SPEAKER_00: hey guys i got a little friend here what oh yeah i think i'm gonna start a new podcast is that a bulldog and i'm gonna have a bulldog as my mascot do you want a bulldog oh my god you got my mascot SPEAKER_04: yeah i took over your mascot well look at that now you're actually likable sax sax are you trying SPEAKER_08: to improve your image sax is so unlikable that he has gotten a bulldog oh my god sax show me SPEAKER_12: his face again is it him or her him what's his name his name is moose oh my god oh my god you got SPEAKER_14: a bulldog he's so cute yeah it's me my mascot jake i'm going solo with my podcast i'm gonna call it SPEAKER_07: this week in technology it already exists please don't start any more trademark all right everybody SPEAKER_19: it's an emergency podcast silicon valley bank uh has been taken over by the fdic i'm sorry is this David Friedberg: twist live stream am i on the twist live stream i mean guys if you couldn't just interrupt me well SPEAKER_22: i'm never gonna get through this it's a lot to get through the world needs to hear our opinions if you care about us click like and subscribe subscribe subscribe button make sure you search SPEAKER_26: for this week in startups and uh right right in the comments if you don't get enough jcal you can get me SPEAKER_30: four more times a week the name of the other podcast is this week in startups thanks for the free promo guys it is a huge day today in silicon valley we haven't seen a black swan like event happen here SPEAKER_07: in a long time since 2008 i thought the last time was when you published the book angel oh god SPEAKER_33: we have to get to work chamath i save the jokes i'm trying to give you a cold open we did that here we SPEAKER_19: got three two 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 polyhapitiya the rain man david sacks and the prince of panic attacks no more his wires cleared david freeberg the sultan of science welcome SPEAKER_07: boys how is everybody just to start this off contextually the last 24 hours can you can you SPEAKER_19: recall a time in our careers where it's felt this acute or insane or intense uh 2008 and covet SPEAKER_48: 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 covet and oh eight really acute effects that many companies and investors are actively dealing with right now like not just a few thousands of companies that are really in a state of like distress right now so it is um potentially from a silicon valley perspective worse than oh eight or covet oh for sure SPEAKER_14: for sure i mean this this is basically a lehman sized event for silicon valley remember when lehman brothers went out of basically file for bankruptcy in 2008 started the whole financial crisis the David Sacks: 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 SPEAKER_14: that svb this is a lehman sized event for silicon valley and there's there's two big things happening David Sacks: one is the impact on the startup ecosystem so you're seeing probably thousands of companies now cannot make payroll in the next few weeks because their money is trapped and tied up at silicon valley bank which is now under receivership so if you wired your money out yesterday you're good and a lot of people managed to do that but there are a lot of people who were had wires in the hopper didn't make it today logged into the website can't log in the money's just frozen and we don't know when they're gonna be able to get their money out or how many cents of the dollar you're gonna 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 SPEAKER_54: exactly those companies have plenty of cash they're fine this is small companies companies with 10 to 100 David Sacks: 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 this all happening in real time is a regional banking crisis because when depositors see that their money was not safe at svb which was a top 20 bank that as far as everyone knows was in regulatory compliance nobody has said that svb wasn't compliant as far as we know they had a regulator's seal of approval and now you find out your money was not safe and it's not fdic insured above 250 000 so the conversations we're all seeing in our chat groups with leading investors is why the hell would you keep your money anywhere but jp morgan or a top four bank and so i think that unless the fed steps in here over the weekend we're gonna see potentially a run on the regional banking system a cascade like we saw in 2008. well sex let's let's just take a step back before because i think SPEAKER_46: you're right but we should talk about why that happens the contagion drivers and just so people SPEAKER_19: 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 in lpn they had millions of dollars that they can access to invest in startups so chamath there are many products and services that silicon valley provides one is uh you know banking services to startups another is to venture capitalists they do the mortgages for banker for venture capitalists and for founders as well they provide those kind of white glove services but you also mentioned in our group chat they also provide loans to gps general partners to people who run uh venture firms so the impact could also hit SPEAKER_30: there maybe you could explain what that is and then we'll get into what happened here yeah well i think SPEAKER_59: it's important maybe actually just for freeberg to just explain what's happening but okay okay and maybe maybe let me just do the lead in and then friedberg can do the details but for for those that are far away and aren't even sure what's going on the basic problem that we have right now is in the last 36 hours a key part of the financial plumbing of silicon valley has basically been turned off and as a result billions of dollars of deposits have basically um been frozen it means that people can't pay their bills it means that people can't access their deposits it means that credit lines could be in default it means that payroll can't be met and so as a result we have this potential contagion on our hands but in order to understand it and unpack it i think it's important to explain exactly SPEAKER_60: how this came to pass so let me just hand the ball to freeberg and then we can talk about some of the SPEAKER_65: implications of which there are many yeah before freeberg starts with the why just the what that's SPEAKER_67: 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 the then the shares in silicon valley bank is a publicly traded entity dropped 60 on thursday then another 60 on friday of course then the entire world got focused on this and then every venture capitalist started telling or i would say the overwhelming majority of venture capitalists told their founders to get their money out of svb then you had a classic run on the bank a small number of venture capitalists gave advice to say hey we should support silicon valley bank i understand that but it turned out to be SPEAKER_30: really bad advice um and then trading uh was halted on friday morning pending news and then finally the fdic shut down silicon valley bank at noon on friday and there's a lot of speculation of what will happen on the way over the weekend but maybe you could walk us through technically what happened to silicon SPEAKER_68: valley bank and why they had this cash shortfall and this right yeah we explained the run on the SPEAKER_46: bank basically but what led up to this the irony is it really was and is prior to the quote run SPEAKER_48: a financially solvent business so i i have a few slides if you're on youtube you can see it um that we pulled one slide that was kind of made by us and the other set that come from silicon valley bank's actual presentations but if you look at their balance sheet this is from the end of the year 2022 um you can kind of look at the you know stuff that they owe their 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 a some other debt so in total silicon valley bank at the end of the year had about 195 billion dollars in liabilities 173 billion of customer deposits that they owe to customers and 22 billion of other debt and then they take those customer deposits and they invest it in in a number of securities and the way that a balance sheet business like this bank would operate is you know the customers have access to their cash anytime they want but in order for the bank to make money they make longer duration investments and those longer duration investments give them the ability to earn money on those longer duration investments um more than they're paying the customers for the deposit so if you look at their longer duration investments they had about 208 billion dollars of total assets sitting on the balance sheet uh so compare that to the 195 billion that they owe customers and and and other debt holders so you know the difference here between 208 and 195 is about 13 billion dollars that's kind of the net what people would call book value of silicon valley bank at the end of the year and of the 208 billion of assets that they had 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 banks 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 freeberg it's actually mbs they bought SPEAKER_67: a bunch of mbs 10-year duration abuse and important to note of the 208 billion that they have the book SPEAKER_47: value friedberg there was a uh whatever 10 percent of it's in cash or something so they do have some cash SPEAKER_48: 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 100 of the 173 billion of customer deposits you know they've got 14 billion of cash and then they've got all these treasury securities they can sell call it 40 billion so if 25 of customers said tomorrow hey we want our cash back theoretically they could just dump those treasury securities distribute the cash and give it all back to customers the problem is if suddenly more than 25 percent 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 um and these this was like a regular kind of occurrence that happened in the 1920s that ushered in a lot of our modern securities laws that are meant to kind of create the necessary liquidity provisions and how these banks are able to operate to make cash available to customers SPEAKER_71: but what happened is so much so by the way freeberg that they made a movie it's a wonderful life SPEAKER_46: about a bank run so basically one of the bigger problems that silicon valley bank they ran into two SPEAKER_48: big problems number one is deposit decline where uh vcs were not investing new money and when they were not investing new money and startups were burning more money than silicon valley had modeled they would be burning because they thought everyone was going to reduce spend and reduce burn and they didn't so deposits were going down while all these startups were burning money no vcs were investing so total deposits were on the decline meanwhile their bond portfolio the assets that they hold on the balance sheet also declined in value and i and i kind of just put a really simple illustration here on why if you have a hundred dollar kind of face value bond that earns two percent uh which is basically you know where these treasuries were a year ago and you and you hold that for 10 years that 10-year bond yields 122 dollars if the interest rate goes up to five percent then that that that bond should yield 163 dollars so the value of the first bond actually goes down by 25 percent because of the market conditions that's how significant the value changes with just a three percent 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 SPEAKER_46: and at that point everyone kind of perked their head up and said oh my gosh what's crazy is in q4 by the SPEAKER_48: 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 um their assets that they hold were basically declining in value because of the massive and very quick rise in interest rates and that svb had bought a bunch of bonds that were long long-durated bonds so it led to a you know obviously a real short-term problem if you look at the rest of svb's loan portfolio there's also a question of how distressed that all is so 10 of their 70 billion plus dollars of loans is in venture debt and venture debt is very questionable in this market right because historically the way venture debt makes money is that they assume that vcs are going to keep funding the companies that they're providing debt to and if the vcs stop funding the companies then the venture debt defaults and so if you go to the last slide in this deck you'll kind of see svb's performance on their venture debt portfolio yeah so look at this this is the the performance results on just the warrants that they get on their venture debt so when you when you issue venture debt you take a write down um or you get paid back and then you also get some warrants you get some a right to buy shares and in the winners and 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 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 dollars in profit on their warrants that they had in their venture debt portfolio in 2021 that number collapsed to 148 in 2022 and you better believe most of that was in the early part of 2022 um so you know they didn't do a quarterly breakdown on this this was like their full year numbers but their venture debt portfolio which is another seven billion dollars of capital also distressed um certainly wasn't going to perform as everyone had modeled so when you kind of start to add this all up and remember you go back to the beginning they only had 15 billion dollars of true net book value which is the difference between their assets and their liabilities and so if you really start to adjust what are those assets really worth are they really worth what they're holding them at the book at and if people start to pull money out and you got to sell them at a distressed price in order to give people their cash that they're owed on deposits that's when you have a classic run on the bank problem and then everyone tries to be the first out the door and that's basically like what triggered this this week can i give you guys my SPEAKER_59: 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 SPEAKER_60: sorry for what's going on and what you guys are going through and then to founders that are trying Chamath Palihapitiya: to navigate this it must be unbelievably tough there are a few founders in our portfolio so you know from SPEAKER_59: all of us just know that we're thinking of you guys and um hopefully everybody ends up on the other side of this by monday or tuesday with not a lot of damage so let's just put that out there as sort SPEAKER_60: of like goodwill and kind of good juju in the world for the next it's going to be a really difficult SPEAKER_52: weekend for people who are trying to navigate this yeah i think it's well said yeah i mean i SPEAKER_67: i've got founders who are in really really tough shape right now trying to figure out how do i make Chamath Palihapitiya: 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 the maybe the best word there's a little bit of blame that you can put at the feet of three different groups of actors and i just want to get your guys's 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 that's worth talking about then i think if you look at what actually practically SPEAKER_59: 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 Chamath Palihapitiya: and you know somebody's like hey freeberg i'll pay you a hundred thousand dollars monthly over some number of months right in in normal pay every two weeks or i'll pay you 200 000 but you only get paid once a year well the problem with that second thing is you still have monthly bills that you have to make up for before you get paid and so most people wouldn't take that job even if they paid you a lot more because you have this durational mismatch you have to pay rent every month you have to pay bills on a monthly basis you have credit card bills all these things and so you need to match the timing of your cash flows and so i think somewhere along the way the risk folks at svb just made a really large miscalculation they basically went and bought 10 year risk in order to pay back money that could be called on a daily or weekly basis that obviously in SPEAKER_95: hindsight was not a good idea but but more importantly they didn't and they didn't adjust fast enough Chamath Palihapitiya: well they can't because they have these mark-to-market assets that were just getting clobbered in the head as rates got raised and then the third the third thing is around regulators you know after the great financial crisis we went through a period where there was hundreds of bank failures and then for the last decade they've been virtually none right they've been like a few here or there and the last one was just during covet and so the the regulators i think have done a really good job with dodd frank and all of these other things to clean up the banking laws and the reporting requirements and the capital structures so that runs on banks are more and more infrequent but they kept this crazy loophole around the accounting treatment of assets and they allow these durational mismatches to appear in a bank's balance sheet and so i think there's a piece here for the regulators which is here's an opportunity that's glaring and obvious now and screaming about how we need to tighten some more of the transparency that's required it shouldn't be a group of armchair 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 SPEAKER_52: freeberg sacks what do you think who who is to blame here most for this blow up or is this just the SPEAKER_99: extragynous event of the rate hikes happening in such a short compressed period of time SPEAKER_101: no i mean look i think that svb's risk management was terrible obviously they signed up for these David Sacks: long dated securities when the market they serve is incredibly volatile like jama says duration mismatch really good point i would also say that there's a weird regulatory treatment where apparently if you buy these 10-year bonds these 10-year mortgage-backed securities or 10-year treasuries you don't have to recognize the loss until you sell them which is just bizarre so in other words they should have been marking the the positions to market and instead they just were allowing these losses to accrue i don't understand how the regulators can allow that kind of system i also don't understand how the regulators can allow a bank to take customer deposits and loan them out to startups with this venture debt that we've been talking about on the show where 10 of their portfolio is basically being loaned out to startups who have no credit that's crazy we talked on the show a few months ago actually it's SPEAKER_52: a good time to play the clip here because what we saw and sax and i you know seeing at the series a SPEAKER_19: level you have a lot of times founders would get this basically free money in their minds i raised 10 i get five in venture debt i can extend my runway um but that money comes due and here's the clip for SPEAKER_67: when sacks and i were talking about it just a couple episodes ago what i don't trust is whether SPEAKER_54: the the return models on venture debt that were created over the last five to ten years will be a good predictor of what the returns will be in the next five ten 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 four or five SPEAKER_110: episodes ago we kind of nailed it startups have no collateral they have no there's no security for SPEAKER_113: that loan how does that make sense no not to make a loan to a credit not true guys look i i disagree SPEAKER_48: with you on this point look if you pull up the the slide that breaks down so let's talk about venture debt for a second because i've actually invested in a venture debt fund and i've seen the economics on it the way that the the venture debt model typically works is the lender loans money to the startup and what they underwrite is what the current vcs in the startup say they're 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 underrated by the fact that the vcs are committed to continuing to put money in and hopefully see that this thing has a big there is no commitment there is no commitment but no let me SPEAKER_46: tell you hold on let me just finish i i get it but the but the asset as a as an asset class we can SPEAKER_48: make fun of it all we want it's actually performed pretty well these guys have generated typically 18 as an industry kind of a bull market and yeah a bull market 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 a bunch of those startups fail they don't get paid back and then the ones that succeed they actually take SPEAKER_46: 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 David Sacks: that broke is um it goes back to the point you made earlier in the show which is the the the lender has this expectation that the vcs are going to keep investing but what if they don't now we've been in a generally up into the right bull market since the last crash that's right in 2009 so i believe that the data for all these models is is skewed because it assumes again an environment in which companies SPEAKER_54: keep raising up rounds and as soon as you get into a crisis in which that breaks then the whole asset David Sacks: 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 SPEAKER_54: to be a venture debt fund go out and raise money from lps because what happens is when you raise it SPEAKER_126: with customer deposits you're creating systemic risk for the banking system and the regulator should SPEAKER_99: never have allowed that even worse under two assets are correlated because you're you're loaning it to people who are depositing it and in every other part of the private credit market that SPEAKER_59: is exactly what you do what sac said you can't use customer 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 Chamath Palihapitiya: 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 eight million dollar loan you have to have eight million dollars always on deposit otherwise you violate the otherwise you're 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 saxy your reaction to this though which is the thing that started this was the fact that vcs seeing the markets imploding stopped giving companies money but they didn't do enough work SPEAKER_91: to help founders cut burn as we said it themselves the burn stayed the same what is going on inside of SPEAKER_54: these 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 gotta 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 and 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 SPEAKER_136: about not wanting to be unpopular with the founder crowd uh led some young capital allocators to maybe SPEAKER_67: say okay yeah let's try this ditch effort before we do you know another riff let's try this new product SPEAKER_71: 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 okay that's better i think that's i think yeah i think there is SPEAKER_140: an 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 bus cycle and the bus are really hard really hard really hard and if you've never David Sacks: lived through a regime change before like there was in 2008 9 or in 2000 2000 was the worst yeah SPEAKER_140: 2001 to three and you're totally unprepared and you have no idea and you know and i think experience does matter and there there aren't that many vcs around who lived through the dot-com crash no probably SPEAKER_46: 85 percent if not by the way if you guys pull up just that slide on the loan portfolio at svb i just SPEAKER_48: want to make the case sacks i hear you it's a risky it seems like a risky investment to make but what don't you guys agree that a balance sheet business like svb or an insurance company or any business that has you know some amount of money coming in that sits on the balance sheet and then they invest it for a period of time there's a laddering of risk and there's a laddering of duration that you have and so if you look at silicon valley bank from their from the update they did last week that triggered all of this if you look at svb's loan portfolio 70 are really these SPEAKER_46: asset-backed loans which are um 56 of the portfolio is like you know prepayments on on lp commitments and SPEAKER_48: then 14 is is private banking loans which is loans against you know public securities that people have SPEAKER_46: only 10 of the portfolio is venture debt which is 7 billion and you know look if the asset historically is performed at an 18 kind of rate of return what is the your venture debt portfolio going to look like in the distressed environment is it negative 100 is it negative 50 i get a 40 i get a 30 i mean you guys can have a point of view on this but you look i mean for any business that's managing a large um balance sheet of assets against you know a short uh kind of liability tree they're gonna have some riskier assets i think you know the question is was 10 too much of the loan portfolio i think one SPEAKER_07: percent is too much yeah and i'll add to that you know one of the issues here that we saw qualitatively and sax and i both saw qualitatively is the standard for giving these and the size of them SPEAKER_99: got lower and lower in fact the covenants went away and this is what we kept having hunters say to us it has no covenants they offered me no covenants i don't have to have a certain amount of cash i don't have a half a certain amount of revenue those covenants were there for a reason to filter out the people who can't afford the house right and this is exactly what happened in 2008 when people started giving those no recourse or no uh background check mortgages remember those where like you didn't have to do a background check to get a mortgage that's what happened in venture they just gave these i saw it firsthand willy-nilly i begged founders to not take them and i only won that discussion sacks one out SPEAKER_48: 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 SPEAKER_153: we're we're we're saying that this is what's the expression past performance is no guarantee of future performance exactly obvious to us on this podcast you guys are arguing about venture debt SPEAKER_154: when the real loss that happened at svb no we understand that they bought a bunch of treasuries and now we hold on rates went from two percent to five percent let me there's two things going on SPEAKER_54: here okay freeberg when i see your chart you talk about laddering this and laddering that and x percent in 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 and what do they do they put it in 10-year uh duration mortgage bonds where the value got devastated with the rise of interest rates they didn't have to mark that to market and second they put 10 of the portfolio in basically loans to creditless startups so when there is a run on the bank you have a what like roughly 30 gap between deposits and their actual the value of their portfolio yeah and and listen that shouldn't be allowed and and the reason SPEAKER_113: it's allowed is frankly i think regulators are completely asleep at the wheel where's powell SPEAKER_54: where's yellen two days ago two days ago powell was testifying in front of the banking committee SPEAKER_113: and they asked him do you see any systemic risk in the banking system because of the rapid rise in SPEAKER_46: interest rates he said no no systemic risk sacks is right i agree that this is the rise in interest rates is the key driver here it drove down venture investing it drove down valuations and it's SPEAKER_48: 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 and it's caused distress and stress on the system my biggest concern is the contagion effect that arises next if you go in and you continue to assume interest rates climb and everyone's holding on to these bonds and they're getting written down meanwhile you owe people all this money in cash and the other thing that's SPEAKER_122: happening if you hold cash today you're likely want a higher interest rate to compete with treasuries because you can invest in treasuries today and make four five percent for a second here i just SPEAKER_164: want to make sure that the audience understands and yellen put out a statement today jake out just to finish the the thought that they're they're monitoring the situation yes she's sitting there SPEAKER_153: like a bump on a log i mean it's ridiculous they need to be out front they don't understand like SPEAKER_113: that this is a cascading situation this so listen either this weekend either this weekend they place svb in the hands of a jp morgan they do basically they either do that this weekend or SPEAKER_54: this thing keeps cascading next week and look i could be wrong maybe they're working on it right now behind the scenes if they are kudos to them they'll have an announcement before the market opens on monday but if they're not and yellen's just like we're monitoring the situation while three days SPEAKER_113: ago she was in ukraine this is incompetence at work all right hold on we'll figure out a way for you SPEAKER_170: to dub this into january 6 next take a pause he connected silicon valley bank to ukraine it was yeah exactly it's beautiful the piece here that's what is our treasury doing in ukraine i mean SPEAKER_99: seriously take it easy take it easy here's what happened just so people understand u.s treasuries were at 102 you get like a two percent 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 two percent 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 SPEAKER_07: 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 i just want to make sure the audience understands that if they had SPEAKER_25: sold these earlier or if they hadn't bought hold on hold on they would have not had this problem go ahead SPEAKER_59: chamath now why why in that meeting did they have to decide to emergency sell it's because vcs stopped Chamath Palihapitiya: giving startups money so startups couldn't deposit more money into the bank but they kept spending at SPEAKER_21: the same rate that they were spending in other words that the deposits went down yeah in the last 18 Chamath Palihapitiya: months not enough folks read the memo yes and by the way the tragedy of that is let's just say that you did get the memo and you did make the hard cuts right now and let's say you're working on something and you can fill in the blank on the thing that you care about okay so for the listeners let's say it's climate change let's say it's breast cancer research whatever it is this had nothing to do with you four days ago you had your money in the bank you did everything you needed to do to go and you know figure out product market fit you know try to get to market try to sell your product and all of a sudden because of some other set of folks and actors who couldn't get their act together now you're on the SPEAKER_71: precipice of bankruptcy in 36 48 hours that's crazy to me this is the challenge sax i think you could SPEAKER_99: 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 uh 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 and they're ankled and they're wounded and now the strong ones are wounded too this is cataclysmic for silicon valley if this does not get stopped this weekend not only and i i i don't want to be hysterical you're right this SPEAKER_113: is the meteor hitting the dinosaur it's extinction level event you're right jacal listen we have David Sacks: portfolio companies that had tens or you know millions or more in silicon valley bank and their account showed that their money was in the safest money market funds money market funds with a publicly traded ticker symbol that were managed by blackrock or morgan stanley okay that's what their account showed them they had and then they're told all of a sudden no you're only protected up to 250 000 everything above that that your your money market fund is just an asset of svb which is in SPEAKER_113: receivership you get a certificate yeah and you get a certificate do you see this announcement by the way i mean the california regulator made things worse the california regulator stepped in and they SPEAKER_54: froze everything so our companies were in the process we have companies that submitted a wire yesterday by the way we spent all day yesterday on the phone with our portfolio companies trying to get them out we had wire requests that went in before the deadline and for some reason we're in a queue they SPEAKER_113: didn't get through and they didn't get out they didn't get through and then the california regulator SPEAKER_54: steps in this morning and freezes everything and what did they announce they said oh you're good you're good for your insured amounts how much is that 250 000 for your uninsured amounts which is everything above 250 you're going to get a certificate a certificate what does that mean that means you're a creditor in bankruptcy so the mutual fund that you thought you owned was actually not hypothecated in your name it was in svb's name at blackrock and so our companies have been calling blackrock and calling morgan stanley saying hey do you have my money market fund and they're like no SPEAKER_192: sorry that's svb so this is the crazy they're sitting in a in a creditor line in bankruptcy we got SPEAKER_99: to explain this these were called sweep accounts so what silicon valley bank did with uh some of these large portfolio holders let's say sax and a bunch of other vcs gave you 30 million bucks yes and they would they took your money and they said you know what just to be safe we're going to take your money will automatically sweep it and distribute it across two other accounts so we got this blackrock over here for you great we got this morgan stanley over here great whatever it is you could only get to those through the silicon valley bank interface and so it was supposed to protect you but there's no recourse it seems those are frozen too so the only thing you can do that's logical and i had a mentor 30 years ago when i had the magazine and we started hitting millions of dollars in revenue and he said SPEAKER_19: i said how much money we have in the bank he's like which bank account and he had four bank accounts and he would load balance them and he did it every friday god bless elliot cook he did it every friday for me and i've always done that i've always had multiple bank accounts and load bounced them but in this case silicon valley bank did it through one interface i have multiple startups today who did this exact thing sacks and they they couldn't even log into silicon valley bank today to even see where they're David Sacks: at i mean i think yeah you're right everything got frozen and the california regulator froze them and they brought in the fdic so there's a couple problems now with the working out of this this is basically a bankruptcy process receivership process it's that we've got all these companies that need to make payroll in the next few weeks right and so these processes don't work at startup time if you could just figure out like over the weekend okay svb lost 30 cents on the dollar and everyone's just gonna be prorated and you're gonna get 70 cents on the dollar and you get your money on monday it would SPEAKER_54: be a hit to the startup ecosystem but people would recover and move on but the fact of the matter is it's not going to be on monday it could take weeks or months to figure out how many cents on the SPEAKER_197: dollar you have are they liquidating silicon valley bank are they selling the debts is everybody SPEAKER_199: getting laid out fdic is going to liquidate everything well you have two paths here path SPEAKER_59: number one is if you actually try to sell these assets but the problem is who do you think the buyer is the buyer are the sharpest sharps on wall street who will purposefully underbid these assets Chamath Palihapitiya: and so that then takes you to path two which is then the only other real solution is for the fed to warehouse them and guarantee them and that's an equivalent version of what they had to do during the great financial crisis which it was this thing called tarp which is the troubled asset relief plan it was just a backstop and a mechanism so that these at the time those toxic assets which were a bunch of mortgage-backed loans could be cleared through the system over time which effectively meant that the fed basically warehoused that risk so i think what we need to see now is is sax it could be 50 cents on the dollar it could be 60 cents if you want immediate liquidity you know a friend in our group chat was mentioning that there was one claim a company that had a hundred million dollars inside of svb was offered 60 cents on the dollar today for that claim now from a third party who said i will take you 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 true 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 u.s 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 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 yeah because you forgot your paid deposit yeah that should not be why we torch hundreds of SPEAKER_07: startups and what they're working on this is maybe thousands yeah this is a this would be a lost decade SPEAKER_46: a lost decade for silicon valley first of all do you guys want to talk about second and third order third order effects just 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 SPEAKER_48: but there's important downstream consequences for example there are payment processing companies in silicon valley that use silicon valley bank to store their capital and to to move money around there are payroll companies that do payroll for many businesses not just tech businesses but many businesses in different parts of the economy that store their cash at silicon valley bank and process money through silicon valley bank today it was announced that rippling one of those companies could not hit their payroll cycle today because they had money tied up at silicon valley bank fortunately they announced that they also have money at jp morgan and other places so they will be able to kind of get the 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 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 the tool in some you know in arizona and then you know the the stripe SPEAKER_46: service isn't able to process e-commerce payments for a small business owner that runs a website you can start to see how there can be very significant trickling effects and more importantly like we saw in 08 perhaps to a different degree but still a significant concern is the the the 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 sac 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 SPEAKER_48: 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 SPEAKER_46: institution that stores their money in some sort of security that's not 100 liquid like cash and that's going to be the way 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 it because i absolutely hate the federal government having a role in this stuff has to say we will guarantee 100 of those deposits to the company that takes over the bank that takes over this portfolio and says let the portfolio of assets run its lifetime see what you get paid whatever the delta is we'll make it up to you but we need to make sure that there's cash here today for all of these depositors to get paid tomorrow you had SPEAKER_71: something you want to say if not i have something i want to say yeah the other big thing that SPEAKER_59: svb was was an on-ramp for a lot of investors including many u.s investors to get money into china and without commenting on whether that's right wrong or indifferent the point is that china has a very complicated capital market structure which requires you to basically use an offshore bank i.e Chamath Palihapitiya: 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 u.s investors and abroad using these bank accounts SPEAKER_59: 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 u.s Chamath Palihapitiya: government and treasury as they think about what they want to do in this heightening great power SPEAKER_65: conflict that sacks 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 SPEAKER_19: rich people already like big tech or billionaires the reason to backstop this with public money is because we have a road map for this people don't know this uh widely but tarp was just over 400 billion dollars it actually returned a 15 billion dollar profit to the american people this would require maybe 25 or 50 billion dollars 10 percent maybe 5 10 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 dollars 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 chamat said you're bailing out innovation on breast cancer on you know uh renewable energy but most importantly this can easily be structured so that the american people return 20 30 percent maybe even double their money you could structure this so it is senior to everything else and is exactly what the government is supposed to do when there is a crisis that doesn't mean the people who run silicon valley bank should have their equity worth a lot they should get wiped out they didn't do their job properly the equity the people who ran the management team there if they don't get anything that's okay they understand that but the people who had their money at deposit to pay the salaries and to pay for this innovation it is unconscionable that we wouldn't backstop it and the i guarantee you the u.s 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 SPEAKER_99: maybe even double and that's the way this bailout should be structured and it has to be done this weekend SPEAKER_59: you bring up a great idea i think i think if the u.s balance sheet does step in over the weekend i'm going to say on behalf of the u.s taxpayer you must get a piece of these companies and the reason Chamath Palihapitiya: 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 SPEAKER_59: that it will benefit just a small sliver of people right so to step in and to save these companies Chamath Palihapitiya: 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 including jobs and taxes including and so if you can view it that way and if you can view a share of it now obviously look we're very we have a very deep incentive for that to happen but i think it's important to present the other side of it the other side would say this industry has a little bit run amok SPEAKER_79: it's not well regulated you know you guys push the boundaries and get away with a lot Chamath Palihapitiya: and there's a lot of consequences you're saying no i'm saying the tech industry no no i'm saying the the average person that's on the outside looking into the tech industry can make that claim and now they would be pointing at big tech but the problem is we all get swept in together under the same thing and then what they would say is i don't think it's right to to to step in and i think that you have to give the u.s taxpayer an incentive if they are going to do it and i think the the incentive should be that they should just get a share in all this innovation if they take over SPEAKER_14: 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 David Sacks: here and the the dominoes start falling and we start getting all the systemic risks 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 they're stocked down people asking questions we know people in our tech groups who are wiring money out as fast as they can just because why SPEAKER_54: 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 SPEAKER_79: actually rational and what this what this is really highlighted is that what you said earlier at the Chamath Palihapitiya: 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 David Sacks: that allows this stuff to build so the wall street journal right now is reporting that u.s 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 SPEAKER_54: these uh bonds at their book value instead of marking them to market every day that's crazy and on the Chamath Palihapitiya: 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 right 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 David Sacks: game theory here okay the banking system the banking regulators have created this opacity in the system you've got all these assets that are being held by these banks that are not marked to market so nobody really knows what the true level of exposure is so what's the response why take a chance just SPEAKER_54: move your money to jp morgan so i think there's a chance that if the if the federal government doesn't step in here the whole regional banking system could be decimated and you're just gonna be left with four too big to fail banks how does that benefit anybody that doesn't benefit the little guy SPEAKER_46: guys there's a there's a pretty good set of regulatory disclosures that happen but i do think SPEAKER_48: 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 continued to rise in the early 20s and averaged 680 banks per year failed between 1923 and 1929 so obviously you know coming out of 08 uh there was a lot of controversy around hey banks can't make money anymore it's too restrictive the disclosures and so on the disclosures are actually quite good you know you guys can go to these these sites that regulate the banks you can go to the sec site you can get a very detailed schedule of every asset held by every one of these banks it's good transparency i would argue but should they be allowed to invest in securities that are effectively not fully liquid 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 SPEAKER_59: 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 SPEAKER_14: the podcast they could do that yeah i mean freeburger 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 SPEAKER_46: depends on whether 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 how do you mark that to market on a daily basis you're right no you cannot you're you're right absolutely yeah yeah and so from a reporting SPEAKER_233: perspective how does that solve the problem no one knows how they've got different they've got SPEAKER_48: different tiers of regulatory capital guys and so you know there are rules around what the ratios need to SPEAKER_27: be and where you need to fall and so they they bucket the stuff up differently right if you're a bank David Sacks: 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 you know to a venture-backed startup package those up and syndicate that and sell it as a security and if you can't do that you probably shouldn't be investing in the asset class SPEAKER_54: anyway same thing with like you know mortgage these mortgages already get packaged up and sold right so it just doesn't make sense to me that like customer deposits that's what we're talking about which you assume should always be 100 safe right this is not a source of capital where anyone's ever expecting to lose money if you want to use risk capital to get some sort of outsized return go raise that from lps but to like take customer deposits and use it on on risky non-liquid SPEAKER_65: investments yeah it makes no sense it makes no sense there's one thing i could i could just help people SPEAKER_19: 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 what 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 one of your startups David Sacks: just take any of your startups they have 30 million we don't 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 i'm not saying that step in or they don't if they don't step in you'll have systemic SPEAKER_19: 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 cut in half SPEAKER_248: it doesn't matter it doesn't matter who's the depository it does not matter it matters for people SPEAKER_99: 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 you properly if allowed to deploy that it's going to return a multiple an adventure multiple two three four five x but if we destroy that money these companies are going out of business SPEAKER_251: next month but jake now that money is their money that's their deposit i agree with you i'm trying SPEAKER_252: to create a framing here for people to understand exactly how much value is going to be i think the SPEAKER_133: better framing is that when you put your money in a fdic insured bank and you put it in a customer SPEAKER_54: 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 that makes no sense raise the fdi like banks should not David Sacks: work that way okay look i think it's crazy that you could set up a bank account okay because you just want to write checks and you could lose that money because the bankers decided to loan it to some SPEAKER_54: 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 this is supposed to work and you got all these people on twitter pushing back no bailouts or whatever that's the depositors money i agree no bailout for svb they should lose everything all those executives their stock options are worthless all the stockholders of that company their shares are worthless but the question is should depositors lose money in these banks they just thought they're selling for a checking account i mean are you kidding me and if you let that happen there will be a cascade here because the the logical consequence will be everybody's 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 SPEAKER_67: tens of thousands of highly paid workers and not just tech workers are going to be out of uh jobs and they don't have jobs waiting for them at amazon or google to bail them out and this is the start of uh a contagion if it doesn't get stopped what did they do wrong jacal what did they do wrong SPEAKER_30: nothing they used uh what is considered one of the most reputable banks in the world they used a SPEAKER_113: top 20 bank that the regulators said was in compliance so did they do something wrong or SPEAKER_67: were the regulators asleep at the at the wheel i don't know um some way i think it's this is biden's SPEAKER_259: fault or zalinski's it's biden or zalinski's fault what do you guys think this means for vc SPEAKER_46: it is a chilling effect i i talked with some lps in the last two days in the vc world i'll give you SPEAKER_48: a couple anecdotes uh i have a friend runs a fund he looked at his portfolio they have 270 million dollars or sorry 350 million dollars tied up at silicon valley bank they need 27 million dollars uh for cash for the next 30 days so he's called his lps and he's trying to get his lps uh 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 um they've gotten dozens of calls uh 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 the the uncertainty that this creates in the investment environment um i think is going to have a real chilling effect not just with the gps and their you know uh proclivity to sign term sheets right now and why are new money over but also with the lps as they're making capital commitments and actually following through with with uh capital commitments that have already been made um given uh you know where's the capital actually 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 um and the fact that this is adding this unique friction in the market um is is a layer on top of an already distressed and challenged uh environment for fundraising for gps for lps and it seems to um be exactly the icing on the cake we did not need right now SPEAKER_52: uh no matter how this gets resolved i i think private markets in 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 SPEAKER_71: do triage another vc friend of mine just sent me a text he can't make payroll next week he has a SPEAKER_48: fund for his vc fund his vc fund their employees cannot he cannot pay his employees on monday lord SPEAKER_46: and so um yes i do think funds could shut down uh coming out of this it i i think that companies that were call it you know 75 distressed are done for now no one's going to step in and bridge them and fund SPEAKER_48: them uh it's going to accelerate a lot of shutdowns because people are now cash is king now cash is kinger SPEAKER_14: right it's like a big shift i think that was really well said i think you're you're right about all that jake how you tweeted that you think this is going to cause a 60-day freeze and and deal making activity i think that's more or less right you're right because you know all all the vcs out SPEAKER_113: 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 got to focus on maybe you're going SPEAKER_74: to make you're picking a few winners you're picking one or two winners you know you're and you're going SPEAKER_46: to focus on that you're going to say you know what the rest of them could be good but i can't SPEAKER_19: it's it's going to be a tough decision i have three open deals right now um that we're doing i now have to figure out how to get those deals done and i have four companies that are in this payroll situation in a major way so now i've got capital and i've got to and we're not personally affected by the silicon valley bank thing thank god but now we have to do you triage the known winners in your portfolio that did nothing wrong or do you make the next three investments or four investments and i'm gonna make good on those three investments but next month maybe not maybe next month i'm taking off and i'm focusing on the portfolio and i think that's what's going to happen writ large SPEAKER_67: we're in triage mode now full-on triage mode if this doesn't get resolved if they can't get those SPEAKER_59: jimath what do you think this 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 there's like a lot of risk management you know we think about this stuff a lot and the message that came back to me was i don't think risk management is worthwhile in venture i didn't understand where that was coming from um because if you're investing your money across a very risky asset class you have to be always thinking about how you could lose money Chamath Palihapitiya: and i think that venture has always romantically been described as like buying lottery tickets and so it doesn't matter if you lose but when you have that kind of attitude you just become super complacent and you don't think about left tail risk you only think about right tail outcomes and this is an example of like left tail risk that came out of nowhere that could wipe out entire portfolios so you had you know folks invest into funds that spent a few years probably 2019 2020 2021 really 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 SPEAKER_67: breaking news uh while we're taping this the department of financial protection and innovation of the state of california has published findings on svb we'll pull it up on the screen for the besties to respond to on march 8th 2023 the bank announced a loss of approximately 1.8 billion from the sale of investments and we've talked about that already uh on march 8th 2023 the bank's holding company announced it was conducting a capital raise despite the bank being in sound financial condition prior to SPEAKER_19: march 9th 2023 investors and depositors reacted by initiating withdrawals of 42 billion dollars in deposits so that would be over 20 percent i think of the of the total deposits from the bank on march 9th or even more 2023 causing a run on the bank as of the close of business on march 9th the bank had a negative cash balance of approximately 958 million despite attempts from the bank with the assistance of regulators to transfer collateral from various sources the bank did not meet its cash letter with SPEAKER_30: the federal reserve the precipitous deposit withdrawal has caused the bank to be incapable of paying its SPEAKER_151: obligations as they come due right and the bank is now inside the beginning 42 billion dollars uh is SPEAKER_48: 25 percent 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 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 uh and the assets that they own because if you have to go and turn around and sell those assets in the market super fast you're going to take a huge loss you guys remember that movie margin call with demi moore and um what's his name and they make this plan to go and mark and they're like we gotta sell patrick swasey no not patrick swasey uh no the jeremy irons jeremy irons he plays the best character he's like the chairman of the bank and they're like we have SPEAKER_46: 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 marked at the current market value or whatever to meet all of their obligations but the rate at which assets started to get pulled out is what drove SPEAKER_48: those that drove the company the bank into distress and if you think about it it it's it's an ironic SPEAKER_46: point of view on silicon valley because silicon valley operates with such we all joke about what a herd mentality uh and and what an incredibly tied and deep network silicon valley is we all got dozens and hundreds of texts and messages from friends colleagues co-workers 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 SPEAKER_48: flipped and you guys saw this we all saw this within 24 hours the beginning of the day yesterday it was like it they'll get through it it'll be fine they just took a little mark down on their portfolio SPEAKER_46: they got plenty of assets but then it's like well founders fund said we should probably get out okay well founders fund is getting out maybe we should get out before everyone else does well if we got to get out before everyone else does let's go 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 SPEAKER_48: drove us all to rush for the door as quickly as possible you know i'm not sure that 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 intertwinedness as we saw with all the depositors here in silicon valley bank i don't know i don't know so i'm just theorizing live yeah this is where David Sacks: um i think that describing what happened as a panic kind of misses the fundamental rationality of the response so both are true by the way yeah 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 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's 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 to get you know pennies on the dollar or not SPEAKER_54: whereas the people who rushed for the exits yesterday got their money out it's prisoner's dilemma it is a prisoner's dilemma but here's the thing it's it's not even about anymore whether David Sacks: the institution is solvent it's about whether there's confidence and i think there is a risk SPEAKER_54: 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 you know 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 free where 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 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 that's going to be it so i i think that that the situation right now is really dynamic and if the fed does nothing and just says up you know these uh depositors should have known better you know the losses on them then i think the rational reaction for depositors at all these other banks would be just to leave because i don't think depositors are in a good position to assess the uh liquidity and credit worthiness 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 SPEAKER_65: founders and capital allocators going forward obviously have your money in multiple bank accounts SPEAKER_59: i sent you guys a list that was just published of all the funds that custody at svb and it's SPEAKER_207: unbelievable the list it's every single major vc in silicon valley wow where'd you get this i have my SPEAKER_278: ways oh extracted from sec filings got it okay thank you yeah this is amazing wow holy SPEAKER_279: shit i mean everybody's in there excel harwich 500 sequoia we're going pretty fast here but yeah SPEAKER_164: yeah everyone's in there fund i mean this is my point by the way all these guys that we were we were out a few months ago when we were talking about venture debt on the pod i didn't believe that svb David Sacks: should be in this business so i told oh look there's craft there's crap no well hold on i'll SPEAKER_164: 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 the show about venture debt i'm like i don't really like SPEAKER_54: that svb is 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 you know warehouse loans or whatever SPEAKER_164: so i thought they were just a lender to us so yesterday when all this stuff went down i i said to our guys like we're out of there right they're like well actually we had about 45 million dollars 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 portfolio companies as we could to get them out and we got a huge number of them out but unfortunately SPEAKER_54: 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 SPEAKER_122: sax i appreciate the 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 SPEAKER_48: 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 um in the meantime for this to get resolved there has to be SPEAKER_122: a bear hug solution offered up this weekend i'll say it again yeah in in order to stop the next set of SPEAKER_164: siren calls to drive the next siren call listen this is the thing i hate about um the the run on the David Sacks: 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 you know i don't think we were putting out like a siren to the world and by the afternoon it was really clear that if they listened and got their money out they were in much better shape than ones who didn't listen so 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 a um another SPEAKER_133: run sorry but hold on but we know things we know that people are very close to us big players are withdrawing their money from other banks right now out of an abundance of caution so let me just SPEAKER_301: finish my point my point is what you're saying makes a ton of sense and it's gonna cause this as you SPEAKER_122: describe kind of pernicious escalatory problem and 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 dollar facility and just by saying that everyone stops trying to pull their money out and you don't actually need to backstop it with any money it's so it's already SPEAKER_59: started so nick if you just the link that i sent you in the in the group chat can you just throw Chamath Palihapitiya: 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 eye shares 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 the 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 SPEAKER_46: if the fed comes in and says you know what we are going to backstop all of these banks and we are SPEAKER_48: going to put 500 billion dollars 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 and you don't even have to put up any money because as soon as it's a first derivative problem it's a feedback loop as soon as you stop SPEAKER_46: people from doing the withdrawals the whole market subsides you don't actually need to unplug it and i think that's what needs to happen this weekend that's what should i had unplug it today is they number one need to go get um silicon valley bank hand it over to a big balance sheet and guarantee SPEAKER_48: that balance sheet that they're going to make money by taking this thing on and number two they got to make a statement we got another 500 billy for you where's the president where's yelling well SPEAKER_211: they'll make a profit on it too so i mean they don't need to use any money to do it right the David Sacks: thing that's missing in our system is that there's no fdic for 25 million dollar accounts what like 250 is not an effective amount that's a personal account it's for a personal business but businesses need SPEAKER_54: confidence in our economy in our banking system or the whole thing starts to unspool so what the quid pro David Sacks: quo should be is you can get a 25 million fdic business banking account and the bank is highly SPEAKER_54: 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 the downside of that for the bank is they'll make less money and pass on less interest to the the business the depositor the shareholders yeah but so what that's SPEAKER_99: the way it should work how are stable coins looking like a better option right now i mean the crypto SPEAKER_311: guys right now are like why did you listen they're not jacal they're not it was a joke nothing can SPEAKER_59: 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 percent so uh so what i just want to recap SPEAKER_164: whenever whenever liquidity whenever there's the reason for that jamoth is just that what we've seen SPEAKER_54: is that liquidity is all correlated so when people are panicking about the state of their finances and worried about getting access to their cash the first thing they dump is crypto because it is very SPEAKER_164: liquid so yeah everyone is trying to free up cash right now i just want to be clear as the end of the SPEAKER_67: 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 the next dominoes are already falling and so it cannot be a contagion it cannot SPEAKER_99: be a contagion we have to stop it that's the point that's your feeling and i agree with you but i just want to make sure people understand we started this we didn't want to go there you know i think with some SPEAKER_59: reticence reticence to to going there let's let's put it this way if you if anybody if you have initiated a wire in the last 24 hours you are worried about contagion yes if you're in dc and you SPEAKER_48: have any ability management matters and if you have any ability to influence what's going to happen this weekend we strongly advise unplug someone comes in and bear hugs the market this weekend and says SPEAKER_122: we will not let contagion happen with a very big slug of capital to support it that will likely not even SPEAKER_48: be needed to support it because once you say that the contagion will stop you gotta come freeberg we're SPEAKER_164: going to know on monday whether these regulators and the administration know what they're doing at SPEAKER_74: all the other black swan problem is that this weekend we will find out what some of the unintended SPEAKER_48: second and third 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 other institutions and companies that we don't know about that may trigger another set of cascading effects SPEAKER_46: that are unrelated to a banking problem but could drive some more significant business and economic SPEAKER_48: problems that we're going to kind of probably end up talking about next week so you know this weekend SPEAKER_99: we're obsessed with payroll but there are other things that this money goes towards uh you know SPEAKER_30: mortgages or rents so the cascading effect of this if people stop paying their rents if people stop SPEAKER_164: paying mortgages i mean real estate yeah i mean biden biden visited kiev instead of east palestine SPEAKER_113: yellen visited kiev instead of silicon valley do these people know what's going on here come home they promise more financial assistance for ukraine and they're saying they're monitoring the situation David Sacks: here we're in the process of what what's the bill for ukraine failure yeah get on the SPEAKER_67: ukraine the the bill for ukraine this month versus this ballot is you know probably the same so i think SPEAKER_199: we have to really think this through folks yeah you're gonna get well no on monday whether these SPEAKER_184: people have a clue or not no they have to be on tv tonight or tomorrow this this has to be a presser SPEAKER_59: on sunday hold on i think 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 Chamath Palihapitiya: 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 SPEAKER_60: get worse unless you do something to make it better right and i and jake i'll just use the word bail SPEAKER_140: out i don't like that word because no not about that backstop yeah there were a big you know too David Sacks: big to fail banks in 2008 in the financial crisis who did get bailed out those people should have lost SPEAKER_54: the value of their stock okay that was wrong that's not what we're talking about here sb 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 marked 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 SPEAKER_67: 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 uh shaman q and on shaman i know that's a passion project for hugh sacks but you can announce your kickstarter for him and your go SPEAKER_336: fund me for the shaman for the shopping but uh where's the bulldog give me that bulldog one more Chamath Palihapitiya: time the shaman 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 that's a trifecta that you rarely see SPEAKER_07: you rarely see that in you know also cultural appropriation so yeah we have to keep that in mind SPEAKER_16: and conspiracy theories i mean this guy's got it all are we gonna play poker this weekend and just SPEAKER_164: like as the as the meteor is coming it's kind of sad he's kind of he's kind of an odd that seriously the the shaman what's his name is uh jake uh he doesn't seem like he's all there yeah no he's he's SPEAKER_54: 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 yeah he you know he's a bit of an odd duck and he's a freeberg of kunan and he didn't assault anyone he just wandered through the capital apparently getting a tour uh from police officers who were just guiding him through it he's the january six three years hold on a second he got four SPEAKER_171: 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 paint or whatever he also made some threats to the politicians too but SPEAKER_77: yeah i mean it does seem like it might not be the appropriate sentence he wrote a note saying SPEAKER_100: we're coming for you i think on you have to look into the case but he was sentenced by a republican SPEAKER_99: judge from texas and he had made threats written threats and put them on the desks of folks SPEAKER_67: and he was one of the first people into the building so i think they got him for that but SPEAKER_54: i agree with you there is the building if he didn't break a door down or didn't smash a window if he if he damaged property that's one thing if he assaulted someone that's one thing but if he just wandered through the capital 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 just 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 SPEAKER_67: broke in who were violent and who got sentences of some degree they were all uh settled like um plea SPEAKER_30: bargained uh including his they didn't go to trial and if you know i think we could all agree the violence that occurred that day is you know should be punished and the non-violent stuff should be David Sacks: a speeding ticket you know and we don't need three categories jason i think violence the assault on cops or and so forth yeah punished full extent of the law yeah then damage of property and then but SPEAKER_54: the people just people who just trespassed or wandered through who may not even have known SPEAKER_14: they were trespassing probation that that that's not that's not jail time that's not a felony SPEAKER_19: yeah i mean we want to promote peaceful protests if they had come with guitars and saying kumbaya SPEAKER_30: and we shall overcome we'd be having a different discussion here instead they'd be 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 it's been another amazing all-in podcast sorry we couldn't get to all the news uh but we felt that this required a big unpacking for the sultan of science the uh dictator and the rain man SPEAKER_67: i am the undisputed world's greatest moderator we'll see you next time on the all in podcast not this week SPEAKER_372: not this week