Surveillance: SVB Fallout with Michaud

I said, get me. Showed he is with KBW, who have been attached to small banking and securities analysis of banking through my entire career. Thomas showed a CEO of KBWO stephel company. We're thrilled he could join us from California this morning at tim, I don't know where to begin with eight themes, but to cut to the chase, you've lived this, what should your own Powell do? And the hours and days? I think this is still a moment about confidence. It's confidence for depositors to know that

the money in their bank is safe. It's also confidence among investors. You've got an SMP five hundred company who stock just went to zero pretty quickly, and so investors want to know that the confidence want to have confidence in the system as well, and so we need orderliness. And that's what I think is necessary at the moment. And the agency took action last night, and we're going to find out if it's enough for if more is needed.

I'm very simply here. My theme for the year, not seeing any of this coming is a great zombie roll up. Keith Briant and Woods is expert engaging the zombies out there among thousands of banks. How troubled is our banking system? How many is bombies are out there? For twenty twenty three great zombie roll up. So I'll tell you the bank that fell last week, Silicon Valley, on all the measures, was probably one of the biggest risk takers in terms

of interest rates with their bond portfolio. They were an outlier. My conversations with many banks CEOs is that the deposit outflow contagion had not spread throughout the industry. However, I know that concern was raising and rising and you could see I think if this continues, you could see it to start to affect banks that had very prudently managed themselves and that's what happens when consumer behavior or commercial behavior for deposits changes quickly. That's why I think we

need a government support mechanism to make things orderly. We got some of that last night. If it's not enough, I think they got to do They should do more. But you know what's really interesting, Thomas, this is all about the unwinding of COVID relief. There are two things that happened that dramatically impacted the banking industry. One is we've had rate increases at the fastest pace of my career. It's been fast, and it's been significant in terms of

its measure. Number two is that the system during COVID was flooded the banking system with deposits. There's a purposeful effort right now to drain liquidity and drain those deposits. It's happening at a pace that I don't think any management team in banking has ever seen before. So while that's happening, you have a crisis of confidence, which is compounding the issue. And that's why I think we need

this broader support. If I were to show you the market the metrics of a typical bank, they're actually outstanding credit quality, is of no concern at the moment. You've got companies that had stable capital, but they weren't necessarily built to have this type of stress put on deposits overnight. And that's why I think we need a calming influence barring some sort of further intervention from the federal government. Tom, what are you doing at KBW to attract deposits and

to keep the ones you have? Well, my firm at KBW, we're a securities firm, but I think that I think that so we don't We don't attract deposits at KBW, so to speak. But I think what I in talking to most banks in the industry, they have the liquidity. There are plenty of ability penny of lines and avenues that a bank can go down to augment their liquidity. So my sense is that depositors demands will be met,

and I think other banks are. Some banks are seeing tremendous inflows from some of these other banks, so it's not equal everywhere in the industry. So I think things are steady enough as long as they don't get worse. That's my point. Well, Tom, do you expect a smaller and regional banks to have to pay more to attract just regular depositors who think, well, why shouldn't we just put our bank at the big money centers that are too big to fail? Well, yes, I think, I think that.

I think in the third quarter of last year is where the light switch went on, so to speak, in terms of deposit competition. And that happened because of the speed at which FDIC deposits have been shrinking because of monetary policy. So we saw that competition sort of green light happen in the third quarter, so I think. And it's not just the banking industry competing with itself, it's

market rates. Treasuries were offering a compelling alternative to deposits, so that competition was building and that's how fun to have been draining out of the system. So I tell ye, got to run up. Just got a headline. I need to get to. Thanks for being with us this morning. Tom shank of KPWA sobridar Rajapa joins us right now on this historic day with society in general. So brodri, I want to speak I think towards what the President

will comment on here. What can we glean from the fixed income markets that can help politicians gauge the moment. What should they be watching in fixed income? Well, they're not watching anything specifically in the fixed income market per se. But what I think we should be encouraged by is the fact that financial conditions are still relatively easy. You're not seeing a meltdown in the in the equity market. You're not really seeing other risks of a contagion in

all markets. This seems to be very localized, if you will. In the bond market, you're seeing a pretty dramatic decline in yields as the market starts to price out rate hikes for this year. So for the most part, at least thus far, it seems to be localized to the price action, i should say, in the bond market, and we're not really seeing a big risk of a contagion. Two things to Patrick. One, you called for lower yields. You're getting them in a mimictive way this morning. We'll

come back on that call in just a moment. The second thing, there's two clear camps emerging. We've been discussing them in the last hour or so. One is that the market is right, this Federal Reserve is done. The second camp is ultimately the feeders shown. It has the toast to deal with deal with feut banks and can focus on tactic inflation, which camp you in it's going to have to be the ladder. I think it's very soon to make a call on the FED being done.

Like you guys have discussing over the last couple of minutes. If you look at inflation, it's running very hot. You have a very strong labor market, and most importantly, financial conditions are easy. The financial stability risks seem to be somewhat ring fenced and isolated with a couple of banks. The question really becomes one of does the FED have all the tools it needs to be able to contain this problem? And again, you know you guys did a

good job of outlining what happened in the UK. I think the parallels there are are very impression for this particular moment where the Fed can kind of threaten needle on two separate issues and continue to raise rates in the March media and even beyond if we can kind of deal with the problem at hand. So I want to just talk about the mechanics of the bond market at a time when you're seeing a fifty basis point move in the two year at a time when so

many people had parked their cash in this debt. How much is it kind of creating fertilities in and of itself that there is such incredible volatility in the benchmark basic instruments that people use as tools of safety. So if it is a tool of safety, you want to be along the bond And we've been kind of talking about that, you know, pretty much since the beginning of

the year, even when yields started a rise. Is that this is typically the sort of price action you tend to see in the bond market towards the end of the cycle, where the market gets a little bit very skittish on the potential turn and policy. So, especially given the fact that yields have risen so dramatically, our view has consistently been that the risk to yields are a specially due towards the downside, and that's exactly what you're

you're seeing in the price action. Yes, the moves look very dramatic, and that's because the absolute level of the two year was at about five percent, you know, just a week ago, so a lot of that repricing is going to happen in the very front end. So that doesn't surprise me at all, um, But what you know, what we have to see going forward is not really

read too much into the price action year. This could be partly driven by position unblinds, given the fact that the market was extraordinarily short heading into the into the March fo MC meeting. But I think kula heads will prevail when you have more information on how this route is going to play out. Brownie speaking, how are you going to play this about her? Are you going to

lean into the long end? Are you going to basically cash in on some of the short positions you've had the short short end of the curve, We really didn't have any any shorts. I think we've been kind of leaning long in bonds for a good portion rule of this year, given the fact that you know, it's really hard to call the pivot on policy, so it's it's kind of you know, especially given the fact that you

get such good returns and bonds. Our bias was perhaps to play from from the long end, because yes, we might lose the last twenty five basis points of rate hikes or not be able to know where the term a FED funds raiders. But broadly speaking, the market's going to look towards the trajectory of lower yields over the next year or two. So in that sort of context, I think that long play made sense. That said, with me moved quite significantly lower here, So I think we

probably take a pause look at how things evolved. I wouldn't be surprised if we see another leg higher in yields, if we start to price in more hikes as the time progress is given the fact that we're not anywhere near achieving the goal on inflation. So Patri, your bonco is looking pretty good this monic and after the last couple of days, that's for sure. So Patra Jafford suck gens at, Patra, thank you. What you need to do

on technology is people get chosen. There was a woman out of Minnesota who was exceptionally astute and operational research at Stanford, and she was annointed I remember the day as clear as I can, Marissa who was annointed as the leader of YAH, who many would say she at least stabilize a company and moved it along in its eventual pain. The gentleman that found her was Michael J. Wolfe. He's co founder and CEO of Activate. Is a unique

voice for technology in this country. Hes worked with MTV, but far more with consulting with McKenzie and he is a voice that when he gets it's a lot, it's Michael Wolf online too. The answer the phone. What did you do this weekend? Were you glued to the phone this weekend? Well, it was a dark weekend for startups and for venture capital firms and either on Twitter, either on message boards and really blowing up my tax over

the weekend because where people were afraid. Startups and vcs were concerned that they wouldn't make payroll this coming week and they were concerned that come Monday they'd have to start letting people go. I want you to address the behavioral construct that was beautifully described by the Wall Street Journal anecdote after anecdote, and I'm not going to mince words, Michael.

It was fancy tech guys with fancy educations on fancy golf streams from Big Sky in Montana, flying back quickly to northern California to salvage the mess that is the image that America has of your world. Is it accurate? What's ironic is that in a lot of ways, the venture capitalists started that, and so it's the immediacy of social media. So starting on Wednesday, they already started advising their startups to take money out, and by Thursday, over

forty billion dollars had already left Silicon Valley Bank. And so in a lot of ways, this was self imposed. And what's different about this versus two thousand and eight was you had at that time, you had Twitter that had two hundred thousand daily users. Today, all of the communication is happening through social media, and so it's not

surprising you had a run on the bank. And what was so important in the quality threads this week and the people that weren't hysterical was bred sets are wonderful at Harvard, an actor and at the end of his thread, Lisa, he was scathing about the lack of humility among tech types. Gary Gensler out with this statement from the SEC that they are investigating and bring enforcement actions if we find violations of the federal securities laws. This raises questions of

what potential conflicts some of these individuals had. Was that one of the discussions that people were having over the weekend, the main thing was this concern about what this meant for startups themselves, and this concern overall for people outside the technology business about what would this do to the innovation that's been taking place. I mean, these were not big companies. These were companies thousands of small companies who

have yes taken in venture capital money. But there's concern that this would shut down innovation, that vcs would not be able to finance companies come this week or these

coming months. Michael Showell was on earlier and he was saying that regardless of what happens and what the is trying to do in the treasure departments to offset some of the concerns about a failure to be able to withdraw it deposits, that lending conditions would tighten materially and that some of these smaller companies would face much higher standards to borrow a much higher rates. Is that in the conversations that you're having with some of these startups. Absolutely,

I think they're worried about what happens. Even though the FED is going to backstop the bank and their funds are going to be available. I think their concern is will this have a chilling effect on venture capital funding? And will this have a chilling effect on the places where they can borrow money and in a lot of cases, though there are many of them are expecting to keep

their money at Silicon Valley Bank. Over the weekend, a group of venture capitalists Kleiner Perkins and others in general catalysts. They put out a statement that said, no matter what happens, that they'll back Silicon Valley Bank. Now, there's also if you look at some of the anecdotes, companies weren't even set up to take money into other places. Of the founders were putting money into their personal accounts as they

were able to transfer it out. Is there a discussion about some of these venture capital firms helping some of their portfolio companies to actually meet payroll to deal with some of their concerns on their imminent funding requirements. They're really based on the conversations I was involved in, there really weren't. That was not an option on the table. I think that everybody was looking at this, and in fact they were concerned about the laws in California in

terms of what happens with missing payroll. Michael Wolfe one of the same voices this weekend. He was cryptic, but nevertheless saying was a guy named Dan Loebe there were others that were a little more hysterical all caps in that mouthing off in a time of true financial crisis, How do we get a behavior change in your world that affects a humility towards the entirety of America away from hyper educated finance and technology elite. Yeah. I think that.

What's happening, though, is the world is moving away. The innovation world is already moving away from Silicon Valley. It used to be you started a company, you could only be located one place, and that was the Bay Area. Some came cases let on that. Let's be clear, the guy from AOL, Steve Case is really let on that. Absolutely. But when we move into new technologies like generative AI and self driving cars and even the metaverse, it's in other places, and I think that that Silicon Valley mafia

will change. I didn't hear Dan Loebe this weekend talking about the metaverse, and most of the people watching the show, We're going, Michael, what the hell is it? We won't know it for five years. How do we reconnect Massachusetts Institute of Technology, Stanford, Caltech and other allegiance Georgia Tech Perdue. That's my pick in the NC double A. How do we connect technology engineering back with an America where the

stereotype is they're flat on their back, right. I think that some of it's going to come down to innovation hubs, so Boston in a lot of ways, in Cambridge, those are gonna places and other places around Austin and others where you've got people. And it's also opening up the world. I mean a lot of these tech jobs have gone away. Those people are all going to find work, but they're

not going to necessarily find work in Silicon Valley. They're going to find it in other companies and mainstream businesses.

We've been talking about the potential fallout and the interconnectedness of markets that previously had been somewhat separate, and I wonder about stable coins, for example, the sort of crypto asset that is pegged two assets that for example, I'm thinking of the USD coin that had a lot of its assets parked at the Silicon Valley bank and suddenly it broke the buck, right, it went beyond one dollar,

which was sort of the backing of its assets. I mean, how do you view that in terms of casting a real pall that has a permanence to it over asset classes that previously were heralded as the winners of the crypto winter. Yeah. I mean there by the way is the real arrogance, which is this idea that this wouldn't have happened if we had descend toalize finance and blockchain. Yes, USD USD coin um it's supposed to be it's a stable coin. It's supposed to always be stable at a dollar.

It dropped down to eighty seven cents over the weekend and um USD had three billion dollars on deposit. So it is going to have a chilling effect on on crypto. It is going to make people wonder is this a viable place as it's safe? John from England emails in. John says, can you ask him if it was a bailout? Was this a bailout for younger Michael of Turks from another time and place? Well, I mean this, what's this is very different. It's a bailout, but it's very different

than two thousand. But was a bailout? No? I think this is this was about about liquidity. It wasn't the This is not a bank that made that made risky investments in mortgage backed securities. This is a bank that had a liquidity problem. They made bad mistakes in terms of their investments, and ultimately, UM a lot of that money will come back. If you see. I don't mean to interrupt. Running out of time, and this is too important. If you were asked to serve on the board of

the new SVB Bridge, what would be your advice. I think that that you better be an expert in finance and you better have really understand the kinds of credit risk officers and other people that are in place. Michael, we got to go because the news is just rip roaring here as or thirty minutes away from the President of the United States, Michael on short notice. Thank you for coming into that. Michael Wolfe at which barely describes

his history with McKenzie, Yahoo and others. We begin this discussion this morning on your future in banking with Myra Rodriguez Valadario's managing principal at MRV Associates. You may not know her, but what you need to know she is steeped in the banking discussion of Washington. Myra, thank you so much for joining us in the six o'clock hour. I'm going to cut to the chase the Republicans, led

by President Trump, are highly suspect of bank concentration. It's Donald Trump channeling is inner Andrew Jackson, I get it. Did that all go by the way, say side yesterday? And will the Republicans have to find common ground with the Democrats to make us a one banking system. Well, it's good to see you again, and thank you so much for having me here. Look, most unfortunately what's just happened this weekend is that venture capital and those kinds

of companies have been bailed out. And this never should have happened. The Republicans primarily, although unfortunately some Democrats back in twenty eighteen voted for the e g R CCPA. Yes, one more alphabet soup of American regulations and laws. But once that vote came in, it revoked important liquidity and testing requirements for those banks exactly around the size of

what Silicon Valley Bank is. So yes, Republicans should be finding common ground with Democrats now to evoke that useless piece of legislation which ended up being incredibly damaging yet again to unsuspecting ordinary Americans. Can we expand too big defail constructively across the regionals the superregionals, even some of the larger institution state by state, or do we need to expand it for each and every community bank. Yeah,

excellent question, Tom Noe. We really need to go back to Title one dot frank that was signed back in twenty ten. At that time, those institutions that are fifty billion dollars and over work considered systemically important. And yes, you can have domestically systemically important banks. You can have the regional ones. Of course, you have the ones the size of JP Morgan, which are globally systemically important bank.

And even these so called smaller banks, I don't call it two hundred and some ud billion dollar institutions like Silicon Valley Bank, small, even those kinds of institutions. We just saw this weekend how much instability and chaos they can cause to ordinary Americans and didn't even know that all of this was going on. And so those institutions should never have been changed. In other words, their designation

never should have been changed. Wellmar whether they like it or not, has in Washington, DC acknowledged that you're right overnight by using the systemic risk exception for smaller banks, right exactly. Unfortunately, and I really hate to be right on this one. Quite a number of consumer advocates and myself for decades have been arguing that it is important to pay close attention to those regional banks. By definition, they are concentrated in their assets and in their liabilities.

The fact that Silicon Valley was not properly analyzing how concentrated it was in its deposits, and some of those, as some of you have mentioned in the previous program, were enormous. All it takes us one or two of those tech companies to withdraw their deposits, to get on their phones with their friends telling them, Hey, I think there's a problem at a particular bank, and next thing you know, we had a just old fashioned run on

the bank. You also had up people on Twitter who should have really known better, billionaire hedge fund managers, really fearmongering and none none of that was necessary. But at the end of the day, this is the fault of the executives at SVB, and the SEC needs to investigate. Why is it that they were selling thousands and thousands of their own shares just a couple of weeks ago, and why weren't they at least doing minimal interest rate

risk management? And liability risk measurements. Well, a lot of people are trying to say this is highly idiosyncratic for all the reasons that you just said. First Bank in California, those shares down almost sixty percent. Comerica shares down almost seven and a half percent in pre market trading. This is following some of the moves that we saw last week. Fifth third, I mean a number of the bigger of

small banks, regional banks are really struggling. So how idiosyncratic is this or is there a larger problem that we're going to see come to the four in the days ahead. The problem is yes, a couple of days ago we could say it's idiosyncratic. A problem is that nobody wants to be the last one in a room turning off the light. In other words, as soon as there's a problem with one bank, fear is real. Immediately everybody starts to say, wait a minute, should I also have my

deposits at bank ABCD, etc. So immediately investors move. You see other banks, bond deals go up, which signal to the rest of the market that there's an increasing probability of default and laws severity. Even if the bank is well capitalized, they keep hearing that banks are well capitalized. Yes, the problem is they can quickly go They can quickly become a liquid, which is really what matters right now.

Lehman was single a it was well capitalized, it was a liquid, it was insolvent, and these things can happen incredibly quickly. That's why there is no way the Silicon Valley Bank and other banks like that should have been allowed to grow that fast back in twenty fifteen, when Greg Becker was actively advocating for lighter regulations. In twenty fifteen,

that bank was forty billion dollars in assets. When it was closed down, it had grown by over four hundred percent to somewhere in the range of two hundred and ten billion dollars. So, yes, you are going to see a lot of gyrations in the market because investors are drums Mara, Thanks for the end of this. Just fantastic thoughts on the regulars you front and why are we're going to go forward from here? Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get

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