Silicon Valley Bank and a Possible Fed Pivot

Let's bring in a couple of experts. These geeks do this every day. They look at regional banks. Herman Chan he covers the equity Arnold Kakuta, he covers the credit side. Both for Bloomberg Intelligence. They're both in our Bloomberg Interactor, a broker's studio today. We appreciate it. So Herman, let me start with you. It seems painfully clear to me that what happened in SVB is pretty much an SVB type of thing, and it's probably not that indemniue. It's

an unique situation. They were absolutely horrible at managing their duration risk, is what we're saying, Like so worse than anybody else in the entire banking industry. What are you telling your client's termoring about just the regional banks in general. Yeah, it's a very dynamic market that we're in today. SBB was indeed a unique bank that took on a lot of interest rate risk, and the fact that their deposits were exiting the door really exasperated their problems. What we're

seeing today. Let me quantify that. So I noticed on the FAGO function on the Bloomberg terminal, if you're clicking the balance sheet, you can see that they had at the end of last year over ninety one billion dollars in a hold to maturity portfolio. How much do you

think that was actually worth? So they were talking about a fifteen billion dollars unrealized loss at the end of the fourth quarter on that health of maturity perform at the end of the fourth quarter, and since then we'd seen the your treasury go above four percent, So probably much bigger, correct, And if they would have taken a loss on the health of maturity book, that effectively would have wiped out their book value. Arnold, you cover the

credit side for all these banks. What's happening in the credit markets for regional banks over the last four or five days. Yeah, not good even even for the bigger guys as well. It's just remarkably shocking how all this can transpire in a day, right, and this is a you know, investment grade credit maybe about three four billion of debt, so it's not a huge per se, but it's just quite shocking how this could transpire. So doing what I'm doing, and I'd know nothing about a bank accounting,

and I'm pretty happy about that. This whole heald to maturity thing. As Matt was just pointing out, I'm now looking at the balance sheet on the FA function for a lot of these companies. Is that what talking about health to maturity? And how where should it be? A what is it? Where should it be for most banks?

And where was it for SBB? YEH know, SBB, like I think you know, as you guys mentioned fifteen billion of unrealized losses in the healthy maturity, but I think even the fourth quarter correct, which looks way worse on March ninth. But but the thing is, I think the important thing is is is the liquidity and the deposits, right, and the velocity of these deposits um you know at SVB, and in particular this you know tech community that was

very very tight, right tech NVC. You know, once they started recognizing the stock was down thirty they recognize, oh, they said, hey, there might be some risk there, take your deposits out. So in that situation, you know, any bank where you know, let's say twenty five percent or more of whatever deposits fleeing, not many really can survive, right, And so I think that is the situation. Can't they

borrow from other banks? Isn't there an overnight lending policy at a very low rate so they can just take the cash and then cover it at a certain point point because those are collateralized right by by your liquid assets, So it's only up to a certain point. So even if some of these measures were necessarily in place before,

you know, could they have stemmed everything? Okay? Maybe maybe yes or maybe no. But it's you know, when a lot of these deposits run out the door at the same time, you know, you can say I have this much access to liquidity, but okay, over what time period? Right? Yeah?

If if like I think it was at forty two billion, right, deposits tried to flee the door in a day at SVB, and I think they had a total of one hundred and seventy billion deposits, right, So and then they came out that day with a negative one billion a cash account. So that's that's what we that. Those are the numbers we know. We only know that they tried to get forty two million out customers tried to pull forty two

billion sorry out. We don't know how much actually came out, So the remaining negative billion doesn't really mean very much. So it's before you even kind of get to that. So the fear is okay, yeah, there is that, um, you know, solvency concern if they have to recognize that

fifteen billion loss. But before all that stuff, you know, you die because of liquidity, right, And so I think what needs to be addressed is, okay, fine, the unsure deposit holders of SVB and SPNY, they were made whole, but maybe something like that make that bigger guarantee to the rest of the market. Right, what is stopping There's

nothing I happened to fed already implicitly done that. They said in their in their memo yesterday that they have a big enough backstop to cover the entirety of US deposits, which is like nineteen trillion dollars. So even though they're not saying, hey, we promise we got you, they're saying we could get you if you need it. I mean, I think the program that they've announced, I mean the you know, you correct me if I'm wrong, But it's it's a way for the banks to manage kind of

when they get the deposit outslow. Notice, oh, you can pledge collateral to the FED at par right, but then once it kind of glows below a certain amount, you know, if deposits run out of the door. This is a

lifeblood of funding for these institutions. Right, if your blood drains out so much, there's only so many like temporary you know body that you know, what this issue really hits telling you is that the posits are the source of the value of banks, and when that value disappears, then there's really get You don't have any legs to really stand on. Hey, I only ask you one question. You're talking to a really smart hedge fund manager who invests in regional banks. What is he or she doing today?

Do you think there's net buyers or net sellers? Unfortunately, it's it's not going to be helpful to the market today, You're you're seeing a lot of fear and you're you're not going to fight the tape no matter what you think fundamentally, and selling M ANDT Bank because I don't because it's down a little bit and I think it's going to be brought down by some contanging risk. Why am I not at there buying M ANDT Bank Because

I know it's a seein. If you think that these banks are going to be around for a long run, which I think MMT will be that, then it is a buying opportunity. But you really have to pick your spots because the contagion risk is looking to continue and extend and we're in a some uncharted territories seasons. Are there any other banks that have such uniform depositor base as we saw with SVB? I mean all of its

depositors were like early tech startups and VC. So what you're saying is, if you the banking community and the analysts and the buy side are are looking at deposit concentration and the concentration of assets above the FDIC insurance limit uh SVB signature, those are are the ones that have high business concentration that have very lumpy deposits, and so that that's why you've seen them fall um. There are others that have similar issues. This is crazy, you know, Matt.

Let's get these guys back at twelve or nine, okay, because they're not going to have time. They have time. When I tell them to be there, they'll be there. These guys are the best. Herman Chin on a cocuta that cover the equities of the credit side. He started out saying, you guys are geeks, but now you're the best. Now you did a good job. You're of the nerds exactly the nerds, are you? Guys? Thanks so much for joining.

I want to get right into this segment. Joe Wisenthal, host of Odd Lots podcast Bluebird News, joins us here, which, by the way, thanks to his partner Tracy Alloy, that is a great listen. I highly recommend now it's all Tracy to be honest. Yeah, Joe, we're haven't you perfect timing today? Perfect timing? Why the US backstop after svb's failure is a bailout? I don't even know why. It's

a debate, Yeah, I don't. Someone someone this morning I think Shinali Bassett suggested it was a non bailout bailout, but it's a bailout equity out. Yeah, but here's the thing, and this is why, like I mean, yes, in the case of SVB, the equity was wiped out, but you know, like a lot we misremember two thousand and eight City Group sharers fell ninety eight percent that year. That was a de facto equity wipeout. So even the most quintessential

parts you have City and AIG is. There should be a reminder to people that even in the most famous bailouts of all time, these were not some big shareholder rescues. And the arguments for why this different innocent depositors, people that just wanted to get their money out. That was why we did tarp at all. That people think was like, oh, we're like protect the CEOs. Very look, of course there are some details, different circumstances, very different, but fundamentally those

bailouts were not about protecting management. The AIG management was replaced, the government installed Ben Moche and the summer of two thousand and nine not that much different fundamentally a little bit, but like this is what we call this is what a bailout is. I think it's so clear that I can't even believe anyone would question. Well, now that Joe

explain it to me, I get it now. I mean, look, if you would have had you had depositors who were like, Okay, we know FDIC insurance goes up to two hundred and fifty thousand, but we're gonna put three billion dollars in there. I mean, that's just a dumb risking is And now they're getting bailed out, you know. I think, like, what is the different between a bailout versus like the FDIC

just doing its job. I say, if you have if you announced a new rule over the weekend that was not in place, And the FED definitely did that because they say, well, one of the key things it did is for all banks they can now for the next year pledge their treasure can be as at a part at part, which is a pretty big thing after like the mark to market hit right. So that's a de facto capital injection that the FED did, which is another thing. You don't want to start this bad policy, Joe. And

this goes back to two thousand. I'm gonna say I'll say this, I'll say two things I don't feel like comfortable assessing, like the exact implementation smarter people than me. But you gotta stop a bank run, okay, and so I mean I think that's clear. Look, there's multiple failures would likely have happened today, and you just get those don't stop on their own right once they get going. You can't. No country can like have a wholesale run

on its banks. The interesting thing to me is that they did just that, and I thought, yeah, no, I mean exactly, there could be unintended consequences. Who knows what they'll be. There will be, I'm sure, but they put a stop to the bank run so swiftly that it surprises me to see so many shares down today. Why I am surprised too. I mean, it may just be

even still, I have to say, I'm surprised. And you know, like to me, yesterday ended the debate about whether there will ever be a cat on deposit insurance all deposits. To my mind, that's what they're effectively doing. Yeah, and I don't see It's like when when I just don't see this, I think the debate is over that all. If you have a deposit in the bank and they might change the rgs so that banks have to be

more careful and have more liquid assets. But I think basically the FED has told us that from here on out, all deposits almost at any level are so does dot Frank does? Should it? Do you think it will be

implemented down to smaller regional banks? So this is a there's backstory here because I guess twenty eighteen, yeah, there were a number people, including some SVB executives, who are lobbying against Dodd Frank m overseeing or regulating banks with smaller amounts of deposits like less than certain liquidity requirements, ability to make drawals. You know, the thing is maybe

that will go into force right now. You know. The other thing I'll say is, however, um, when you have an instantaneous massive bank run, everyone that I'm not even sure that more liquidity requirements actually would have saved them. Maybe it would have a little bit, But the scale of the demanded withdrawals on Friday it was like so far like orders of magnitude off the charts. But it does seem likely now that people are gonna look, but

it's gonna be tough. You know, there's like real like fights I think the big fight that's coming, in my opinion, is not even necessarily going to be about the degree to which certain Dodd Frank requirements applied to some of the smaller or sort of the regional banks. But like the deeper fight is like, well, like Canada has like six banks, like they know they don't have a really a small bank. We have like thousands of thousands of

banks in this country. And I think there's gonna be a fight now about like, well, why do we have so many banks? And you're gonna like, and I think it will be very intense. Do we want to just have JP Morgan and City and Wells and a few others? Why is that? Why do we have so many versus say Canada, for example. I wish I knew the banking history, and I think it has to do with like our populist past. Yes, that there has been a deep discomfort

throughout American history about the centralization of banking power. And I think that's like a very sort of like historical like thing we associate with us that like a lot of people do not want banking held in just a few hands. And I think we still have that today. But look a lot of people are asking. They're like, wait, do I want to be exposed to a bank that

has very specific geography geographical exposure? I want to be exposed to a bank that is just like exposure to a specific industry, just open to chase a kin who cares? We have one search engine globally, and we have like three social networks, one of which is controlled by the Chinese.

I mean, we don't care about anything like that anymore. Well, right, I think a lot of people are just gonna say, you know what, I'll just go to a chase and so I do think, you know, some of these moves that we're seeing might not be bank run type panics, but just could be like the expectation that a lot of their depositors are going to migrate anyway, even if

they're not afraid. Do you think it's I mean, to me, this may just be a silly little detail that I can't get over, But they had a ninety one billion dollars portfolio of holding mat charity securities and only one hundred and seventy billion in deposits. It seems like the worst mismanagement of duration risk of any bank in America. I mean, I've been scanning the fays of every bank I can pull up on the Bloomberg, and nobody had that much. It does seem like it does seem something

was off. And again this is I talk about questions that I personally don't feel particularly you know, I'm not a no one should hire me as a bank risk manager. It does seem there was something very strange about their arrangement. But like I think, in a normal time, like I also think that like why did everyone rush out of this like bank that was like operating? People seem to like in twenty four hours, this is the new world. I do think like social media group chats what's happened

was also part of this. They announced like a couple billion dollars in equity raise and an equity raise, and all of a sudden, the most important vcas in California, like everybody get out. Yeah it's odd. It's so it's just like everything about this seems to like the way I think about it is like everything about this sort of like hit in this sort of like risk scenario that just people were not thinking about, not anticipate a very How about the signature bank that one kind of

surprised me over the weekend. I don't feel like I don't know enough about it. But well, the thing is is that they have really like got They leaned pretty hard into crypto, and so if you look at their church, it's not it was like silver Gate at silver Gate a little bit, but they like sort and so then they also have this sort of like outflow of deposits because crypto is for the moment kind of a shrinking.

I saw a Bloomberg story, so obviously we all know now that Circle had three billion, yeah at SBB of the forty billion circulation. Then I saw some other stable coin operators have much of their coins backed by Circle. Oh, yes, that's right. And the funny thing is, yeah, so the funny thing is a lot of the so called decentralized

stable coins algorithmic ones. They have other cryptocurrencies that automatically serve as a form of collateral, but USDC usd coin is the backing of some of these so called decentralized even the d centralized ones are implicitly backed by dollars in a regulated bank account. There is this is which I mean, this is another conversation. There's a lot less decentralization to crypto than the people in the industry, clear, all right, So the US backstop for SVB was a

bailout obviously. Oh come on, alright. I mean, it's just so silly to debate something like that. And I will say the same thing to the rest of my life about the raid at Marilago. To call it anything other than a raid, it's just a silly attempt to be political. I mean, oh, that was a test. It was obviously a raid. Alright, alright, alright, Joe, what all right? Joe, thanks so much. We really appreciated. Joe Wisenthal, host of Odd Lots podcasts along with Tracy Alloway for He's from

Bloomberg News, as is Tracy. Odd Lots podcast really really good, one of my most popular ones out there. So take a listen, boy. The mark sent bouncing around open down pretty significantly, bounced up and now down a little bit. So market trying to digest what's going on. Market unrushed leavable to your treasury down fifty five basis point four point zero three percent. We were just at five percent, dude, exactly.

I mean on Monday when I was last year, a week ago before I was struck down by COVID nineteen. We were talking about the entire yield curve above four percent. Now I'm looking at a tenure that's three forty five. I know, just amazing, so big, big moves there. Let's check in with a professional has to deal with this stuff every day. Efan Devitt, chief investment officer for Moneta Group. Ifan, thanks so much for joining us. What do you make

of the last I don't know. Seventy two hours. We've kind of learned once again to except we forgot it what a bank run looks like. Yes we have. We're seeing bank round by smartphone or by Twitter. Certainly at the moment it's a whole new feel when everything can be communicated real time. Look, we have been dealing with our clients. We've been fielding calls. I will say it's

not a drill. We are very much engaged now in assuring clients around the safety of their say, their custody accounts and money of which will not be would not have been with it with a small regional bank. But we're looking also we're fielding questions around money market funds. We're also seeing some concern about the different sectors, particularly

the financial sector, which clearly took a hit on Friday. Overall, though, we're looking at context, and we're looking at the way these institutions have mobilized so quickly and so effectively to address this problem. This is almost like a repeat of what we saw going on in the UK around the time of another liquidity crisis, which was around the pension songs of LDI. We saw the Bank of England. They're mobilizing very quickly. So I think there hasn't some lessons learned, however,

from these great financial crisis. However, what we're also seeing is this for something in the sense that we actually thought the banks were very robusted, that was the characterization of the financial institutions this time around. Did we miss this? Did financial analysts miss this? Very likely in the case of SBB. Now it's going to be a question of friends. They going through the other financial institutions to see who's

in the same boat. Well, I went through all of the US listed US banks to see if anybody had as big whole to maturity portfolio relative to deposits as SVB, and nobody else had it even close. I mean they they were about fifty percent of their whole to maturity as was about fifty percent of their total depositor base. So it does seem very unique in that sense. You say there have been questions raised about money markets. Is there a possibility that they also have a duration mismatch. No,

we don't think so. I think it's just that whole affect of the money markets breaking the book, which is of course what we saw financial crisis that has clearly lingered very much in the memory. We see that most money market, especially that the ones that are back by the full space and credit of the US government very safe. We see that for the most part, these are we don't think there's any concern they're they're they're run by

robust institutions. They're not in these longer duration assets. But we still we have to make clients feel at ease, and we have to verify that we need and we're still in a process of discoveries getting that assurance from

the very large group. So many, so many banks getting punished today, which is puzzling to a lot after you'd after you had this fed backstop, Are there opportunities that offer you opportunities even in terms of getting in there and buying something that everyone's too scared to own absolutely. What we are saying is this is, as I mentioned before, liquidity crisis, not a solvency crisis. It could have become a solvency crisis how the institutions and the government institutions

not stepped in. But in any case there will be now some definitely, just as there was after O nine, there will be opportunities to step in. Generally, we are consonants in the large diversified institutions that they will be in the position to provide rescue entities in this situation, and and there will be opportunity. And anytime there's a massive set off indiscriminate as we've seen, they're going to

be opportunities. Now it's a question of just patients trusting our equipment in the sense of trusting the managers that we've chosen for our clients. And overall, the equity exposure is really minimal. You know, we're looking at maybe at most one two percent in one or two smid portlios client hrount exposed to the equity loss in this bank. It's just that kind of systemic effect that this kind of chill will create on the other side, on the other side of the coin, EF What does this mean

for the feder Reserve? Does that maybe give them some pause in kind of their rate hiking movements? What do you what do you think? Really good question, and I don't think I'd agree that this is going to radically undermine the position that their position around heightening. It certainly may mean the resolve around that fifty place point rise that everyone thought was coming. That's going to be changed quite significantly. Now what I see from the FED is

we're still looking at this. They're still frosty indicators around employments. Now, certainly this will puncture some of that enthusiasm that's been in markets up to now, some of that kind of ongoing consumer optimism that seemed so resilient in the face of so many, so many indicators to the contrary. So I don't see them reversing course. I do see them perhaps taking a pause or having another repeat of that that the acceleration gesture, which was a course of twenty

five basis point rise. I think there will definitely have to salt in the rhetoric. Now, this is that thing which broke which people said that we'll see race rising until something breaks for has we've seen that now and so there will be a pause that alat has not changed at the same time. Yeah, like the structural inflation that we see. So does the FED then come back

and keep going? I mean, right now World Industry Probability screen on the bloomber Terminal WORP, I'm sure you use it all the time, has the highest peak at four seventy seven in May. Does keep going. I think it keeps going at a slower pace. I don't, As I said, I don't think that that that many the fundamentals have changed here at all, And I think that that we're very much looking at at the FED staying focused on

that inflation target. We don't know what inflation is going to do now, but there there will certainly be sub some dude consumer sentiment which may well lead to remaining in of spending. So you are you, guys at Manetta buying on this weakness? Are you just kind of trying to stay out of the way of it for the next several days. We're doing no buying at the moment. We are very much assuring clients about the safety of

ore deposits. We're looking at the possibility of contagion. We are staying focused, which has been a core equity exposure that we've had for some time, and we're trusting our managers. Were in constant dialog with our managers. As I said, this isn't a drill, but we are fully engaged around this and we you know, our fundamental long term outlook

for the markets for different afflect classes haven't changed. Heck of a lot better then it would have been had the Fed not stepped in last night, don't you think. I mean I was freaking out all weekend and then when we got that at six fifteen, I thought, oh good, I can get some sleep now. That was a critical move absolutely all right, Ifan, thank you so much for joining us. Efan Devitt, chief investment Officer of Manetta Group. Kind of standing on the sidelines here, letting the market

kind of sort itself out. Let's go see what's going on in the UK as it relates to SBB. We do that with doctor Richard portis professor at the London Business School. So doctor portis this Silicon Valley bank now signature bank in New York. It has been front and center for markets here and certainly for here Bloomberg News. What's the feeling. Just give us a sense of kind of how you're viewing it from the UK and what is HSBC seeing in the SVB business in UK. Well,

let's start with the last question. It's a good business and the the tech firms, the innovative firms that HSBC will have a customers. That's a very good business. And buying it for one pound, that's a very good deal. Look back, Baring Brothers was sold for one pound in nineteen ninety six and the Dutch buyers did very well with that. So I don't think that's an issue, huh.

Now the issue is why did it come to that and was there a regulatory failure on this side of the Atlantic as well as on the other side of the Atlantic where there surely was a regulatory failure and bad risk management. I don't think we know enough about the subsidiary, the London subsidiary to know about its risk management and whether it was just brought down by contagion from the from the parent bank. That's not obvious from

the data we have right now, doctor Poros. We had pretty swift action from the Federal Reserve together with the FDIC and the Treasury, and that seems to have contained any fears of a bank run certainly in this country. Do you think we're going to see similar statements from regulators around the world. Is there any concern of a bank run at a bank in the UK in Europe that needs to be stopped. I don't think there's any

concern for a bank run in the UK. I do think that the SPV story here does suggest that somebody wasn't watching closely enough, but that's another matter. We are in general watching well and banks are well capitalized, and there's no risk of a bank run here. I think myself, by the way, that there are risks in the United States still despite the FEDS actions, You've seen big outflows of funds from some of the regional banks, and it's not clear how that's going to play out yet. But

that's another matter. Why why why we were talking about this earlier. Maybe you can help us with an answer. Canada apparently has only six banks, big banks, but six that served the entire country. Here in the US, I don't know how many thousands of banks we have, but about five thousand. Actually, Why is the market here so fragmented? That is a very interesting historical question and is partly

because of state regulation, which is significant. It was the New York state regulator that shut down signature right over the weekend. It wasn't the federal regulators. So you've got um individual states. There has been a fair amount of consolidation over the past and fifteen years, but but it hasn't been at the regional level. It's been at the national level. So the American system is still very fragmented,

that's for sure. The British is not the continental Some continental countries very fragmented, Germany for example, So it varies a lot in the European Union. So doctor Ports, in your opinion, with a just a smidge bit of hindsight, did the system work here in a case of Silicon Valley Bank. It's not hindsight, excuse me. It's regulatory failure that was partly historically built in by Congress and by the Fed. By the FEDS acceptance of not imposing on

so called small banks. Turned out, it turned the SBP wasn't a small bank. Yeah, not imposing on small banks the same the same requirements for the quidity, et cetera, as we're imposed on large banks. That's a regulatory failure and it was enshrined by Congress. By the way, in two thousand and eighteen. So um, so the the blame is widespread. And then you look at the credit rating agencies. Excuse me, we go back to two thousand and seven, two thousand and eight. What you know what provoked the

final collapse of SBB. Part of it was Moody's downgrading them when on Wednesday, right up until Wednesday, they were a three. Excuse me? Um, you know, so, um, we've got regulatory we've got bad risk management. Yeah. Of course SPP didn't have a chief risk officer between April two thousand twenty two and January of this year. What how could the regulators not see that and do something about it.

There's also that a lot of talk about the uniformity of their deposit base, and a lot of people have said you'd be hard pressed to find another bank in the US that has such a uniform deposit bases. And almost everyone who was a depositor there was a tech company or a venture capitalist. Of course, there were a few wineries in there as well, but everybody wants a

piece of those. It's very important. But it is that the kind of thing that regulators need to be watching out for, because you know, if it's a small community of concentrated people, and Peter Teel all of a sudden says, hey, everybody get rid of this, everybody selling your position at SVB. Then all of a sudden it happens. It herd behavior. Herd behavior is what we call it. And of course it's more likely when you have such a homo genius close knit community of big depositors. It's not clear that

that holds for many other, many other banking institutions. I hear them the tech firms in the SBB subjidiary are not They're not as big as the American was, their deposits are not as big, and so forth. But um, there was of course at risk of her behavior there. So that's one reason I'm sure why the Bank of England acted. Doctor Portis. New York Governor Kathy Hokel said the takeover of Signature Bank by federal regulators on Sunday

quote was not a bailout. Do you agree? Sorry, the takeover of Signature Bank in particular on Sunday, to be clear, to be a clear, doctor, everybody seems to be at pains, including Jeremy hunt Um in terms of the UK arm but also regulators and politicians here to say, hey, this was not a bailout. You know, look elsewhere, move on, nothing happening here. Why are they so worried that this was a bailout because of what we call moral hazard,

which leads to immoral behavior. That is to say that if you bail out old depositors, then everybody thinks that you're going to bail them out next time around, and that there and therefore you get people taking riskier decisions than they would otherwise in the belief that they'll get bailed out if things go back. And that was after bear Sterns got rescued in February two thousand and eight.

Nothing was done, okay, and so you came to Layman, and then the FED decided, no, you know, we don't want to create that moral hazard, we don't want to bailout. And then look what happened. Okay. So so that's one of the reasons why why more serious regulation was introduced, because because the system, the politicians, and the financial sector realized that we didn't want to go there anymore, right,

you know. So uh, and that's you know, this, this bailout of all depositors is I think a risky decision to have made and what will be the fallout from that going forward? It may well be that that depositors. Now I say, well, oh well, you know, I don't have to worry about it, right right, all right, so we'll have to see our doctor Richard Porters. Thank you so much for joining us, doctor Richard Porters, professor at

the London Business School. Right now, all right, Uh, let's talk a little bit more about what exactly happened here at SVB with a company that is connected, at least in a some small way. Mountain is a television a connected television marketing platform, and Mark Douglas is the CEO and co founder of the company. He joins us now via satellite from Miami. Where are you, Mark, I'm actually in Dallas, Texas? Dallas, Okay, I never know, dude, I

never know where executive travel a lot. That's true, all right, so you do. And but I think I found it interesting to hear. I think this morning or last night one of our mutual buddies told me that SVB actually had a one percent stake in Mountain. Why is that? Were they an investor because you got some funding from them? Or how did that work out. Yeah, so SBB to explain that SBB is unlike really any other banks, So

Pilcom Valley Bank. I think everyone at this point knows that essentially half of all tech companies banks with Silicon Valley Bank, and for merging companies, newly funded companies, the percentage was even higher than that. And the reason for that is Silcom Valley Bank was once you got funded, you raised twenty million dollars, was then willing to provide

you receivables loans and what's called venture debt loans. Essentially, if you raised twenty million, they'll loan you another two million on top of that receivable zones to just run your business when most other banks wouldn't and there and those loans were actually very safe because they were backed by your cash in Silcom Valley Bank that you were

required to keep there. But they also took warrants on those long So any company, most companies that had a loan agreement with Silicon Valley Bank, Silcom Valley Bank wound up with a small steak in their company and that the aggregate of that is an interesting asset on their books. So that means they may own small steaks and Airbnb or you know they do with Mountain and other companies that that's going to be an interesting asset to die best of in the future. But that's how that comes about,

and that was true for many many companies. What does that mean in terms of you had to keep money there? Then essentially your deposits weren't cash You could just pull out on Thursday, even if Peter Teel advised you to

do so. I wonder how many deposits they have like that. Yeah, so that is a substantial Essentially all of their loan agreements or a very substantial portion loan agreements would require you to bank all of your money with Silicon Valley Bank, and usually you have more money than the loan agreement. So if they had loan agreements a seventy four billion dollars, that means they had a substantial amount of cash that

could not be withdrawn. And so on Thursday, I think myself and other folks like Mark Schuster, who's a found but from Venus and other folks were saying withdrawals who going to have to slow down? Because there are just so many Silicon Value Bank customers that literally cannot withdraw money because of all the intertwined loan agreements they had with them, and that was going to be a stabilizing force.

But obviously the government made a different decision and shut the bank down within hours essentially that of that occurring. So this is really unusual. This is not like your typical retail bank that has average deposits of six thousand

dollars and then loans out on thirty year mortgages. Silkoon Value Bank had average deposits of over a quarter of a million dollars usually you know, over ten million dollars, and the loans were these revolving receivables lines which were against the invoices you sent to customers and had to be paid within the next sixty days. It was it's unlike any other bank in that regard. And yeah, did did you end or your company have money deposits at SVB And if so, what do you think your recovery

will be? Well, so we at that we kind of so the largest most successful companies at a certain point outgrow SVB because you need now global banking facilities and other facilities. So we actually had reached the point where we were no longer SVB customer, and so you know, and quite frankly, if companies didn't grow to that point, Silton Valley Bank would have even more than half of

all startups. So essentially, this is the interesting part. The companies that could withdraw money were the youngest ones that didn't yet have loan agreements. The companies that couldn't were the emerging and mid sized companies that couldn't withdraw money because they were successful and had all these loan It had loan agreements with sub and then the very law and as you got larger and law archer, you eventually,

you know, went with a more global bank. And so it's it's an interesting it's a very unique cohorted customers. And the other thing to keep in mind is when you raise money from a venture capitalists, you're not going to risk any of them money on anything but growing your business. So if you raise twenty four million dollars and you want that money to go for twenty four months, so you're gonna spend a million dollars a month, it gave SVB a lot of predictability on the rate at

which you were going to withdraw that money. And ultimately, what this crisis seems to be about is that SVB misjudge that startups we're going to need to withdraw their cash a little faster, and then you know, didn't fully have the cash on hand to do to deal with the increased rate of withdrawals, even though there was tremendous stable cash in the bank. And that's we got just about a minute left here, Mark. But I wonder what kind of problems you think this causes, at least in

the short term. I can imagine it's hard to pay bills to companies whose only bank account was at SVB and their lines of credit that won't be h met as far as I can tell, Like, what are the what are the worries that you have for your peers that haven't uh, you know that needed SVB. Yeah, so pure cast flows, So you couldn't as a Friday give money out of the bank to set up for payroll.

You couldn't get money to pay the loan. So in other words, I started having other tech companies eat send emails to my company to not pay them because they literally had no way to pay the CAST ironically, which would have given sv BE more cash on Friday. So it's just really a cash flow problem in the near term. In the but it'll give resolved, it appears because the government is saying that they're going to return one hundred

percent of the money in the long term. There's no other source for these kinds of loans for receivables, loans for you know that the kind of lending and facilities that SVB IT did for these emerging startups having lots of casts and just needing banking services that a typical bank would not provide a startup. And so that's going to create a lot of hardship in the very near term.

And just where do you go to get a line of credit for an office when your brand new startup, even though you have ten million dollars in the bank from Aventa Capolas. So it's just going to cause a lot of heartache and pain for all of these new up and coming companies because these typical big banks just don't understand them, even though they have a lot of casts that they just raised. All right, Mark, thanks so much for taking the time. We really appreciate getting your

perspective right on the ground there. Mark Douglas, President and CEO of Mountain getting the latest perspective of kind of what this means for the up and upstart companies in Silicon Valley in technology going to be a real challenge for them going forward as this situation gets unwelcome. After the lists, reading everything I can on this SVB issue elsa intra bank, I think I've got an understanding of what happened, okay, but our next guest is gonna show

me how much more I still don't know. And it happens every time. John Author's senior editor for Bloomberg Opinion joints us here in a Bloomberg Interactive Broker studio. John, let me just start with what you and I think Matt were talking about. And you know Joe Wisenthal from Bloomberg News and Odd Lott's podcast was in here earlier because he wrote a piece today saying, of course it's a bailout. What say you? Is this a bailout? Your governor Kathy Holkel says it's not. A bailout has come

to be meant thoroughly pejoratively. It's certainly in some way a riscue, which is perhaps a less loaded synonym for a bailout. I guess the question is whose money goes towards it and who precisely gets bailed out. So what was most controversially No. Eight was that taxpayers money bailed out rich people running banks and the rest of the country. I mean, that's exactly what I think is just I didn't mind top rescuing my credit cards, my ability to get money out of an ATM, my ability to get

paid my paycheck. That this was the thing that people didn't understand. Let the banks fail means let my bank fail and at least for a while, cut me off from access to my money, which is what happened for two weeks in Greece when they had the Grexit crisis. Little remembered now because of what happened the year after and that, but that single handedly created a depression in Grease two weeks of not having access to your bank,

that was That's what we're talking about. So if we're talking about some kind of coordinate action to stop the banking system, which is in here urrently unstable because of fractional reserve banking, because if everybody wants to take their money out at the same time, even the best run bank will fail, then then yeah, there needn't be anything

pejorative about it. The recent people are dancing around the topic of whether this is a bailout is because it's been decided politically in the discourse, I think, mainly because nobody got punished for two thousand and eight that bailouts of add Therefore, we have to say that this is not bad as it stands at the moment. Well, if so far it's not, I mean, look, there could be unintended,

unintended consequences. I think right now, we're happy that there are no more runs on banks, right That's that's the good thing that they fed the FDIC and the Treasury did yesterday's they start people from freaking out and pulling their money out of a ton of other regional banks. I'm not totally sure we can say that yet. If you look at what's happened to two year bond yields, somebody has been spending a lot of money buying short

dated bonds today. It's the biggest fall in bond yield two year bond yields since Black Monday in nineteen eighty seven. That money had to come from somewhere, and I suspect quite a bit of it will have come from uninsured deposits at smaller banks. We need to find out. More Similarly, if you look at the share price, plainly, quite rightly, if anybody is bearing the brunt of it this, it

will be bank shareholders. Because this is going to damage profits for banks across the system because because of the extra levy on them for bank insurance, for deposited insurance, and certainly what's happened to the retail bank index is pretty spectacular the way, are there still uninsured deposits at

US banks? Or are all deposits insured now? Effectively, at this point you could say that, yes, all deposits are insured, but the bank, the government is still saying, but even if we come in in the very first resort, ultimately it's going to be the banking system that pays, because

we're going to levy extra deposit insurance premiums. And that's what government Hogle is essentially saying, right, yes, And given that the great majority of US do have money on deposit with banks, and the great majority of US do pay tax, ultimately taxpayers are going to have to pay for this. That said, a functioning banking system is a public good, so if something goes wrong with it, presumably it's not unreasonable for us to have to pay something

towards making sure it carries on. Yes, that in terms of getting back to the angels dancing on the head of a pin or whatever, you could say, it's not a public bailout because it will ultimately, we are being told, come from other banks, depositors, from the levy that's paid on the well until you get to the this new facility that was opened up by the FED. Now you can take assets that maybe worth only half of par yes and get the par as using them as collateral.

That's yes. I can myself live with that because if this is a liquidity crisis, and I think it is more of a crisis of liquidity than solvency, then this is a way to deal with that liquidity crisis. Banks are sitting on a bunch of bonds that whose value has gone down dramatically. That needn't matter if they hold them until term. If they have a run and need to sell bonds for a loss, then things get very much uglier. This is a sensible way I hope of

doing away with that liquidity issue. I don't myself have a conceptual problem with what the Fed is doing there. The issue is whether people are going to believe that it can be done. There's a twenty five billion dollar capacity so far. The hope is that the mere presence of this facility means that there is much less angst and it never gets called on, which is what happened with some of the rescues back in twenty five billion.

Then they say that they can issue four times that amount, and then they can keep taking hits from the treasury at twenty five billion apiece. It seems like limitlessly if I guess, I mean, certainly, the ultimate potential scale of the losses is enormous. That's it. Capitalism does have some

self balancing mechanisms. Given that bonds have just gained in value in a way that hasn't been seen in years, you could argue that the wave, the effect of what's happened to SVP, SVB is to rescue everybody else who has large holdings of bonds that are underwater. Whatever the losses are that banks are sitting on, and I don't know, I do know that they're less than they were because the value of bonds has just shut up. Yes, of course,

all right, so John, let's fast forward to tomorrow. We can get the take a view off of this train wreck, which is the SVBS or the world CPI. Yeah, I thought I was going to spend all day writing about that. Yes, exactly. So does this give I mean, if we look at the warp function, boy, that's changing just the last few days. Has it ever? Has it taken it off? There is fifty basis points now after table is twenty five? Maybe after table are they going to start cutting this year?

I think fifty is off the table unless the CPI print tomorrow is very very strong. Evidently people are now reckoning the work function, which for listeners that that's how Bloomberg derives predicted FED funds prices from futures market. If you believe the work function, then twenty five is off as well. Yeah, yeah, I am not totally convinced of that.

I think what the curve at the moment is telling on work is this is going to be the beginning of a recession that the Fed has now completed its mission of tightening until something's something breaks, something has now broken, Banking is going to be much tighter. We finally are going to tighten the financial conditions and the Fed can

start to ease. That's that's what it's saying. I suspect it's right if we get a very hot CPI reports, I'm not sure that the current numbers can be fulfilled by the fit all right, So I'm gonna take a snapshot of the WI RP GO function today, look at it tomorrow and see if it changes. I mean it changed a lot. When I came in at three, yep, it looked a heck of a lot different than when I went on are at five, yep. It looks a

lot different. Now marketson movie before finding my call him at midnight, it was barely changed from Friday, and that was not the case. We could work a late day. That was not the case when I woke up. So the rate, what the interest rates you're telling you, is maybe not as high, not as long, and maybe some rate cuts later in the year. John Author, Senior editor for Bloomberg Opinion. Thanks so much. We appreciate that. Thanks

for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three. And I'm fall Sweeney. I'm on Twitter at p. T. Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio