Behind the Silicon Valley Bank Collapse

He promised to hold responsible those behind the collapse of the two banks and said he'd call on Congress to

strengthen regulation of the banking system. Joining me as business law expert, Eric Tallely, a professor at Columbia Law School, start with the basic question what happened to Silicon Valley Bank SEB basically fell prey to a pretty conventional bank run, and sort of odd to think, after so many years of knowing what can cause bank runs, that it happened again here, But I guess There are two critical insights from modern finance and banking that most people try to

keep in mind. The first is that concentration of any type of investment or asset can be really hazardous in volatile markets, particularly if you don't try to diversify or heads that concentration. And then the second rule is that accounting tricks don't help you solve the first problem. So I think both of those managed to work their way into this SVB collapse. They managed sort of to ignore the insights that are served there, or at least ignore

parts of them. And so there's a sense in which I think a lot of people think that although this was a conventional bank run, it also was one that on some level would not have been all that difficult to avoid, but it required sort of thinking through how some of these issues work. Explain how Silicon Valley Bank was in essence v bank for Silicon Valley. You know, the offense, Unless you were in the VC or startup community,

you probably had never heard of Silicon Valley Bank. On the other hand, if you were a Silicon Valley startup or a VC fund, there's a chance you'd probably never heard of any other bank, or at least you were discouraged from doing any business with them, because that was the bank for venture finance and basically not anything else.

There really were certain concentrated the venture capital funding and fundraising community, and that, you know, sort of is a big degree of concentration, and while having VC funds and startups all banking at the same place, that was sort of the bank where all the cool startups and the cool VC funds went. That has some advantages on day to day transactions and transferring balances and making payments and

so forth. It really did suggest that SVB was susceptible to all kinds of boom and bust risks that might befall the sector of VC finances. Startups explain how the reasons slowed down in the economy played into this. In early twenty twenty one and twenty twenty two, I guess there was just a huge boom and so they managed to ride this boom in which scb's deposits grew astonishingly fast.

But then when we hit the recent slowdown in the economy, startups faced a much injured environment, and that also kind of plamed Silicon Valley Bank. Now, even in that situation, you could still try to hedge some of those risks using various types of strategies, but that largely was going

to be up to Silicon Valley Bank. It was not one of the big banks that you would be subject to Relatively stringent requirements that would effectively require them to have assets on hands to deal with the bank run.

This is a smaller bank, and in twenty eighteen, the Trump administration actually rolled back some of those stringent requirements for banks of this size, and so it was really up the Silicon Valley Bank to develop its own policies on how best to insulate itself against these sorts of bank runs, and therefore Silicon Valley had to kind of come up with its own approach. Now, the approach they

came up with itself wasn't obviously super risky. A lot of banks, for example, might start lending money out to various of their customers and those borrowers could actually bring in even more risks to the bank, and Silicon Valley largely didn't do that because they were pretty much catering to the venture capital community, and there isn't a lot of debt that's floating around in the venture capital community,

or at least long term debt. A few short term pet debt instruments, but it's pretty much a cash set industry, so they didn't really have customers that were in that industry that were demanding loans. So instead they parked that money in what looks to be relatively safe government or corporate bonds, but they were importantly long term corporate bond

and that is one of the potential risks. Even though those investments look safe on their face, it's not like they're going to default or likely not going to default. It does sort of give rise to a standard problem that all banks face, which is that they have creditors who are basically their depositors, who have short term claims on the company. They can show up any time and

ask for their money. And what the banks typically do is they have those funds parked in various types of longer term investments, and so they basically transform short term claims into long term claims. And when those two sorts of claims go crosswise with one another, like they did here, that can cause a bank run. And that's effectively what happened in this case. So you've got this sort of concentration. The bank buys the longer term bonds, which you know,

when they bought them twenty twenty one. In early twenty twenty two, interest rates were really low, and so these bonds they bought a pretty low interest rates, and when interest rates suddenly start to spike in the latter half of twenty twenty two. In early twenty twenty three, the value, the fair market value if you wanted to sell one of those government bonds, or if you wanted to sell one of those Clipper bonds, it goes down. And the reason it goes down is because you've got to find

someone to buy it from you. And then investors looking around and saying, well, interest rates has just gone up. I can invest in some of these high interest rates assets right now. Why should I buy your really low

interest rate asset. The only way that you can make an attractive is to basically give people a price cut, and that's effectively what happened is the Silicon Valley Bank realized they were starting to get hit with a bunch of demands to withdraw the cash from the accounts because these startups were having to make payroll, and they will know,

the venture capital funding it down a little bit. They had to sell some of these bonds, and when they did, they had to officially recognize in their accounting statements that yeah, they lost a bunch of money on these things, and then they had to sort of make up for that that amount of money. Now, in reality, they had already kind of lost that money. The fair market value of those government bonds had been going down because of the

fact that interest rates were going up. But given the way that they treated these government and corporate bonds on their accounting statements, they didn't have to recognize those losses until they actually sold them where they in, which they did, and at that point the market is susceptible to freaking out. And that's exactly what happened. A bunch of these startups

start trying to pull their money from the bank. In order to provide that money, you got to sell even more of these bonds, recognized even more of it had lost, and the whole thing can unravel. And that's effectively what happened.

In a remarkably fast forty eight hours last week, two days after as Phoebes collapse, regulators close another crypto friendly bank, New York Signature Bank, and Barney Frank, the co sponsor of the Dot Frank Bill and also on the board of Signature Bank, said, I think that if we've been allowed to open tomorrow, that we could have continued. We have a solid book where the biggest lender in New York city under the low income housing tax credit. I think the bank could have been a going concern. Did

the regulators act too quickly? Well, First of all, that statement, whether it comes from Barney Frank or anyone else, is not an uncommon statement from any manager of a bank or board member of a bank that has fallen into crisis.

That's sort of the standard point that bank runs, you know, in some respects are as much about psychology as they are about anything else, and so in principle, sure, if you can reverse the psychology that causes the bank run, then you're unlikely to have to pay the huge consequences

of it. The problem is that to the extent that some of these bank failures or bank moments of distress are also contagious to other parts of the banking system, that's not going to be something that the manager of the bank in question is themselves going to internalize, right, They're just really hoping to turn things around in this particular instance, And the signature bank exposure in many ways was much more sort of akin to the already familiar tale of the sort of banks with a fair amount

of crypto exposure having their own valuations undercut, and signature far more than Silicon Valley Bank in fact had that type of exposure. So you know, on some level, the decision to lump in the Signature with Silicon Valley Bank was really more of a macro decision. The two institutions faced a slightly different set of portfolio risks, but it's clearly the case that the federal government stepped in. Even

though these were officially classified as all regional banks. The move over the weekend sees them ensure them up was you know, in many ways the type of move that is appropriate for a so called systemically significant bank, and that's effectively the exception that federal authorities kicked into play

when they did this. So I think the move here is to say, Signature and Silicon Valley Bank, we don't want them to be the first threat of a sweater that unravels, and so it's important for the federal government to step in and assure depositors, even those that don't have insurance deposits, that they'll have access to their funds.

But the challenge is to do so in a way that doesn't create any so called moral hazard problem of every bank realizing, oh, we've got this great backstop of the federal government writing to the rescue, So why do

we have to engage in very much discipline ourselves? And so part of the structuring of both the STB and the Signature resolution plans was to try to figure out a way to do that that wouldn't sort of encourage other future banks and bank managers and owners to go down the same path and think that they're going to get bailed out or rescued by the federal government. Well, I think President Biden was attempting to convey that this morning.

Biden also said they need to get a full accounting of what happened and promised to hold responsible those behind the collapse of the two banks. Do you have any idea what he means by that hold them responsible legally financially well, part of the issue, I think it really is trying to figure out how to structure one of these bank resolutions. I'm not going to call it a bailout, though some people are calling it that in a way that doesn't kind of reward the decision makers that put

the bank into that position to begin with. And so I think there's been a fairly strong sense of kind of rules of thumb when one of these things is going on, and some of my own research is kind of you landed in this place as well, is that if you are going to step in from the government's perspective and do something that resembles a bailout of a bank or a big institution, you don't want to then

sort of say oh, and don't worry about it. You know, shareholders and managers that put the bank into the spot, We'll just give you a second chance. That the more prudent roles to say no, you are now going to be moved out. You're going to be replaced by new

shareholders and new managers. And therefore the you know, you're going to have to eat your own cooking, and the bank's going to go forward under new management with a new ownership structure, probably consisting of some of the lenders to the bank some of the creditors off the bank. And so I think that's the idea, the good chunk

of the idea behind these resolutions. And if you're going to do a type of a bank resolution like this, it makes a great deal of sense to play hardball on some level as a way to avoid some of these moral hazard problems. The risk in doing that is that if you can't find, say, bank managers who are as good as the ones you're getting rid of, then that could be problematic as well. And so it is a little bit of a kind of a hardball policy tactic is one that makes a great deal of sense.

It might come with a little bit of risk, but I think for all intents and purposes, it's probably the prootive way to step in and back up some banks without it constituting what you know basically amounts to an invitation to all the other banks out there to go down the same road. I mean, is it going to stop? Do you think at these two or they're going to be spillover effects on other regional lenders or the broader economy. Well, I think that's the huge concern right now, and that is,

in fact a very significant question. It's it's one of the reasons why a senior government officials worked feverishly all

weekends to put this plan in place. You know, to the extent that things like bank runs are largely the artifacts of psychology and freaked out you know, depositors who are worried about losing their deposits to step in and say actually, no, we got your back on this depositors, even the ones who are above the two hundred and fifty thousand SEIIC assurance, We've got your backs on this. The hope is that that's going to cause depositors of

other banks to be less concerned about it. Now, there are still several regional banks that I think are you know, kind of on that bubble themselves, and I think the hope is to increase confidence in the integrity of the deposits of those banks as well. And so there is you know, almost a sense of moving in aggressively and assertively early on, playing a little bit of hardball with the managers the banks that are being sailed out as

a way to affect the psychology of depositors for future banks. Now, whether that work is in many ways itself a question of psychology, how credible is the governmental move, how credible is it going to be that they do it again

if necessary. But I think the part of the structuring of this plan that was that was announced over the weekend was also meant to give people at least some degree of confidence that the government is not going to let contagion run amuck, even if some banks end up, you know, having to be liquidated or sold off like STP. So Biden said he's going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again,

But no specifics. As you know, during the Trump administration, Congress row back some of the strictest post crisis regulations from midsize bank So what's your take on what would be best to put those regulations back into effect or to strengthen the regulations for all banks. Well, that's kind of the interesting question right now. You know, after the financial crisis and the wake of the financial crisis, fairly stringent regulations were in place that in fact would have

covered many meet in size banks in this range. Those in mid twenty eighteen were rolled back, you know, rodly under the narrative of we're just you know, eliminating unnecessary regulation and opening up small regional banks to lend to small businesses and to grow the economy. And you know,

the taglines are pretty easy to predict here. But what that did leave is this kind of open field for banks of that size to you know, decide what the best approach would be for trying to head their risks, and in both of these cases there was a fundamental miss calculation. So my sense is that the political winds may start to blow in President Biden's favor. Whether those winds are going to be strong enough to tip a Congress that is less friendly to regulatory interventions remains to

be seen. But you know, the quaysie, you know, panic, I'd say more of a you know, kind of a systemic concern that that that really spawned what happened over the weekend is definitely going to have at least some implications in the political landscape and trying to understand how to go about reregulating some of these banks that look like they may be more systemically significance than they were

given credit for. I mean, is a question of putting more of the banks under the stricter regulations of Dodd Frank or making all the Dodd Frank regulations if both are possible. I mean, I think probably the easiest thing would really just be to bring back down the threshold

for the Dodd Frank rules. I don't think anyone is worried that some of these larger banks that have to undergo routine stress testing and pretty much have the stringent requirements that require them to wapp the assets to answer a bank run. I don't think anyone has any significant concern about the integrity or the solvency of those larger banks, So it may well be the case that the easiest thing to do would be basically bring that asset threshold back down so that it ended up effecting some of

these more medium sized regional banks in the future. The other possibility, of course, is just to increase the regulatory oversight or demand of DoD Freak rules across the board. That one, you know, I think probably would face a fair amount of blowback for the same reason that I just noticed that the larger banks out there don't seem

to be in this same situation. The Dodd Frank Acts rules are actually kind of working for them right now, and so to say, okay, we're going to ratchet them up may not be the you know, the street of shooting approach from a policy perspective compared to, you know, making sure that the banks that really are at the root of some of these problems, which are typically specialty concentrated in regional banks, that those have greater degrees of

oversight in them. So if I were wagering on this, I would think that an overall enhancement of Dodd Frank requirements is less likely than maybe an extension of them to a larger population of banks, or you know, possibly you know, causing those those regional banks to you know, be more likely to have their assets transferred into some of the larger banks, and so that you know, you know, auctioning off the assets of a bank in its resolution period, you know, those assets may end up wandering to a

larger bank that is subject to some of those more stringent requirements, and that might be in a mechanical way to do it. But I would see the more likely approach if there is going to be a regulatory response here, is to extend some of the Dodd Frank requirements back to in the direction that they were before twenty nineteen. Thanks so much, Eric, that's professor Eric Talley of Columbia

Law School. New Life for Relevant Sports Groups plans to market foreign soccer teams regular season matches in the US. A federal appeals court in Manhattan has revived an antitrust suit brought against two of soccer's governing bodies. The Second Circuit found it was plausible that FIFA and the United States Soccer Federation are enforcing an anti competitive policy that divides geographic markets and restricts access to the game. Joining me is Stephen Bank, a professor at UCLA Law School.

For those who don't know soccer, tell us about the alleged ban or why relevance efforts to host official season games between overseas teams in the US was denied. So US Soccer is a member the designated governing member of the United States Territory for the international sports governing body

of soccer, which is FIFA, the Federation International Football Associations. Historically, the reason for FIFA is that soccer is such a international game gameplayed worldwide, unlike some American sports like American football for example, that they wanted to standardize the rules. They wanted to create opportunities for teams in different countries

to compete against each other. So in creating the worldwide game, one of the things that they have done is given each federation, each governing body in the country jurisdiction control over the soccer played in that country. Historically, that's just meant that at most you'd have international tournaments like the World Cup you'd have some friendlies what they call friendlies,

we would call scrimmages played in the offseason. So sometimes you have tours buy teams from in Europe or elsewhere in the world in the US where they're doing kind of a preseason training camp, and they'll play some games in the US, and so those were all games that you have to seek permission from the governing body in the local jurisdiction to play in those games. And it's only recently with the expansion of fans outside of a home country that there's demand and for people to watch

a team from another country play. So people are watching games in other leagues. So it used to be you just watched your home league, that's all you did. So there's a lot of interest in for example La Liga, which is the Spanish first division league. So that has generated demand from those leagues to expand their base. They don't have to just rely on the fans within their within Spain. They can go outside of Spain, and so they'd like to mine what is viewed as a relatively

untapped market at the United States. The rule came about because Relevant Sports, which is a soccer promoter. They were contacted by La Liga to try to arrange for games in the US. Now, that'd be fine, except that they

were going to have league games in the US. The concern in that situation is that if you're trying to grow domestic league, especially one that's relatively new and in the case the United States, that demand for that league would get reduced potentially if a better league and more established league, more historical league Black LA Liga was playing its games to the US. This is not unique to

the United States necessarily. This is a concern in lots of jurisdictions around the world that there's a few top leagues that will kind of dominate the domestic leagues, and the only protection the domestic leagues have is that they can control what's played in their country. So that led the attempt to play a game in the US, which when US Soccer is talking about this, originally they were kind of slowballing it. They were saying, I don't know if we're allowed to do that. This is not a

preseason game, this is not a scrimmage. This is a league game. And FIFA eventually stepped in and issued a rule that said you can't play out domestic league match outside of your home jurisdiction, and that is the rule that is under challenge here in the relevant sports case against the United State Soccer Federation and FIFA, that that

restricts competition in the US. And so in July of twenty twenty one, Federal Judge Valerie Caproni found no evidence to prove there was illegal conspiracy to ban foreign matches. How did she come to that decision? So, just to back up a second, there are two requirements really to establish a violation under Section one of the Sherman and I Trust Act. The first is there's concerted action, so there's a conspiracy among people involved, and then and the

action unreasonably restrains trade. So on the first question of concerted action, the issue, which is a much broader issue than Soccer or FIFA United State Soccer Federation, is does being a member of a trade association mean that you are acting in concert on all rules adopted by that association. Right,

That's the broadest principle that is at issue here. It's the reason why the Department of Justice intervened in this case, the reason why there's amicus brief filed by a variety of essentially non soccer related interests, is that that's a broad issue. What does it mean to be in a conspiracy or act in concert if you're just a member of an association and they have a rule and you follow the rule, is that acting in concert? And judgment Prony in the lower court concluded that you need to

allege in your complaint an agreement to agree. That is some kind of evidence that the parties agreed before they voted on the rule, that hey, we should all vote this way because we don't want this competition something like that. And the Planets Relevant Sports argued that that was a very high burden to show that there was an agreement to agree at the complaint stage. So what they're simply

saying is, hey, there's a rule. All the rule is anti competitive, and they remember the association and they all they agreed to be bound by this rule that was adopted by the association in this case, FIFA, and therefore that was enough to allege concerted action. What Judge Caproni was doing was establishing a fairly high bar for any kind of an anti trust case involving a trade association.

That's why the Department of Justice intervened in the case, not because they cared dramatically about FIFA or US soccer or this thick or issue. But they didn't want that high a bar to be set on anti trust actions. And so that's really where we get to. The second circuit is is do you need an agreement to agree or is it enough to establish that there is a rule, the rule is anti competitive, and the parties are members of the association that has the rule. The second Circuit

disagreed with Judge Caproni. Tell us why they disagreed, what their ruling was. Yeah, the second Circuit, their major observation was that you shouldn't be able to avoid antitrust liability by acting through some kind of a third party intermediary

like a trade association. That if by being a member of a trade association, you agree to be bound by the rules of the association, whether you've voted for them or not, and the rules are anti competitive, then that should be enough to provide direct evidence of concerted action and sort of get you in the door. It doesn't mean it's an antitrust violation, doesn't mean it's ultimately it would be found to be unreasonable restraint on trade, but it means that you can't simply say look, I just

a member. I'm just following the rules. You know, I'm not. I didn't actually agree to vote in a certain way.

I didn't talk to anybody ahead of time. I made my decision independently, all the kinds of things Judge Caproni was talking about that you don't need to allege that you simply need to allege you agree to be a member of association where you were going to be bound by any rule they had, whether you liked it or not, or whether you discussed it with anyone at We're in or not, and that that was enough to establish this.

So that's really the upshot of the Second Circuit ruling is that you don't need to allege or establish in the complaint in an agreement to agree. If the rule itself is the violation, that's enough to establish a concerted action. So does this now go back to Judge Caproni for trial? What happens next? So it does go back to Judge Caproni. Since this was a motion to dismiss, it goes back

to that stage. So now they vacated the motion to dismiss, and it doesn't mean there couldn't be further proceedings before you got to a trial, so you can have a summary judgment, motion or something else. There might be additional emotions, but it means that the case is going to proceed and might ultimately end up in trial. At least this part of the question unconcerted action. The Second Circuit has ruled.

There could be other issues there, and there could be issues relating to whether it's an unreasonable restraint on trade, and then ultimately it could go to trial. So FIFA said that it had taken note of today's decision and would review it before deciding on its next steps. What next steps could it take outside of going back to Judge Caproni and having a trial. Well, FIFA could rescind the rule. It's actually a policy that they adopted, so

certainly could rescind the policy. They could revise a policy in a way that would cause relevant sports to drop the claim. So it could be some kind of a compromise measure that you know, there'd be some limits on how many games you could play abroad or something like that that relevant sports would find reasonable and that FIFA could defend. So there could be some kind of a settlement there. There There could be a settlement of course, financial settlement.

It could also go back to its membership and decide whether the membership wants to proceed. Typically, we'll go through the FIFA Council, which is the kind of executive committee of the group, and they could decide how strongly do we believe in this, But it's definitely a question of, you know, our the litigation costs worth the benefits of the policy. One challenge here is is that this is a US ruling. That doesn't mean other countries feel the

same way. So this is one of the challenges for an international sports organization which is dealing with multiple jurisdictions, and in other countries this may be perfectly fine. So they could decide to keep the rule. Why would let the United States dictate this. We don't want anyone, for example, in the Bundesligue and Germany to play games in Austria because we want the Austrian league to have primacy there.

Otherwise the Austrian league. Why would anyone in Austria watch the Austrian League when they could watch the German league, you know. So that's there are plenty of other countries where this could be an issue. So the idea that they would change this dramatically seems somewhat unlikely, although it maybe they make an exception in the US alone because

of this rule. So it could be that they would say, we're restricting the ability to stay gain in countries other than the US, so that that would be a way that okay is the US, it's okay, and the US doesn't care about the anti competitive policies in other countries,

So that might be one possibility. It's more likely since that the Uscccer Federation in FIFA will be concerned about FIFA member leagues, and it's also more likely that other leagues and football players in those leagues might be concerned about the additional cost and travel of playing in the US. So it may be one of those issues where it's not going to be a very frequent thing anyways, but

that's certainly possible. I do think that this is only one piece of the question in the case concerted action, So I think they could feel like there's strong pro competitive reasons for the rule, and that might be enough to survive the nitrust challenge. So, for example, they could argue, you know, the case ever came to trial, they could argue that by allowing La Lagua to play home games

or play games in the United States. That would destroy not just Major League Soccer, but the United Soccer League and the National Independent Soccer Association NISSA, which is a third division league, and in those situations there'd be less soccer in the US. Then if you had not played law league games here, and if you did this, if you can imagine this worldwide, there'll be five leagues maybe worldwide, and no domestic league would would be able to survive.

And if that's the case, then we'd have less overall soccer games for people to watch, which is bad for competition because they can raise ticket prices and lower wages because there's not alternative employers, all sorts of the pro competitive arguments. And so in that sense, if FIFA really wants to stick to its guns and US Soccer, you know, they have some arguments they could make for why this rule should be allowed. So this is not a victory

like final victory for relevant sports. It's probably more it's a victory for the Department Justice and some of these amicust filings that you can file an anti trust lawsuit against the trade association, and there are a lot of those. The NCUBA is a trade Association, other sports organizations, but not just for sports organizations, professional societies, all that. It's a really a victory for that. Thanks for being on the show. That's Professor Stephen Banks of us LA Law School.

And that's it for this edition of the Bloomberg Laws Show. I'm June Grosso and you're listening to Bloomberg