20VC SVB What Happened What Happens Now Will Depositors Have Deposits Guaranteed How Long Will It Take Will There Be a Buyer Who is the Most Likely Buyer What is the Best and Worst Outcome

In a timely discussion on the Silicon Valley Bank (SVB) collapse, Harry hosts Jackie Reeses, CEO of Lead Bank, and Chris Dixon, CFO of Lead Bank, to dissect the causes and implications of the crisis. Reeses, with extensive experience in financial services, and Dixon, with a background in managing Lehman Brothers' post-bankruptcy estate, shed light on the systemic risks and strategic communication errors that led to SVB's downfall. They highlight SVB's concentrated customer base in the VC tech ecosystem, its long-dated securities investments during low-interest rates, and the subsequent market value gap as interest rates rose. The conversation also covers the FDIC's role in managing the crisis, the potential for other banks to face runs, and the critical importance of diversifying banking relationships. Reeses and Dixon express confidence that a resolution involving buyers for SVB's assets will emerge swiftly, mitigating the broader impact on the economy and instilling depositor confidence.

• Harry predicts a resolution for the assets and deposit base of a bank, indicating a buyer or buyers will be announced before the market opens.
• He bases this on the FDIC's past behavior, Chair Yellen's statements, and the quality of the deposit base.
• The expectation is that the bank's situation will be resolved quickly.

"I believe that there will be a buyer or buyers for the assets and that a hundred percent of the deposit base will be assumed, and it'll be announced before tomorrow morning when the market opens."

Harry expresses confidence in a positive outcome for the bank's assets and deposit base, emphasizing the anticipated speed of the resolution.

• Jackie Reeses and Chris Dixon are introduced as experts to discuss the SVB situation.
• Jackie is the CEO of Lead bank with extensive experience in financial services.
• Chris is the CFO of Lead bank, with a history at Lehman Brothers post-bankruptcy estate.

"So I'm thrilled to welcome Jackie Reeses, CEO of Lead bank and previous exec, chair of Square Financial services, and head of lending and banking."

The host expresses excitement about having Jackie Reeses on the show due to her extensive background in financial services and leadership roles.

• Jackie is the chairman and CEO of Lead bank, working with venture firms and companies in Silicon Valley.
• She has 30 years of experience in financial services, including roles in private equity, investing, and being part of the Federal Reserve's Economic Development Council.

"I currently am the chairman and CEO of Lead bank."

Jackie confirms her current position and highlights her deep involvement in the financial industry, underscoring her relevance to the discussion.

• Chris joined Lead bank as CFO and has a decade of experience managing Lehman Brothers' post-bankruptcy estate.
• His experience is particularly relevant due to the current financial issues being discussed.

"For ten years, Lehman whole coastate has liquidated and distributed $129,000,000,000 to unsecured creditors through the end of 2022."

Chris provides a background of his professional experience, emphasizing the scale of the financial operations he has overseen, which lends credibility to his insights.

• Banks manage risk by balancing customer deposits with investments.
• SVB's deposit base and loan portfolio were concentrated in the VC tech startup ecosystem, which became problematic when conditions changed.
• SVB made a significant bet on long-dated securities, expecting low interest rates to continue.
• The Fed's rate hikes in 2022 and a slowdown in VC funding led to a decrease in SVB's deposit base and increased interest expenses.
• SVB's investment portfolio lost value, creating a capital shortfall.

"For SVB, this challenge was particularly acute as their deposit base and their loan portfolio were heavily concentrated in the BC tech startup ecosystem."

Chris explains the specific risks SVB faced due to its concentrated customer base and investment strategy, setting the stage for the bank's collapse when external conditions changed.

• SVB announced a capital raise, which caused panic instead of reassurance.
• The psychology of banking and the fear of being the last depositor in a failing bank triggered a run on SVB.
• SVB's communication strategy was criticized for its unusual approach and timing.

"And so that announcement did the exact opposite of what it intended to do, and it created immediate fears around the tech community."

Jackie discusses how SVB's announcement of a capital raise backfired, leading to panic withdrawals and exacerbating the bank's liquidity crisis.

• The collapse of Silvergate and SVB in the same week suggests a broader systemic risk in the banking sector.
• The FDIC's report shows elevated unrealized losses in banks' securities portfolios.
• Not all banks have significant unrealized losses, and further analysis is needed to understand the spread of these losses.
• SVB's investment decisions in 2021 and 2022 were based on risk assessments that did not anticipate aggressive rate hikes and a VC funding slowdown.

"It would be naive to suggest there isn't some broader risk to consider here."

Chris points out that the issues faced by SVB may be indicative of wider systemic risks within the banking sector, highlighting the need for further investigation into the health of the industry.

• SBB's investment decisions faced headwinds and ultimately failed.
• The withdrawal of deposits was rapid due to perceived risks, even if minimal.
• People tend to act conservatively in the face of non-zero risk, opting to withdraw funds.

"But would SBB have been able to ride out the investment losses had their depositors not gotten spooked and jumped ship all at once? We'll never know."

This quote suggests that the rapid withdrawal of deposits was a significant factor in SBB's inability to recover from investment losses, highlighting the importance of depositor confidence.

"And in a non zero chance of risk, why not pull?"

Harry reflects on the rationale behind depositors' decisions to withdraw funds, emphasizing the conservative nature of risk management when any level of risk is present.

• The venture capital community's communication and actions are scrutinized for their role in the bank's challenges.
• Collective actions by individuals, driven by risk assessment, can lead to significant consequences.
• The speaker recalls a personal experience from 2008, highlighting the urgency and necessity of decisive action in financial crises.

"I'm angry at the VC community because this was caused by them."

The speaker relays the sentiment of a pension fund CIO who blames the venture capital community for the bank's problems, though the speaker considers this view overly simplistic.

"I recall 2008, my third child was born October 2, 2008, and there was a bank that was failing in Europe."

Harry shares a personal anecdote to illustrate the urgency and critical nature of managing financial risks during a crisis.

• Social media and electronic banking have accelerated the speed of bank runs.
• Future risk management strategies may change, with VCs potentially demanding more control over company funding.
• There is a lack of understanding of the risks associated with non-bank financial institutions.

"This is the first time, we've really had two things in such a bank run, which know social media and the speed of communications, and then electronic banking, the speed of the ability to withdraw."

The speaker notes the unprecedented combination of social media and electronic banking contributing to the rapid pace of the bank run.

• The FDIC follows a standard process when dealing with bank failures, typically acting on weekends.
• They assess the bank's balance sheet and resolve issues with assets and liabilities.
• The order of repayment and potential for advanced dividends are part of the FDIC's resolution process.

"So, first of all, you're right, it is the FDIC. They take over a bank, they resolve it."

Harry explains the FDIC's role in taking control of and resolving a bank's failure, emphasizing the structured process involved.

"They actually send people in. They work part and parcel with bank employees to do their job."

This quote details the hands-on approach the FDIC takes in resolving a bank failure, working closely with the bank's existing employees.

• The liquidation process can be lengthy, with the possibility of it not being completed for years.
• The Lehman bankruptcy case is cited as an example of an extensive liquidation process.

"Lehman filed for bankruptcy in September of 2008. Here we sit in March of 2023. It's not done."

Chris Dixon highlights the lengthy nature of the liquidation process by referencing the ongoing Lehman bankruptcy case, underscoring the potential long-term implications of bank failures.

• SVB's balance sheet at year-end shows market value of investments and loan portfolio exceeds deposits.
• FDIC, as liquidator, will sell off assets like the investment portfolio and loan portfolio.
• SVB's conservative investment portfolio should be easier to liquidate than Lehman's complex assets.
• The liquidation process should not be as extensive as Lehman's due to the straightforward nature of SVB's assets.

"Now, if a quick look at SVB's balance sheet as of year end, if you take the market value of their investment portfolio, both the AFS securities and the health and maturity securities, plus their loan portfolio, which should be saleable, it's more than their deposits, so there should be enough to cover most of their deposits ultimately over time, but it just may take some time."

This quote outlines the components of SVB's balance sheet and indicates that the assets should be sufficient to cover the deposits over time, though the process may be lengthy.

"And then as the FDIC, as the primary liquidator of the bank, goes through and actually liquidates all of the assets, primarily being the investment portfolio and their 74, 75 ish billion dollar loan portfolio, then they can actually go through and make additional payments."

Chris Dixon explains the FDIC's role in liquidating SVB's assets to make additional payments to depositors, emphasizing the assets' conservative nature and potential for relatively swift liquidation.

• The best outcome for SVB would be an immediate takeover of deposits by a buyer.
• High-profile banks like Morgan Stanley, PNC, JP Morgan, and Goldman Sachs may be interested in SVB's client base.
• Public statements by venture capital firms and companies show support for SVB to inspire confidence in potential buyers.
• The buyer would need to assume any liability hole left by the difference between insured deposits and the total deposit base.

"But they are going through a sale like that is their job. Their job is not to sit there and say, wait, if I held it for another month, maybe I could get a better buyer, immediate sale."

Harry describes the FDIC's objective to sell SVB's assets promptly, rather than waiting for potentially better offers, to resolve the situation quickly.

"I mean, I personally think it is. I think SVB is a very, very unusual, super high quality set of customers that many banks would want to have."

Harry expresses his belief that SVB's customer base is highly desirable for potential buyers, making it a strategic acquisition despite the current crisis.

• Regulatory issues and financial metrics will influence banks' decisions on acquiring SVB.
• Regulators are motivated to find a buyer quickly to maintain stability in the financial system.
• The FDIC's mission is to ensure depositor confidence and financial stability, guiding their actions in finding a buyer.

"I think all different banks have all different issues, and they're looking at financial metrics, their own challenges around how they deal with their own balance sheet and what it looks like combined."

Harry acknowledges that various banks have different considerations when contemplating the acquisition of SVB, including regulatory and financial challenges.

"The regulators and the folks who work at the FDIC take their job pretty damn seriously. Many of them have worked there for 20, 30, 40 years."

Harry emphasizes the FDIC's dedication to its mission and its experienced staff's ability to handle the situation efficiently.

• The impact of SVB's situation on other banks will depend on their balance sheets and customer base diversification.
• Banks with industry concentration or customer base imbalances may experience deposit withdrawals.
• Rumors and fear can exacerbate the situation, but fundamentals should be considered to avoid panic.

"I do think those banks will start to see deposit pulls just out of panic, even if they have a very strong balance."

Harry predicts that banks with certain characteristics may face deposit withdrawals due to panic, despite having strong financials.

"The more they instill confidence before Monday morning. And frankly, Tokyo opens this afternoon at 04:00 p.m. And so you'd want to see an outcome so that the trading days are less sloppy."

Harry highlights the importance of instilling market confidence before the opening of Asian markets to mitigate sloppy trading and potential fallout.

• An announcement of a buyer taking over SVB's depository accounts would instill confidence.
• Ensuring depository accounts will be paid out at par and providing immediate liquidity access are crucial.
• The FDIC is likely to advance insured amounts to depositors to maintain confidence.

"I would want to see an announcement that a buyer has taken over the depository accounts, and two, those depository accounts will be paid out at par."

Harry outlines the actions that would instill confidence among SVB's depositors and the broader market, emphasizing the importance of clear communication and guarantees on deposits.

• SVB's collapse affects a broad range of industries beyond tech, including schools, clubs, and the wine industry.
• Small companies with heavy reliance on SVB are particularly vulnerable due to a lack of multiple banking relationships.
• These companies may struggle with liquidity and moving assets, hindering their ability to maintain regular operations.

"You don't think about companies in all the different states who also work with SVB. You think of schools, you think of clubs, you think of all kinds of institutions."

This quote highlights the widespread impact of SVB's situation across various sectors and institutions, not just the tech industry.

"And because they have such a heavy concentration of small companies, they don't have the multiple banking relationships that big Fortune 500 companies would have to be able to as agilely move money."

Here, the speaker emphasizes the vulnerability of small companies that relied heavily on SVB and their limited ability to manage their finances amidst the crisis.

• The best outcome would be the announcement of a buyer or a guarantee of deposits to prevent immediate panic.
• The worst-case scenario includes no buyer announcement, insufficient advanced deposit returns, companies failing to make payroll, and broader market effects.
• Companies are seeking immediate liquidity solutions, with VC firms and others offering payroll financing.

"So the worst is they don't announce a buyer, they announce a percentage of advanced deposit that people aren't happy with."

The quote describes the potential negative reaction from SVB's clients if the resolution to the crisis is not satisfactory, leading to widespread fear and financial instability.

"I don't think everybody has access to that though, and they don't have access to it immediately."

This quote addresses the concern that not all companies affected by SVB's collapse will have immediate access to financial support or solutions.

• Founders are advised to diversify their accounts and consider the underlying banks of neo-banking platforms.
• It's recommended to move funds to systemically important banks or strong regional banks.
• Caution is urged against moving corporate funds to personal accounts due to legal and managerial complications.

"It's worth doing whatever you can to create account diversification."

The speaker suggests that founders should spread their funds across different accounts to mitigate risk.

"But if it were me, I would be moving money to Morgan truist."

Here, the speaker personally endorses moving funds to well-established financial institutions for greater security.

• There is a risk of withdrawal halts, as seen with SVB, where approved wires did not result in funds being transferred.
• The FDIC is working to resolve issues with transactions that were in process at the time of SVB's takeover.

"So there is. I think we saw that on Thursday and Friday with SVB."

The speaker confirms that withdrawal halts have occurred and could pose a risk to those trying to move their money.

"And that's what the FDIC is trying to unstick."

This quote explains that the FDIC is actively trying to address and resolve the issues caused by halted transactions.

• Public and founders should be wary of rumors and misinformation regarding the SVB situation.
• Only a few key groups are truly informed about the ongoing developments, and they are unlikely to share sensitive information publicly.

"I'd be very thoughtful about what you're hearing, who you're hearing it from."

The speaker advises caution when it comes to the reliability of information sources, given the speculative nature of the situation.

"There's a very small group of people who actually knows what's going on."

This quote underscores that accurate information about the crisis is limited to a select group of individuals directly involved in managing the aftermath.

• Both speakers express confidence that a resolution involving a buyer or buyers for SVB's assets will be announced, ensuring depositor confidence.
• They believe the FDIC is committed to avoiding a crisis of confidence and will act to ensure continuity for depositors.

"I believe that there will be a buyer or buyers for the assets and that 100% of the deposit base will be assumed and it'll be announced before tomorrow morning when the market opens."

The speaker expresses a strong belief that a positive resolution will be announced imminently, reflecting confidence in the FDIC's actions.

"Chris, I'm in complete agreement because I think the FDIC is fully aware that the potential crisis of confidence among depositors is something that must be avoided at all costs."

Here, another speaker agrees with the optimistic prediction, emphasizing the FDIC's awareness of the need to maintain depositor confidence.