgages. Remember those?

Where like you didn’t have to do a background check to get a

mortgage? That’s what happened in venture. They

just gave these, I saw it firsthand

willy nilly, I begged founders to not take

them. And I

only won that discussion Saxe

one out of five times because founders are like

money. We’re having this debate, but there’s

no indication and there were no losses in this

portfolio to date that show that venture debt’s

underperforming. We’re saying that this is stupid

and no one should do it. What’s the expression, past performance

is no guarantee of future performance?

Exactly. It’s obvious to us on

this podcast. You guys are arguing about

venture debt when the real loss

that happened at SVB was the fact

that they bought a bunch of treasuries and

went from 2% to 5%.

There’s two

things going on here. Okay, Freeberg, when

I see your chart, you talk about laddering this

and laddering that and X percent

and all this kind of stuff. I think about the smartest

guys in the room. Okay, this is long

term capital management. This is Enron.

This is the 2008

bank failure. They think they can basically

do financial engineering to make this work.

You know why it doesn’t work? It’s because number one,

they’re not in fully liquid assets. Number

two, they’re not marking to market every day.

If you’re a deposit bank,

you should be required to keep all of your

assets in fully liquid

securities that you mark to market

every day. It’s that simple.

What do they do? They put it in 10

year duration

mortgage bonds. We need to explain this.

Hold on. Where the value got devastated

with the rise in interest rates, they didn’t have

to mark that to market. Second, they

put 10% of their portfolio in

basically loans to

creditless startups.

When there is a

run on the bank, you have a roughly

30% gap between

deposits and

the value of their

portfolio.

That shouldn’t be allowed. The reason

it’s allowed is, frankly, I think regulators are

completely asleep at the wheel. Where’s Powell?

Where’s Yellen? Two days

ago, Powell was

testifying in front of the banking committee.

They asked him, do you see any systemic

risk in the banking system because of the

rapid rise in interest rates? He said no.

No systemic risk. Sachs is right.

I agree. The rise

in interest rates is the key driver here.

It drove down venture investing.

It drove down valuations.

It’s driving down the value of

long-durated bond portfolios, which, by the way, is

the mainstay and the standard of how a lot of these

businesses invest and operate.

It’s caused distress and stress on the system.

My biggest concern is the contagion

effect that arises next. If you go in

and you continue to assume interest rates climb

and everyone’s holding onto these bonds and they’re getting written down.

Meanwhile, you owe people all this money and cash.

The other thing that’s happening, if you hold cash

today, you’re likely one of

higher interest rates to compete with treasuries

because you can invest in treasuries today and make 4 or 5%.

Let’s pause for a second here. I just want to make sure that the

audience understands. Yellen put out a statement today,

Jake, just to finish the thought,

that they’re monitoring the situation.

Yes. She’s sitting there like a bump

on a log. I mean, it’s ridiculous.

They need to be out front on this.

They don’t understand that this is a

cascading situation.

So listen, either this weekend,

either this weekend,

they place SVB in the hands

of a JP Morgan, they do basically a

Bear Stearns or a WAMU.

They either do that this weekend

or this thing keeps cascading next week.

And look, I could be wrong.

Maybe they’re working on it right now behind the scenes.

If they are, kudos to them. They’ll have an

announcement before the market opens on Monday.

But if they’re not, and Yellen’s just like

we’re monitoring the situation,

three days ago, she was in Ukraine.

This is incompetence at work.

All right, hold on. We’ll figure out a way

for you to dump this into January 6th next.

Take a playa.

He connected Silicon Valley Bank to Ukraine.

Yeah, exactly. It was beautiful.

What is our Secretary of the Treasury doing in Ukraine?

I mean, seriously.

Take it easy.

Here’s what happened, just so people understand.

U.S. Treasuries were at

102, you get like 2% a year.

They bought a bunch of those.

That was actually, when you think about it,

you would say, that’s a safe bet.

The problem is, those are locked up

for 10 years. And nobody anticipated

on the Silicon Valley Bank team

that the rate hike would happen so

quickly, so violently.

Remember we saw the 25, 25, 50, 50,

75, 75, all those increases.

Now, what happens to

a 2% U.S. Treasury

when the interest

rate goes up is they get devalued.

They’re not worth as much. So if you did need to sell them,

you would have to sell them at a discount.

If you held them to maturity, you would get that

complete return. And what happened

here is they needed to sell these

early. And they sold them early, and they

took a massive loss, billions of dollars.

And that’s what lit the fuse.

That’s the slide I showed, like the price basically goes down.

I just want to make sure the audience understands that. If they had sold these

earlier, or if they hadn’t bought these,

they would have not had this problem.

Now, why in that

meeting did they have to decide

to emergency sell? It’s because

VCs

stopped giving startups money.

So startups couldn’t deposit

more money into the bank,

but they kept spending at the same rate that they

were spending. In other words, the deposits

went down. In the last

18 months, not enough folks read

the memo.

And by the way, the tragedy of

that is, let’s just say that you did get

the memo, and you did make the

hard cuts.

Let’s say you’re working on something, and

you can fill in the blank on the thing that you

care about. So for the listeners, let’s say it’s climate

change, let’s say it’s breast cancer research, whatever it is.

This had nothing to do

with you four days ago.

You had your money in the bank, you

did everything you needed to do to go and

figure out product market fit,

try to get to market, try to sell your product.

And all of a sudden,

because of some other set

of folks and actors who

couldn’t get their act together,

now you’re on the precipice of

bankruptcy in 3648

hours. That’s crazy to me.

This is the challenge. Saks, I think you could speak to this as

well, is we did all this portfolio

management over the last year.

These were the troubled companies. And then you

have the companies, a large portion who

did the right thing. They had a big

war chest, and they had

set the burn at the right pace.

And now they, the other

portion of our portfolio that had

big war chests, they’re now at risk.

So if you’re a capital allocator right now,

you’re looking at a group of companies that you tried

your best to save, and they’re

ankled, and they’re wounded. And now

the strong ones are wounded too.

This is cataclysmic for Silicon

Valley. If this does not get stopped this weekend,

not only…

I don’t want to be hysterical.

You’re right. This is a meteor hitting the dinosaur.

It’s an extinction-level event. You’re right, J. Cal.

Listen, we have portfolio companies

that had tens

or millions or

other real solution is for the Fed to

warehouse them and guarantee them.

And that’s an equivalent version of

what they had to do during the Great Financial

Crisis, which was this thing called TARP,

which is the Troubled Asset Relief Plan.

It was just a backstop and a mechanism

so that these,

at the time, those toxic assets, which

were a bunch of mortgage-backed loans,

could be cleared through the system

over time, which effectively meant that the Fed

basically warehoused that risk.

So I think what we need to see now

is, Sachs, it could be

50 cents on the dollar. It could be

60 cents if you want immediate

liquidity. You know, a friend in our

group chat was mentioning that there was one

claim, a company that had

100 million dollars inside of SVB,

was offered

60 cents on the dollar

today for that claim.

Now, that’s a really… From a third party.

From a third party who said,

I will give you 60 million today

in return for that certificate

plus the 250,000

that says you’re owed 100 million

because they’re willing to take

the risk that they’ll get, you know,

80 million, right? And then they take the

difference. Now, the point is that if you’re

seeing today that kind of a discount,

that’s not a good sign, I think. And it

does speak to the fact that regulators have

to step in. Now, here’s the other reason why I think

it’s important. I think

what regulators, and I think the people,

and there’s a lot of them in Washington that listen to this,

what this does is it

torches years

of US innovation.

And you should not let that happen.

There are companies

working on really

important things for the

United States and for the rest of the world.

And if it’s…

If the company fails

because they can’t make the product work,

so be it. We take that risk every day.

If the company fails because customers don’t

want to buy it, so be it. If the

product fails because a better product

comes out, so be it.

But it shouldn’t fail because

we can’t get money

that is in a deposit.

That should not be why

we torch hundreds of

startups and what they’re working on. Maybe

thousands. This would be a

lost decade for Silicon Valley.

Jake, first of all, do you guys want to talk about

second and third order effects

just so folks really understand those? Because I

think it’s important to highlight why

it’s not just about a couple

hundred tech bros in Silicon Valley

not being able to make payroll, but there’s

important downstream consequences.

For example, there are payment processing

companies in Silicon Valley that use

Silicon Valley Bank to

store their capital and to move

money around. There are payroll companies

that do payroll for many

businesses, not just tech businesses,

but many businesses in different parts of the economy

that store their cash at Silicon

Valley Bank and process money through Silicon

Valley Bank. Today it was announced that Rippling,

one of those companies, could not hit their

payroll cycle today because they had money

tied up at Silicon Valley Bank. Fortunately, they

announced that they also have money at JPMorgan

and other places, so they will be able

to kind of get the payroll processed

early next week and get everyone back

on track. But this is hundreds and potentially

thousands of companies that

use their payroll software

to process and pay

their employees. And then there’s all the

payment processors. We don’t know how many of them

have what level of exposure and a lot

of infrastructure companies that move money

in and through Silicon Valley Bank.

And so if they start to go down

and then payroll doesn’t hit the air conditioning

company that’s using the tool

in some, you know, in Arizona

and then, you know, the stripe

service isn’t able to process e commerce

payments for a small business owner that runs a website,

you can start to see how there can be very

significant trickling effects. And more

importantly, like we saw in 08, perhaps

to a different degree, but still a

significant concern is the

contagion of panic, where

people say if there isn’t reliability in the

things that I thought were reliable before,

I start to have real

questions in the soundness of the system

overall. And that’s why it’s so important to

sack said to step in

shore up the problem this weekend. I don’t think it’s

about bidding 50 cents or 60 cents on the

dollar. Every depositor needs

to get paid 100% of their money. And that

cash needs to be made available to them by

early next week. And if that money is not available

to them within the first

48 or 72 hours of the end of

this weekend, then we’re going to have a real

crisis on our hands, because then you will see a

lot of people trying to move money away

from any institution that stores their money

in some sort of security that’s not 100%

liquid like cash. And that’s going to

cause that’s not that’s going to cause a

massive run. And so some what

has to happen, the only way this can

happen is if someone takes over

Silicon Valley Bank this weekend,

and that the federal government

unfortunately, as much as I hate to say

because I absolutely hate the federal government

having a role in this stuff has to say

we will guarantee 100% of those deposits

to the company that takes over

the bank that takes over this portfolio, and

says let the portfolio of assets run its

lifetime, see what you get paid,

whatever the delta is, we’ll make it up to you.

But we need to make sure that there’s cash here

today for all of these depositors to

get you had something you want to say. If not, I have

something I want to say. Yeah. The other

big thing that SVB

was, was an

on ramp for a lot of

investors, including many US

investors to get money into China.

And without commenting on whether

that’s right, wrong or indifferent. The point is that

China has a very complicated capital market

structure, which requires

you to basically use

an offshore bank, ie non

domesticated Chinese bank, and

to be able to get those dollars. And so what would happen

is Chinese startups that raise money would

raise money from US investors and

abroad using these bank accounts.

And so this issue now doesn’t

just touch the United States innovation economy,

it also touches China’s innovation economy,

which, you know, creates actually

a complicated set

of trade offs for the US government and Treasury

as they think about what they want to do in this

heightening great power conflict that Saks

talked about last week. And I want to just make a very

important nuance point here. I know there is

no bank that the public

specifically, you

know, people who don’t want to support

you know, rich people already like big tech

or billionaires. The

reason to backstop this with

public money is because we

have a roadmap for this. People

don’t know this widely, but TARP

was just over $400 billion.

It actually returned

a $15 billion profit to

the American people. This

would require maybe 25

or $50 billion.

10%, maybe 510%

of the totality of TARP would be

enough to cover what’s happening

here with Silicon Valley Bank and work this

out. That’s $50 billion for the people

listening in Washington or for the people who will say

hey, why are we, you know

bailing out big tech?

You’re bailing out small tech. As

Chamath said, you’re bailing out innovation on

breast cancer on, you know,

renewable energy. But

most importantly, this can easily be

structured so that the American

people return 20%,

30%, maybe even double their money. You

could structure this so

it is senior to everything else

and is exactly what the government is supposed

to do when there is a crisis.

That doesn’t mean the people who run

Silicon Valley Bank should have their equity worth

a lot. They should get wiped out.

They didn’t do their job properly.

The equity, the people who ran the management

team there, if they don’t get anything, that’s okay.

They understand that.

But the people who had their money at deposit

to pay the salaries and to

pay for this innovation, it is unconscionable

that we wouldn’t backstop it.

I guarantee you the

US government could get some warrants

on those companies or

warrants and ownership in Silicon Valley

Bank and make at least 50

cents on the dollar, maybe even

double. And that’s the way this bailout

should be structured. And it has to be done this

weekend. You bring up a great idea.

I think I think if the US

balance sheet

does step in over the weekend,

I’m going to say on behalf of the

US taxpayer, you must

get a piece of these

companies. And the

reason why is that that’s the way

to make it fair for

everybody that’s not in tech who’s on

the outside looking in. And

if you look inside of Twitter as an example,

there’s a lot of negative

sentiment around even

the idea of a bailout happening.

And it’s for this exact reason because I think

people believe

that it will benefit just a small

sliver of people, right? So

to step in and to save these companies, Jason

would still be, you know, really only helping

say several hundred

thousand or several, you know, and

and the thing that that gets wrong, in my opinion,

is that

these companies, if they’re if they’re

allowed to germinate,

should be building things that actually help everybody.

And so if you can

do it that way,

including and so if you can view it that way, and if

you can view a share of it now, obviously, look, we’re very

we have a very deep incentive

for that to happen.

But I think it’s important to

present the other side of it. And the other side would say

this industry

has a little bit run amok.

It’s not

well regulated.

You know, you guys push the boundaries

and get away with a lot.

And there haven’t been a lot of consequences.

You’re saying the banking industry. No, I’m saying the

tech industry. No, no, I’m saying that the average

person that’s on the outside looking into the tech

industry can make that claim.

And now they would be pointing at big

tech. But the problem is we all get swept

in together under the same thing. And

then what they would say is, I don’t think

it’s right to step in.

And I think that you have to give the US taxpayer

an incentive if they are going to do it.

And I think the incentive should

be that they should just get a share in all this innovation

if they take over the

venture debt portfolio, then they would have that

right, the venture debt portfolio comes with warrants

so they would have that I think there’s a big

risk here that precisely because

tech is unpopular

and people I think are confusing big tech with

small tech that the government

doesn’t step in here and

the dominoes start falling

and we start getting all the systemic

risk playing out. Remember the

beneficiaries here aren’t just these

the sort of current generation of tech companies

and everyone they do business

with. It’s also wherever

the contagion goes next

and we’re already seeing

I think multiple regional banks under

pressure their stock down people

asking questions. We know people

in our chat groups who are wiring

money out as fast as they can

just because why take a chance

you know that and by

the way, you have to understand that the game theory

around these bank runs people

describe them as a panic, but

that implies that it’s irrational. It’s not

irrational. It’s actually rational.

And what this what this is really

highlighted is that what you said earlier

at the beginning sacks, which is that

the regulatory oversight

is actually extremely pristine

at the biggest

banks, but the smaller

and smaller you get there’s a level

of opacity and

a lack of regulatory follow

through that allows this stuff to build to the Wall Street

Journal right now is reporting that US banks

have 620 billion of unrealized

losses just on Treasuries.

I don’t know what the unrealized losses are

on these long dated mortgage backed securities.

Like I said, I have no idea why regulators

allow banks to hold

these bonds at

their book value instead of marking

them to market every day. That’s crazy.

And on the equity side, you have to do it.

Buffett talks about this all the time. The

equity side, you have to mark to market

the equity portfolio at the end of every

quarter and he sees these wild

swings and he complains about it, but

it’s the right thing to do for exactly this

reason, right? So think about the game theory

here. Okay, the banking system, the bank

regulators have created this opacity

in the system. You’ve got all

of these assets are being held by these banks

that are not marked to market. So nobody

really knows what the true level of

exposure is. So what’s the response?

Why take a chance? Just move your money to JP

Morgan. So I think there’s a chance that

if the federal government doesn’t step in here,

the whole regional banking system could be

decimated and just be left with four

too big to fail banks. How’s that

benefit anybody that doesn’t benefit

the little guy guys, there’s a there’s a pretty

good set of regulatory disclosures that

happen. But I do think that the real

question is, you know, are the ratios

right? Do they should they really be allowed

to invest in these types of assets

with depositor capital? And

if so, with what percent of the

depositor capital should they be allowed to do it?

And maybe, you know, that seems to be where

the biggest, you know, issue is we’ve come

a long way. I mean, I just pulled up the

statistic. It’s insane. There were

505 banks that failed

in 1921. Failures

continue to rise in the early

20s, and averaged

680 banks per year

failed between 1923

and 1929. So obviously,

you’re coming out of a wait, there

was a lot of controversy around, hey, banks can’t make

money anymore. It’s too restrictive, the disclosures

and so on. The disclosures are actually quite

good. You know, you guys can go to these

sites that regulate the banks, you

can go to the SEC site, you can get a

very detailed schedule of every asset held

by every one of these banks. It’s good

transparency, I would argue, but should

they be allowed to invest in

securities that are effectively not fully

liquid, that are risky, that are

long dated, with short dated

deposits, right? It seems it’s a fundamental

question about what banks are supposed to be doing.

In a world of computers that can calculate

everything, the idea that you can’t

solve duration matching doesn’t

seem like one of those problems that’s intractable

in 2023. I mean, if people can

make an AI version of the podcast,

they could do that.

Yeah. I mean, Freiburger also, like,

take this, I think venture debt’s the

most extreme example. How do you

mark to market a loan to a Series

A startup? I mean, that just 100%

depends on whether you’re going to raise a Series B or not.

I actually, I’m a believer you can underwrite anything.

I think you can under, for the right interest

rate, for the right premium, you can underwrite insurance,

you can underwrite loans. I mean, there’s a lot of ways that you

could kind of invest. But how do you mark that to market on a daily

basis? You’re right. No, you cannot.

You’re right. That’s my point. Absolutely.

Yeah, yeah, yeah. And so from a reporting perspective,

So you disclose it, how does that solve the problem?

They’ve got different

tiers of regulatory capital, guys.

And so, you know, there are rules around what the ratios need

to be and where you need to fall.

And so they bucket this stuff up differently, right?

If you’re a bank and you want to

buy securities, you want to invest

in something that’s not

liquid and mark to market every day,

you should have to package it up

in some period of time and sell it.

If you want to make a loan to a

venture backed startup,

package those up and syndicate

that and sell it as a security. And if you can’t

do that, you probably shouldn’t be investing in the asset

class anyway. Same thing with

mortgages. These mortgages already get packaged

up and sold, right? So it just

doesn’t make sense to me that customer

deposits, that’s what we’re talking about, which

you assume should always be

100% safe, right?

This is not a source of capital where anyone’s ever

expecting to lose money. If you want

to use risk capital to get

some sort of outsized return,

go raise that from LPs.

But to like take customer deposits

and use it on on

risky non liquid investments.

It makes sense. There’s one thing I could

I could just help people frame this.

The

aggregate amount of dollars in

these bank accounts, I would estimate

equals 10% of the value

of the startups they represent. Would we

all agree on that?

It’s about 10% of the value of those startups,

maybe 20. If you

were like, how do you how do you calculate

I’m thinking about the startups who recently

did a round of funding, they diluted

10%. That represents

all of their treasury or half of

their treasury. So if that cash

for the startup portion of this equals

10% of the value of startups, I can guarantee

you those startups with access to that capital

again, Monday, will be able

to outperform the backstop

that the government provides. This sounds like

Enron math to me. No.

Okay, if you want to start

to take any of your startups, they have 30 million

have time. Listen, we don’t have time

here for the government to figure out how to be

a partner in or an investor

in all these startups. I’m

sorry, we don’t step

in or they don’t. If they don’t step

in, you’ll have systemic failure. No,

no, but do the math with me here of

one of the companies pick one of the companies that has

20 you have a company that has 20 million there

or 30 million there. What does that represent?

If you were to take their valuation from last year when they

raised that money, it doesn’t

matter. It doesn’t matter who’s the depositor.

It does not matter. It matters for people

to understand how much

value is going to be lost.

And how easily

recoverable it is if these companies are allowed

in aggregate to deploy that capital.

That’s the point you’re not getting, or I’m

not explaining to properly. If allowed

to deploy that, it’s going

to return a multiple,

an adventure

multiple 2345x.

But if we destroy that money,

these companies are going out of business next month.

That money is their money.

It’s their deposits. I agree with you. I’m

trying to create a framing here for people to understand

exactly how much value is going to

be lost. I think the better framing is that when you put

your money in a FDIC

insured bank and you put it in a customer

deposit that’s supposed to be completely safe,

that’s paying you a couple of percent interest

and that is reflected even as a

money market fund on your account, you

do not expect that money to be turned around

by the bank and

put in risk assets. So you’re saying raise the FDIC limits.

That makes no sense.

Banks should not work that way.

Look, I think it’s crazy that you could set up

a bank account because you just want to

write checks and you could lose that

money because the bankers decided to

loan it to some startup. That’s insane.

Or the bankers decided to buy a 10-year

mortgage-backed security who doesn’t

understand interest rate risk. That’s not the way the system

is supposed to work. And you got all these people on

Twitter pushing back no bailouts or whatever.

That’s the depositor’s money. I agree.

No bailout for SVB. They should lose everything.

Executives, their stock options are worthless.

All the stockholders of that company,

their shares are worthless. But the

question is, should depositors lose money

in these banks? They just thought they were

signing for a checking account. I mean, are you kidding me?

And if you let that happen,

there will be a cascade here because

the logical

consequence will be everybody’s going to say,

put my money in JP Morgan or

Wells Fargo or Bank of America. There’ll be four banks.

That’s it. And all the regional banks are going to

shut down. That’s where we’re headed to.

Tens of thousands of highly paid

workers and not just tech workers

are going to be out of jobs and

they don’t have jobs waiting for them at Amazon

or Google to bail them out. And this

is the start of a

contagion if it doesn’t get stopped.

What did they do wrong?

They used what is considered

one of the most reputable banks in the world.

They used a top 20 bank that the regulators said

was in compliance. So

did they do something wrong or were the regulators

asleep at the wheel?

I don’t know. Some way I think

this is Biden’s fault or

Zelensky’s.

It’s Biden or Zelensky’s fault.

What do you guys think this means for VC?

It is a chilling

effect. I talked with some LPs

in the last two days in the VC world.

I’ll give you a couple anecdotes.

I have a friend

runs a fund. He looked at

his portfolio. They have $270

million or sorry $350

million tied up at Silicon Valley Bank.

They need $27 million

for cash for the next 30

days. So he’s called

his LPs and he’s trying to get his LPs

to front him money

to wire money so that he can

front his company’s money so they

can actually pay their operating expenses

and cover their payroll. And then I

spoke with a couple of LPs in the last 48 hours.

They have gotten dozens

of calls from

various venture funds. Everyone is asking

the same question. Can we do a capital call?

Can we get money delivered early? Can we

use that money to support our companies because

their cash is stuck? Coming out

of this, the uncertainty

that this creates in the investment

environment, I think

it’s going to have a real chilling effect.

Not just with the GPs and their

proclivity to sign term sheets

right now and wire new money over,

but also with the LPs as they’re making

capital commitments and actually following

through with capital commitments that have

already been made.

Where’s the capital actually going to land up?

That was never a question mark before.

It was never anything that anyone even considered

that capital could be disappeared or locked up

or tied up. And the fact that

this is adding this unique

friction in the market

is a layer on top of an already

distressed and challenged environment

for fundraising, for GPs,

for LPs. And it seems

to be exactly

the icing on the cake we did not need right now

no matter how this gets resolved.

I think private markets and VC

could seize. I think you’re going to see people

pull term sheets, maybe

half as many fundings are going to occur

as people try to do triage. Another

VC friend of mine just sent me a text. He can’t make

payroll next week. He has a fund. For his

VC fund. His VC fund,

their employees cannot, he cannot pay

his employees on Monday. Oh, lord.

And so, yes,

I do think funds could shut down

coming out of this. I think

that companies that were, call it

you know, 75% distressed

are done for now. No one’s going to step in

and bridge them and fund them.

It’s going to accelerate a lot of shutdowns

because people are now, cash is king

now cash is kinger. Right? It’s like

a big shift. I think that

was really well said. I think you’re right about all that.

Jake, you tweeted that you think this is going to cause a 60 day

freeze in deal making activity.

I think that’s

more or less right. You’re right because, you know,

all the VCs out there have to think about shoring up

their existing portfolios. Exactly.

What if you got companies that are now in distress

that are perfectly good companies?

You’ve got to focus on, maybe you’re going to make new investments.

You’re picking a few winners. You’re picking one or two winners

and you’re going to focus on that and you’re going to say,

you know what, the rest of them could be good, but I can’t.

It’s going to be a tough decision.

I have three open deals right now

that we’re doing.

I now have to figure out how to get those deals done

and I have four companies

that are in this payroll situation

in a major way. So now I’ve got

capital and I’ve got to

and we’re not personally affected

by the Silicon Valley bank thing, thank God.

But now we have to

do triage the known winners

in your portfolio that did nothing

wrong or do you make the

next three investments or four investments and

I’m going to make good on

those three investments, but next month,

maybe not. Maybe next month I’m taking

off and I’m focusing on the portfolio

and I think that’s what’s going to happen writ large.

We’re in triage mode now. Full on triage

mode.

If this doesn’t get resolved, if they can’t get those.

Chamath, what do you think?

It’s dark. I had a meeting

three weeks ago with a US

LP and

you know, you guys know how

I run this business here,

but it’s, there’s like a lot of

risk management, you know, we think about

this stuff a lot and

the message that came back

to me was, I don’t think risk

management is worthwhile in venture.

I didn’t understand where that was coming

from because if

you’re investing your money across

a very risky asset class,

you have to be always

thinking about how you could lose money

and I think that venture has always

romantically been described as like

buying lottery tickets and

so it doesn’t matter if you lose, but

when you have that kind of attitude,

you just become super

complacent and you don’t think about

left tail risk. You only think about right

and this is an example of like

left tail risk that came out of

nowhere that could wipe out

entire portfolios. So you

had, you know, folks invest

into funds that

spent a few years, probably

2019, 2020,

2021, really

misallocating money, right?

Writing ginormous checks into

companies at valuations that didn’t make sense

who then went and burned it

and now what little

cash they had left may also be gone,

which means those valuations are even more

impaired, which means that the LPs that

gave them the money are even more underwater

and that cycle I think is

really terrible. That’ll take a, so

maybe this is the wake up call

where now risk management

is actually in vogue and cool and it’s important

to know this stuff. I don’t know. We have

breaking news while we’re taping

this. The Department of Financial Protection and Innovation

of the State of California has published

findings on SVB. We’ll pull it up

on the screen for the besties to respond

to. On March 8, 2023,

the bank announced a loss of

approximately 1.8 billion from the sale of

investments. We’ve talked about that already.

On March 8,

2023, the bank’s holding company announced

it was conducting a capital raise despite the

bank being in sound financial condition

prior to March 9, 2023. Investors

and depositors reacted

by initiating withdrawals of

$42 billion in

deposits. So that would be over

1, I think, of the total deposits

from the bank on March 9, or

even more, 2023, causing

a run on the bank. As

of the close of business on March 9, the bank

had a negative cash balance of approximately

$958 million despite

attempts from the bank with the

assistance of regulators to transfer collateral

from various sources. The bank did not meet

its cash letter with the

Federal Reserve. The precipitous

deposit withdrawal has caused the bank to be

incapable of paying its obligations as they come due

and the bank is now insolvent.

$42 billion of withdrawals

is 25%

of total deposits. But

$42 billion is greater

than the $14 billion of cash they had on hand

and the $26 billion of

liquid securities that they had.

So you add those two up together, you’re at

$40 billion. And then to get

more cash, they’re going to have to sell a bunch of loan

portfolios. And selling loan portfolios,

you’ve got to package them up. It takes weeks or

months to do that, and they’re going to be sold at distressed

prices. So this is where a classic

run on the bank problem actually

causes a decline in

the asset value of the business

and the assets that they own. Because if you have

to go and turn around and sell those assets in the market

super fast, you’re going to take a huge

loss. You guys remember that movie Margin Call

with Demi Moore and

what’s his name? And they

make this plan to go in market and they’re like, we’ve got

to sell… Patrick Swayze?

No, not Patrick Swayze.

Jeremy Irons. He plays

Patrick Swayze. He’s like the chairman of the bank.

And they’re like, we have to sell all this, but we’re going to

take a huge loss. And they make this

big trade that happens at the beginning of the morning.

But that’s what happens when you have to sell a lot

of assets very fast. As you guys know,

you end up selling them at a discount. So

the rate at which deposits are coming out

of the bank can actually impact

the asset value held at the bank.

And that’s fundamentally what a run on the bank

causes. And the irony is, as

they point out, the company was fundamentally

financially sound. They had enough assets

at the current market value or whatever to meet

all of their obligations. But the rate at which

assets started to get pulled out is what

drove the company, the

bank into distress. And if

you think about it,

it’s an ironic point of view on

Silicon Valley. Because Silicon

Valley operates with such, we

all joke about what a herd mentality

and what an incredibly tied

and deep network Silicon Valley

is. We all got dozens and hundreds

of texts and messages from friends,

colleagues, coworkers yesterday,

all relaying the

news about what they were going to do.

And as soon as that happened, that’s how tightly

intertwined Silicon Valley is.

Within 24 hours, every

CEO and every venture capitalist

was on a chat group or on

a message group with other people in the Valley.

And once there was any indication

of panic, the entire market

flipped. And you guys saw this, we all saw

this within 24 hours. At the beginning of the day yesterday,

it was like, they’ll get through it, it’ll be fine.

They just took a little markdown on their portfolio.

They got plenty of assets. But

then it’s like, well, Founders Fund said we should

probably get out. Okay, well, Founders Fund is getting out.

Maybe we should get out before everyone else does.

We got to get out before everyone else does. Let’s do it now.

I’m getting out right now. I’m telling my best friend I’m getting out right

now. And then everyone tells their second best friend.

And then all of a sudden, the whole Valley knows it.

And then the whole Valley is running for the door.

And this is a really interesting and unique

scenario. It’s not like the classic

consumer run on the bank

where you’re trying to pull cash out. It’s the

Silicon Valley 24 hour cycle

of we all got to do it because everyone

else is doing like what we’re seeing with investing

cycles in Silicon Valley, where everyone chases

and these bubbles emerge. The reverse

I think happened yesterday, where the

herd mentality drove us all to

rush for the door as quickly as possible. You know,

I’m not sure that that might be why

it’s not as much of a contagion,

you know, as you might expect elsewhere

because places, other kind of

regional banks don’t have the same sort of

inter windedness, as we saw with

depositors here in Silicon Valley Bank. I don’t know.

I don’t know.

This is where

I think that describing what happened is a panic

kind of misses the fundamental

rationality of the response.

So true, by the way. Yeah.

So it does seem like a panic, but that

doesn’t mean that each individual decision makers

motivation is panic. I actually

think it’s a rational upside

downside calculation. I

mean, this is all game theory. So

if you think that there’s a risk

of other people pulling out their assets,

and in fact, you’re hearing that they are,

you don’t want to wait and

be the last one to leave. And so

you think about it, there’s no penalty

or downside to taking your money out,

right? So the

downside of taking your

funds out immediately is zero. And the upside

is you might save 100% of your money.

So it’s a rational decision

when confidence is lost

to take out your money. And in

fact, it was rational. There were a bunch of

VCs, not a lot, but some of them

tweeting yesterday that, you know,

SVB has been a great player in the ecosystem

for 30 years. We should show our support

right now by not taking our money out.

Well, guess what? What happened to them?

They got stuck, and now their

money is frozen, and they’re not sure whether

they’re going to get pennies on the dollar

or not. Whereas the people who rushed for the exits

yesterday got their money out. It’s a

prisoner’s dilemma. It is a prisoner’s dilemma.

But here’s the thing.

It’s not even about anymore

whether the institution

is solvent. It’s about

whether there’s confidence. And

I think there is a risk now of contagion

spreading to these other regional

banks because people aren’t sure, and there’s

already huge cash outflows

leaving these other banks, because why take a chance?

The game theory of it is

move your money out until this is over,

and if you’re okay

with moving it back in a few

weeks, if it turns out not to be around the bank,

that’s fine. So a lot of this can be self-fulfilling.

You have to remember that

runs on the bank, Friedberg, you said this 100

years ago, were extremely common.

Every decade, there would be a

giant financial panic, and there’d be

a run on the bank, run on many banks.

And the only way that the federal government stopped it

was by introducing FDIC,

and they said to depositors,

your money is safe. And at that time,

$250,000 was enough. The problem

we have is that with these business banks,

$250,000 is not enough.

So all of a sudden, there’s going to be a crisis

of confidence. If you think a business

bank can go under, again,

you’re just going to leave all these regional banks,

you’re going to go to the top four, and that’s going to be

it. So I think that

the situation right now is

really dynamic, and

if the Fed

does nothing and just says,

these depositors

should have known better,

the losses on them, then

I think the rational reaction

for depositors at all of these other banks

would be just to leave.

Because I don’t think depositors are in a good position

to assess

the liquidity

and creditworthiness of a bank. I just

don’t think they are. I think stockholders are.

They’re the people who should lose all their money

if the bank goes under, but not depositors.

Any advice or takeaways for

founders and capital allocators going

forward? Obviously, have your money

in multiple bank accounts.

I sent you guys a list that was just published

of all of the funds that custody

at SVB, and

it’s unbelievable, the list.

It’s every single major

VC in Silicon Valley. Wow. Where’d you

get this? I have my ways.

Oh, extracted from SEC filings. Got it.

Okay. Thank you. Yeah. This is

amazing. Wow. Holy shit.

I mean, everybody’s in there.

Excel, Gleason, Sequoia.

We’re going pretty fast

here, but yeah.

Yeah, everyone’s in there.

I feel very fortunate

that we were out.

A few months ago, when we were talking about

venture debt on the pod,

I didn’t believe that SVB should be in

this business, so I told… Well, look, there’s

Kraft. There’s Kraft.

Well, hold on. I’ll tell you.

Does it say how much money we got in there?

Yeah. Go to the right. I’ll tell you what happened

is, so after the conversation we had on this

show about venture debt, I’m like,

I don’t really like that SVB’s in this business,

so I told my guys, set up an account somewhere

else, so we did that. So we moved our firm

accounts over, and we were just using

SVB to make warehouse

loans or whatever.

So I thought they were just a lender to us.

So yesterday, when all this stuff went

down, I said

to our guys, we’re out of there. They’re like,

well, actually, we had about $45 million

that we were about to distribute to LPs.

And I’m like, whoa, that’s crazy.

So we were able to sweep that to

an account we used to make

in-kind distributions, and then we got

on the phone, and we called as many

companies as we could to get them out.

And we got a huge number of them out.

But unfortunately, some of them didn’t get out.

Here’s the thing that I think people in Washington don’t understand.

We’re doing this with the next set of banks.

The triage is still happening.

Guys, I will tell you, look,

Sax, I appreciate the siren call,

but I think the only

way that what you’re saying,

because you’re saying that

triggers the next siren call

and the contagion spreads, I’m not blaming

you, I’m just saying it’s a reality, and you’re right.

The game theory optimal way to play this

as a depositor is to move your money

out and get it somewhere that it’s completely safe

and you know you have your cash secured or

buy a security in a brokerage account where it’s totally

safe and it’s registered with a

securities exchange or something.

But in the meantime,

for this to get resolved,

there has to be a bear hug

solution offered up this weekend.

I’ll say it again.

In order to stop the next set of siren calls,

to drive the next panic…

This is the thing I hate

about the run

on the bank conversation, is that if you warn

people that there’s a possible

run on the bank happening, you’re actually

creating the run on the bank. That’s why it’s so

pernicious when these things get started.

And yesterday,

we were calling all of our portfolio companies

because we were warning them, because our obligation

was to them, but we weren’t…

I don’t think we were putting out

a siren to the world.

By the afternoon, it was really clear that

if they listened and got their money out, they were in much better

shape than the ones who didn’t listen.

This is the pernicious thing, is that

every individual actor has to do what’s in their

best interest, and we’re not trying

to start another run.

Hold on, but we know

things. We know

that people very close to us, big players,

are withdrawing their money from other banks

right now out of an abundance of caution.

Let me just finish my point. My point

is, what you’re saying

makes a ton of sense.

It’s going to cause

this, as you described, pernicious,

escalatory problem.

The only way to stop it is a bear hug,

which may not cost the taxpayer anything

if the Fed or some

federal agency stepped in

and said, we are going to backstop

all of these banks with all of these

deposits with cash, and we’re going to guarantee

it today, and here’s a $500 billion

facility. Just by

saying that, everyone stops

trying to pull their money out.

And you don’t actually need to backstop it with any money.

You can’t. It’s already

started. So, Nick, if you just

the link that I sent you in the

group chat, can you just throw that link up

there? I think this is the best

proxy for what Sax is talking about.

So, sort of, I think, very unemotionally,

how would we know that there

is a contagion that’s afoot?

You would look at the equity

layer of all these regional

banks. So what is this? This is the

iShares regional banks ETF.

And what you start to see is

this decay, and go to the

one-week view, Nick, please. It just

starts to fall off of a cliff.

And so, why is this happening? Well,

it’s happening because the equity

tier of these banks

are now increasingly worried

that their equity will get wiped out.

And so that’s why they’re selling.

And so, I think what

David said is already afoot, unfortunately.

It starts at SVB,

but forget the name for a

second, and take Silicon Valley out of it.

This is a top 20 bank that

now is in the receivership

of, you know, the authorities.

And so, there does need to be

something that needs to happen in really short order

because what’s to prevent bank number

35? Let me just say it again.

If a federal agency comes in, if the

Fed comes in and says, you know what?

We’re going to backstop all of these banks.

And we’re going to put $500 billion

behind it, and we’re going to guarantee that all these deposits

are going to be made whole.

It stops the panic. At that point,

you don’t even have to put up any money

because it’s a first derivative problem.

It’s a feedback loop. As soon as you stop

people from doing the withdrawals, the whole

market subsides. You unplug it.

And I think that’s what needs to happen

this weekend. That’s what should happen today

is they, number one, need to go

get Silicon Valley Bank,

hand it over to a big balance sheet, and guarantee

that balance sheet that they’re going to make money by taking this thing

on. And number two, they’ve got to make a statement.

We’ve got another $500 billion for you.

Where’s the president? Where’s Yellen?

They’ll make a profit on it, too.

They don’t need to use any money to do it.

Right. The thing that’s missing in our system

is that there’s no FDIC

for $25 million accounts.

$250 is not an effective

amount for a business bank.

It’s for a small business.

Businesses need confidence in our economy,

in our banking system, or the whole thing starts to unspool.

So what the quid pro quo

should be is you can get a $25 million

FDIC business banking account,

and the bank is highly restricted

in what it can do with that money.

You can’t put that money in Fugazi Venture debt.

You can’t put that money in laddered

10-year bonds that don’t get mark-to-market.

It’s only highly liquid,

secure, mark-to-market assets.

And the downside of that for the bank

is they’ll make less money and pass on

less interest to

the business, to the depositor.

The shareholders. I agree with that.

So what? That’s the way it should work.

How are stablecoins looking like a better option right now?

Even the crypto guys right now are like,

what did you listen to?

They’re not, J. Cal. They’re not.

It was a joke.

Nothing can revive the crypto market as we’re seeing today.

Even in a run on the bank, which is exactly what

everybody was afraid of in a Bitcoin world,

that thing is down 10%.

I just want to recap the end of the show here.

The reason for that, Chamath,

is just that what we’ve seen

is that liquidity is all correlated.

So when people are panicking

about the state of their finances

and the state of their cash,

the first thing they dump is crypto

because it is very liquid.

So everyone is trying to free up cash right now.

I just want to be clear as the end of the show here.

We were dancing around,

is this going to be a contagion?

And I think what we know

and what we’re seeing is

the next dominoes

are already falling.

It cannot be a contagion.

We have to stop it.

That’s the point.

We started this.

We didn’t want to go there.

I think with some reticence

to going there.

Let’s put it this way.

If you have initiated a wire

in the last 24 hours,

you are worried about contagion.

Yes.

Risk management matters.

And if you have any ability

to influence what’s going to happen this weekend,

we strongly advise

that someone comes in

and bear hugs

the market this weekend and says

we will not let contagion happen

with a very big slug of capital

to support it that will likely

not even be needed to support it.

Because once you say that,

the contagion will stop.

Freeberg, we’re going to know on Monday

whether these regulators and the administration

know what they’re doing at all.

The other black swan problem

is that this weekend we will find out

what some of the unintended second

order consequences are going to be

of SVB being in receivership

this weekend. We talked a little bit about

the pipes problem, but there may be

several other businesses and other

institutions and companies that we don’t know about

that may trigger another

set of cascading effects that are unrelated

to a banking problem but could drive

some more significant business and economic

problems that we’re going to probably

end up talking about next week.

We’re obsessed with payroll,

but there are other things

that this money goes towards,

mortgages or rents.

The cascading effect of this, if people

stop paying their rents, if people stop paying

mortgages, I mean…

Real estate.

Biden visited Kyiv instead of

East Palestine. Yellen visited

Kyiv instead of Silicon Valley.

Do these people know what’s going on here?

They promised more financial assistance

for Ukraine, and

they’re saying they’re monitoring the situation

here. We’re in the process

of what could be a run of banking failure.

What’s the bill for Ukraine this month?

Get on the case.

The bill for Ukraine this month versus

this bailout is, you know,

probably the same, so I think we have to

really think this through, folks.

Well, no on Monday,

whether these people have a clue or not.

No, they have to be on TV tonight or tomorrow.

This has to be a presser on Sunday.

Hold on. I think a lot

of these guys do know what they’re doing, so let

me just say it to them in language they understand.

Folks, when you look

at the equity tier of these regional

banks, people are

liquidating the equity tier

because they know that that is the first

domino to fall if banks

go into receivership. Please

act accordingly. You can

see it in the ETFs. You can

see it in the trade flows. This is not

a Silicon Valley problem anymore.

It is a regional bank

problem, and it will get worse

unless you do something to make it better.

Right, and Jake, I’ll just use the

word bailout. I don’t like that word because…

No, not bailout. Backstop.

There were two big-to-fail banks

in 2008 in the financial crisis

who did get bailed out. Those people should have lost

the value of their stock. Okay, that

was wrong. That’s not what we’re talking about here.

SVB is wiped out already.

What we’re talking about is protecting depositors.

These are people who trusted that when

they put their money in a top-20 bank

that our regulatory system is

compliant, that they will not

lose their money. When it says on their computer screen

that my money is in a

BlackRock or a Morgan Stanley Mutual

fund, or money market fund rather,

the safest instrument there is,

that that money is where it’s

supposed to be. And if regulators

allow that bank to put their money

in stupid assets that are not mark-to-market

and that’s why they shut down,

that is not a good reason for depositors

to not get their money. 100%.

We’re taking care of depositors

here and not bailing out stockholders. Yes.

This is not for the executives at the banks.

It’s for the depositors who did

nothing wrong, and nor did their employees

and their customers, and the innovation

that they’re working on. All right, this has been a great all-in podcast.

Sorry we didn’t have time

to talk about the

shaman, QAnon shaman.

I know that’s a passion project for Hugh Sachs,

but you can announce your Kickstarter

for him and your GoFundMe

for the QAnon shaman.

Where’s the bulldog?

Give me that bulldog one more time.

The shaman

is an intersection of three,

of a very interesting Venn diagram.

He is very athletically

fit, incredibly

hairy, and oddly tattooed.

That’s a trifecta

that you rarely see.

You rarely see that. Also,

cultural appropriation, so yeah, we have to keep that

in mind, and conspiracy theories. I mean, this guy’s

got it all. Are we

going to play poker this weekend and just,

like, as the meteor is coming

towards Silicon Valley? He’s kind of

an odd, seriously, the shaman,

what’s his name? Jake?

He doesn’t seem like he’s all that.

No, he’s a guy who has

diagnosed mental illness, but he’s completely

non-violent. He’s completely non-violent.

He actually believes in the philosophy

of Mahatma Gandhi of no violence

towards any creatures.

He’s a vegetarian.

You know, he’s a bit of an odd duck. He’s a

freeberg of QAnon. And he

didn’t assault anyone. He just

wandered through the Capitol, apparently getting a

tour from police

officers who were just guiding him through it. He’s the January

6th freeberg. And he got four years, hold on a second,

he got four years in jail for that because he

became the face of an insurrection

because he just looks so weird

with the Viking horns and the face pain

or whatever. He also made some threats to the

politicians too, but yeah. I mean, it

does seem like it might not be the appropriate sentence.

He wrote a note saying, we’re coming for you,

I think, on, you have to look into the case,

but he was sentenced by a Republican judge

from Texas. And he had made threats,

written threats, and put them on the desks of folks.

And he was one of the first people

into the building. So I think they got him for that.

But I agree with you.

Listen, it depends how he got into the building. If he didn’t

break a door down or didn’t smash a window,

if he damaged property, that’s one thing.

If he assaulted someone, that’s one thing. But if he just

wandered through the Capitol,

I think four years is kind of excessive. And I think the

reason why the guy got four years is because

of his mental illness, he’s not

able to defend himself the way that he should be.

This is a fundamental civil liberties issue.

If you have any compassion at all, you shouldn’t

let a guy like that get scapegoated.

There’s 400 people who, of

the thousands of people who broke in,

who were violent and who got sentences

of some degree, they were all

settled, like, plea

bargained, including his.

They didn’t go to trial. And if,

you know, I think we can all agree, the

violence that occurred that day is,

you know, should be punished, and the non-violent

stuff should be a speeding

ticket, you know, and we don’t need to…

I think three categories, Jason. I think violence, the

assault on cops, and so forth,

punished most severely.

Then damage of property, and then

people who just

trespassed or wandered through, who may not even

have known they were trespassing.

Probation. That’s not jail time,

that’s not a felony. Yeah, I mean, we want to

promote peaceful protest. If they

had come with guitars and saying

kumbaya, and we shall overcome,

we’d be having a different discussion here. Instead,

you can’t beat cops, you know, and you can’t

beat cops up. Sorry. Those ones go to jail.

Yeah, period. Full stop. We’re in agreement. Okay,

everybody, this has been another amazing

All In podcast. Sorry we couldn’t get to all the

news, but we felt that this required

a big unpacking for

the sultan of science,

the

dictator, and the rain man.

I am the undisputed world’s

greatest moderator. We’ll see you next time on the All In podcast.

Not this week.

I’m going all in.

We’ll let your winners ride.

Rain man

David Saks.

I’m going all in.

And instead, we open sourced it to the fans

and they’ve just gone crazy with it.

I’m the queen of quinoa.

I’m going all in.

Let your winners ride.

Besties are gone.

That’s my

dog taking a notice in your driveway.

Oh, man.

We should all just get a room

and just have one big huge orgy

because they’re all just useless. It’s like this, like,

sexual tension that they just need to release somehow.

Wet your

feet.

Wet your feet.

We need to get merch.

Besties are gone.

I’m going all in.