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--:-- Noel King: Thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe. That was President Biden speaking this morning.
--:-- Noel King: After the unexpected and somewhat spectacular collapse of Silicon Valley Bank late last week, the Biden administration moved on Sunday to ensure that all deposits held at that bank and at Signature Bank, which closed over the weekend, will be available today. All customers who had deposits in these banks can rest assured they'll be protected and they'll have access to their money as of today. This is unusual. Typically, the FDIC ensures only deposits of up to $250,000. While depositors should be OK, Biden offered not much sympathy to those who manage the bank. If the bank is taken over by FDIC, the people running the bank should not work there anymore.
--:-- Noel King: Coming up on Today Explained, why Silicon Valley Bank imploded and what it means for the economy writ large. Support for Today Explained comes from Saks Fifth Avenue. Fall is here. Might be time to find some nice new pieces you can wear again and again. With Saks Fifth Avenue, it can be a breeze to shop for your personal style, like maybe a relaxed Prada blazer or Gucci loafers that are great for both work and the weekend.
--:-- Noel King: This is very Sean. This is very Sean-coded. Gucci loafers. Saks says Saks makes shopping feel totally customized to you, whether that's from an in-store stylist or a visit to Saks.com, where they can show you just what you want to see. They say they'll even let you know when arrivals from your favorite designers are in or when something you've been eyeing is back in stock. You can find inspiration for your personal style every day at Saks Fifth Avenue.
--:-- Noel King: Support for this show comes from Strawberry.me. Be honest. Are you happy with your job? Or are you stuck in one you've outgrown? or never wanted in the first place? Sure, you can probably list the reasons for staying, but are they actually just excuses for not leaving? Let a career coach from strawberry.me help you get unstuck. Discover the benefits of having a dedicated career coach in your corner. Go to strawberry.me slash unstuck to claim a special offer.
--:-- Noel King: It's Today Explained. I'm Noelle King. And if you were paying attention to the news at all this weekend, you probably saw a great deal of speculation, including some very informed speculation, about what would happen this week and what all of this means, including from financial reporters who are trying to get their heads around everything.
--:-- Noel King: Our guest today was one of those reporters. I'm Ben Bergman. I'm a senior correspondent at Business Insider.
--:-- Ben Bergman: Silicon Valley Bank has been around for 40 years, and it's really become the go-to bank for the tech ecosystem. It's tough for a lot of tech entrepreneurs to get any sort of traditional banking because they're young, they don't have much banking history. But Silicon Valley would step in and they would provide funding for startups as well as debt financing. There was no equal, and there still isn't.
--:-- Ben Bergman: How did it become the number 16 bank in the U.S.? If it was sort of niche for startups, how did it get so big? Well, it got big in Silicon Valley as Silicon Valley boomed. There were all these other bank busts and Silicon Valley Bank very much survived that. And every tech event that you would go to, it was sponsored by Silicon Valley Bank. I was just at a party less than two weeks ago. And of course, the DJ booth said Silicon Valley Bank. It was really everywhere.
--:-- Ben Bergman: What's the deal, baby? One second, you hit the party switch to the next second, your business? I need to see all of your books. Okay, so it's everywhere out where you are. In the rest of the country, a little less well-known, I think. But why did things start to go south for this bank if it was so well-established?
--:-- Ben Bergman: So there was a very ill-advised decision that looks very stupid in retrospect. And that's what former executives of the bank have told me, that it was, quote, idiotic to make. But Silicon Valley Bank had what would be good for most banks. It had a flood of deposits. Because remember, in 2021 and 2020, there was just a flood of money coming into startups. And startups couldn't raise money fast enough. They literally got more money than they wanted, because they wouldn't even be trying to raise money. And venture firms would step forward and say, here you go, here's a check for hundreds of millions of dollars. And so they would need a place to park all that money, and they put it in Silicon Valley Bank.
--:-- Ben Bergman: So that's a good problem, right? But the problem is that there's this thing called net interest margin, where banks have to make a certain amount of money on your deposits to be able to make profit margins, to appease Wall Street. So they said, okay, let's put this in 10-year Treasury bonds. They bought tens of billions worth of Treasury bonds. And that's usually a pretty conservative investment. We're not talking about what happened during the financial crisis of, you know, toxic assets or synthetic assets. This is pretty safe. But the problem is it's locked up for 10 years.
--:-- Ben Bergman: So when interest rates went up very quickly, suddenly there was a problem because they couldn't access those for 10 years and they were worth much less. What was the idiotic decision that you referenced? To put so much of the bank's balance sheets in these 10-year mortgage-backed securities that couldn't be accessed for 10 years. So the money was there, but it was what they call it a duration problem. It was a mismatch because if people, if depositors were allowed to withdraw their money, then the money had to be there, not socked away for 10 years.
--:-- Ben Bergman: And so the other problem that happened is that, you know, starting last year, venture funding dried up. Startups weren't getting this funding anymore from venture capitalists, so they were drawing down their accounts. And so that happened a lot more quickly than the bank expected. Why did the bank end up shutting down? So this was the first and hopefully the last Twitter run on a bank. So after the financial crisis there were all these restrictions put on banks about what they could and could do. And this thing was supposed to be prevented.
--:-- Ben Bergman: But starting Thursday or actually Wednesday, the bank announced that it was going to be selling stock and raising new cash because it had this problem with the 10-year mortgage-backed securities. And I think normally that would be greeted with some concerns, probably, you know, a significant drop in the stock price, but not a crisis because, you know, again, the funds were all there. It was a pretty solid balance sheet.
--:-- Ben Bergman: But what happened is a few very key venture investors like Peter Thiel, Founders Fund, they got out there and said, you know, we're very concerned about our money and we're going to withdraw it. First call was get the money out. And some of the resistance was, well, you know, they'll survive this, then they'll remember that we weren't there for them. And I said, you're not hearing me. Get the money out. Because it's not worth betting your company on.
--:-- Ben Bergman: And, you know, I kept calling venture capital investors and startup founders on Thursday. And I said, well, you know, what are you doing? And they said, well, we don't think the bank is actually going to go under. But we also don't want to be the last one there. So we're going to get out just in case. And so when everyone does that, you have what happened, which is a run on the bank.
--:-- Ben Bergman: I called the investor and I said, hey, what was this email about? He was out of breath, like he had just run a marathon. And he said, take your money out of SBB. Go into your account. Take your money out as soon as possible. OK, so ultimately, who is to blame here? Is it the bank for investing in these 10-year mortgage-backed securities? Or is it the people who started the bank run on Twitter? Who's getting the fire?
--:-- Ben Bergman: Well, I think it's both of those entities. I think it's also regulators. How could they not have seen this coming? How could they allow banks to put so much of their balance sheet in these securities that weren't accessible for 10 years and not make them mark to market on their balance sheet because they didn't have to account for this, which seems like a huge oversight.
--:-- Ben Bergman: Also, you know, you could blame the rise in interest rates. It's a factor of all these things. It's a perfect storm that made this happen. There are recent developments that concern a few banks that I'm monitoring very carefully. And when banks experience financial losses, it is and should be a matter of concern.
--:-- Noel King: Well, let me go back to what you said about regulators. How did they not see this coming? Well, I think that's what we're going to be asking. But, you know, what happens is regulators always look at the last crisis. So they looked at what happened during the global financial crisis, and they wanted smaller banks. And now, all of a sudden, everyone was wanting bigger banks.
--:-- Noel King: And, you know, I think that 10-year securities seemed pretty safe. But no one expected interest rates to rise this quickly. And also, you know, Twitter wasn't really used like it was during the global financial crisis. So now they've seen how panic can spread so much more quickly. Did regulators play a role here beyond not just seeing this coming? Absolutely.
--:-- Noel King: I was just reading today the testimony from the CEO of Silicon Valley Bank, Greg Becker, in 2015, because he lobbied for this loosening of regulations to make it so banks gave less scrutiny to smaller banks like Silicon Valley Bank and the other ones that we see in trouble. And he told Congress in 2015, we are not sustainably important. And what the federal government decided yesterday with this huge emergency measure was that they were systemically important. So he was clearly wrong about that.
--:-- Noel King: And we've seen how it, you know, threatens to topple all these other banks. And so what happened under President Trump is they loosened some of Dot Frank and they made it so that smaller banks would not receive the same level of scrutiny. Ben, in the interest of full disclosure, Vox Media did some of its banking with SVB.
--:-- Ben Bergman: I don't know much more than that, unfortunately, but I wonder which types of companies are being affected here. You know, over half of venture-backed companies are backed by Silicon Valley Bank. And so over the weekend, there was a great deal of panic because companies like yours could not access their credit cards. They couldn't access their bank accounts. They were all frozen.
--:-- Ben Bergman: And you had some companies like Roku that had 25% of their cash in Silicon Valley Bank, and suddenly they couldn't access it. And, you know, I think when people hear Silicon Valley, they hear VCs, they think, oh, these people, they're so reckless. Why are we bailing them out? But the reality is that this was just cash. This was what, you know, companies and investors were doing to sock away their money. And they thought it was completely safe.
--:-- Ben Bergman: There's always money in the banana stand. No touching. No touching. What does this mean for people and for companies who had money in this bank? Well, over the weekend, everyone was panicking because it looked like anything over the federally insured amount of $250,000 might disappear or they might not get that back. But then the government stepped in in a very aggressive way on Sunday night and said, all deposits are guaranteed. We're going to make you whole.
--:-- Ben Bergman: So everyone's going to get their money eventually. And on Monday, the government also said that they're going to make it so people can access their accounts again. Who is paying for companies to get their money if the money wasn't insured? Well, President Biden has been very explicit that no taxpayer funds will be used because, remember, the money is there on the balance sheet. It's a good balance sheet. It's not like those banks we saw during the financial crisis with all these really bad assets on their balance sheet.
--:-- Ben Bergman: So what's going to happen is the government is going to essentially backstop the money and say that banks can get the 100% value of those 10-year securities now so they will be able to pay out the depositors. What probably going to happen or has already happened is that a larger bank or entity has bought Silicon Valley Bank. I don't think the government going to be running Silicon Valley Bank. But they couldn't get that done quickly enough over the weekend to announce anything.
--:-- Noel King: Was it surprising that the federal government stepped in? You hear, oh, they're bailing out the tech guys. You know, you see people on Twitter and elsewhere being upset over this. Did the federal government have a choice? How shocking is this? I don't think it's that shocking. And I don't think they had much of a choice because, you know, this was one of the largest banks in the country.
--:-- Noel King: Putting aside the fact that it was called Silicon Valley Bank, it was a big bank. And you've already seen other banks like First Republic, you know, be in similar trouble. So in the U.S., you know, we don't want our banks just to fail. And when people say, you know, oh, they bailed out these rich investors, that's not really accurate. Because in this case, it's not really a bank bailout because none of the investors in the bank are getting bailed out, that their investment is all worthless.
--:-- Noel King: It's the people who put their money in these savings accounts. It's the depositors who are being made whole. No losses, and this is an important point, no losses will be borne by the taxpayers. Instead, the money will come from the fees that banks pay into the deposit insurance fund.
--:-- Noel King: Coming up on Today Explained, there were, and to some degree still are, some fears that SVB's closure could spark a contagion among other banks. And if you were sentient during the financial crisis of 2008 and 2009, you understand why. Ben Bergman of Insider takes us through the likelihood of such an occurrence, And Ben will answer the big question. Did the federal government's move to shore up deposits at these failed banks put an end to fears of a broader economic collapse? Support for Today Explained comes from Chime.
--:-- Noel King: Nobody likes fees and complicated banking, says Chime. And Chime gets that, says Chime. Chime is a financial technology company that says they understand that every dollar counts. So when you set up direct deposit through Chime, they say you get access to fee-free features, such as free overdraft coverage, getting paid up to two days early with direct deposit, so much more.
--:-- Noel King: Chime says with qualifying direct deposits, you can be eligible for free overdraft, up to $200 on debit card purchases and cash withdrawals. Plus, they say you don't need to worry about monthly fees or maintenance fees. You can work on your financial goals through Chime today. You can open an account in two minutes at chime.com slash explained.
--:-- Noel King: That's chime.com slash explained. Chime feels like progress. Chime is a financial technology company not a bank. Banking services and debit card provided by the bank or bank na or stride bank na members FDIC. Spot me eligibility requirements and overdraft limits apply. Timing depends on submission of payment file fees apply at out of network atms bank ranking and number of atms according to u.s news and world report 2023. Chime checking account required.
--:-- Noel King: We'll see you next time. Don't look now, but there's something funny going on over there at the bank, George. I've never really seen one, but that's got all the earmarks of being a run. It's Today Explained. We're back with Ben Bergman of Insider.
--:-- Noel King: Ben, the events of the past 72 or so hours have some people referencing the 2008 financial crisis when we saw a kind of contagion among banks. Now, another bank, Signature Bank in New York, did close yesterday. And then today, HSBC announced it's going to buy Silicon Valley Bank UK for only one pound. What does this tell us? Is this the contagion that people have been so worried about?
--:-- Ben Bergman: So this is not the global financial crisis all over again, because as I keep saying, these balance sheets are much more solid. I mean, a lot of people had said banking wasn't really a great business because the regulators had taken all the profits out of it. But at the same time, the fact that this has happened so quickly and you've had these smaller banks teetering on the edge and Silicon Valley Bank just be completely cleared out in less than 24 hours is clearly very concerning.
--:-- Ben Bergman: But this is not Lehman Brothers. I've seen people on Twitter upset that this is a bailout, but people on Twitter are not always the most informed group. What has the response been more broadly so far to the government's decision to intervene like this? Yeah, so clearly a lot of people see the words Silicon Valley, and that just creates negative reaction.
--:-- Ben Bergman: And you saw in President Biden's comments Monday morning, he was very careful to say no taxpayer money will be used. No losses will be borne by the taxpayers. And he said the executives of this bank will be, quote, fired. If the bank is taken over by FDIC, the people running the bank should not work there anymore. So he was very clear that this is not, you know, the government coming to the aid of investors. That's how capitalism works.
--:-- Ben Bergman: But I think this is going to be very tough for the administration and for tech to message, because already there's a lot of ill will against tech, Elon Musk, FTX, you name it. It's seen as irresponsible. So people who don't really look into the nuances of this can see the government just coming in and providing aid to rich people. And yet the government clearly felt that it had to, which demands that we ask, does this move, does this intervention by the federal government fix the problem? Does it mean we will not be talking about this tomorrow morning?
--:-- Ben Bergman: Well, we might still be talking about it, but I do think the extraordinary measures that the government made on Sunday night do fix the problem because they have made sure that depositors are made whole. I mean, you may see some of these other banks and I don't want to name them, you know, go under, but there the backstop there. And the financial system will remain strong.
--:-- Ben Bergman: And workers who are working at companies that are banked by Silicon Valley Bank, which is most of Silicon Valley, are going to get their paychecks this week, which is important. How is it going to affect the startup industry in this country? If this was their bank, where else can they go? There's not really an equal to it.
--:-- Ben Bergman: If the government doesn't step in, I think that basically a whole generation of them will be wiped off the planet. Lots of other banks like JP Morgan have stepped in and tried to fill the void already or Brex, but there's not an equal to Silicon Valley Bank. So that's going to be really interesting.
--:-- Ben Bergman: And that's why a lot of venture investors have tried to save Silicon Valley Bank. So somehow it can be preserved instead of just absorbed by a larger entity. But it's also, you know, tech was already in deep trouble, which is part of the reason this whole mess happened in the first place. And this does not help because aside from just losing the bank, you know, it kind of provided the back end. It oiled the machine of Silicon Valley, providing bridge rounds and everything else.
--:-- Ben Bergman: And it had investments itself in a lot of companies directly. What's going to happen to those? So it's already a tough time for tech. This makes it much worse. Are there lessons that other banks should be taking from the collapse of SVB? Well, yes. Don't put a significant part of your balance sheet in these long-dated securities. That's clearly a problem because what I've heard from former executives is they should have just gone to Wall Street and said, we're getting all these deposits. That's a good problem to have, but we're not going to be able to get as much interest on them as we want.
--:-- Ben Bergman: Sorry, that's better than putting them in 10-year securities and bringing down the whole bank. And I think other banks are going to be looking very closely at their balance sheet. Also, another thing I think banks will look at is their deposit base, because a big problem with Silicon Valley Bank is it was banking all the same people. It was banking these high net worth individuals who all happened to be on Twitter.
--:-- Ben Bergman: And when they started telling each other, because they all know each other or they all see each other on Twitter to pull their money out. They did so very quickly. So that's a concern. And that's also a concern you see with First Republic Bank, which is in trouble as well, because that's also high net worth individuals, a small number of people. And most accounts are over that 250,000 FDIC insurance limit.
--:-- Ben Bergman: First Republic down 75% over the past three days. This morning alone, we saw it plunge by 65%. It got halted for volatility. That's something that was happening periodically during the session on Friday as well. This is one of the other banks that is perceived as having the same types of exposure. This happened, as you've noted, in part because of interest rates going up.
--:-- Ben Bergman: Does the Federal Reserve have to rethink what it has been doing with respect to rates? Does it take a beat now and say, oh, that seems to be happening. And that's certainly how markets are reacting, that the Fed is saying perhaps they're not going to raise interest rates as quickly as they were planning to. I think that in terms of what the Fed is going to do, this bank implosion, this potential contagion may reverse Jerome Powell's direction.
--:-- Ben Bergman: It may lead to, instead of a half a point increase at the March meeting, it may lead to no increase at all. In fact, it's even conceivable that interest rates start dropping out of the fear that we're going to be in deep trouble. A lot of people have been critical of how quickly rates have gone up. And they say, OK, look at what the Fed has done. And there's all sorts of knock-on effects of that.
--:-- Noel King: What do you think the big news is going to be as we move ahead into the week? Well, I think it's going to be looking at these other banks and to see what happens to them. They've had huge drop in their stock price when markets open on Monday morning. So, you know, are they going to be able to survive? Also, is a buyer going to come forward or has there already been one that's not announced of Silicon Valley Bank?
--:-- Noel King: Like, you know, what's going to happen to all these startups that, you know, we're banking with them? How quickly will they be able to get their money? And are they going to be able to make payroll? And I think also, you know, this has left the venture community, which I cover, reeling because they usually project an image of cohesiveness and unity. But this has left a lot of bitter feelings from certain VCs who are upset at other VCs who feel like there's some who fomented this, who made it much worse and were irresponsible by telling people to pull their money out of the bank.
--:-- Noel King: But then there's others who say, well, the people who stood by and said, oh, everything is fine, you know, that looks pretty bad right now as well. Ben Bergman of Insider. Thank you so much for taking the time today, Ben.
--:-- Ben Bergman: Of course, anytime.
--:-- Noel King: Today's show was produced by Avishai Artsy and Victoria Chamberlain and edited by Matt Collette and Amina Al-Sadi. It was fact-checked by Laura Bullard and Amanda Lewellyn and engineered by Paul Robert Mounsey and Patrick Boyd.
--:-- Noel King: Surely that is everyone. No, it's not. The rest of our team includes Siona Petros, Miles Bryan, Halima Shah, Jolie Myers, Hadi Mwagdi, and my co-host Sean Ramosverm, who's at South by Southwest in Texas today doing a really good live show.
--:-- Noel King: I've seen an early version that you can hear in the feed and on the radio next Monday. We use music by Breakmaster Cylinder and Noam Hassenfeld, and we're distributed to public radio stations across the United States by WNYC in New York. Today Explained is part of the Vox Media Podcast Network. Thank you.
