E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

00:00:00.000 | Hey guys, I got a little friend here.

00:00:01.840 | What?

00:00:03.380 | Yeah, I think I'm gonna start a new podcast.

00:00:06.240 | Is that a bulldog?

00:00:07.360 | And I'm gonna have a bulldog as my mascot.

00:00:09.440 | You bought a bulldog?

00:00:11.440 | Oh my god, you got my mascot.

00:00:14.400 | Yeah, I took over your mascot.

00:00:16.480 | Look at that, now you're actually likable, Sax.

00:00:18.960 | Sax, are you trying to improve your image?

00:00:20.320 | Sax is so unlikable that he has gotten a bulldog.

00:00:26.080 | Oh my god, Sax, show me his face again.

00:00:27.760 | Is it him or her?

00:00:29.520 | Him.

00:00:30.020 | What's his name?

00:00:31.520 | His name is Moose.

00:00:32.800 | Oh my god.

00:00:33.840 | Oh my god, you got a bulldog, he's so cute.

00:00:36.480 | It's me and my mascot, Jake.

00:00:37.680 | I'm going solo with my podcast.

00:00:39.120 | I'm gonna call it This Week in Technology.

00:00:40.960 | It already exists, it's Leo Laporte's podcast.

00:00:43.120 | Please don't start any more trademarkal updates.

00:00:45.600 | All right, everybody, it's an emergency podcast.

00:00:47.920 | Silicon Valley Bank has been taken over by the FDIC.

00:00:52.480 | Sorry, is this the Twist livestream?

00:00:54.480 | Am I on the Twist livestream?

00:00:55.760 | I mean, guys, if you couldn't just interrupt me while...

00:00:57.760 | I'm never gonna get through this.

00:00:58.720 | It's a lot to get through.

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00:01:18.400 | It is a huge day today in Silicon Valley.

00:01:21.520 | We haven't seen a Black Swan like event happen here in a long time, since 2008.

00:01:27.120 | I thought the last time was when you published the book Angel.

00:01:29.840 | Oh, God.

00:01:30.400 | We have to get to work, Chamath.

00:01:34.880 | I saved the jokes.

00:01:36.400 | I'm trying to give you a cold open.

00:01:38.000 | We did that already.

00:01:38.640 | Here we go.

00:01:39.040 | Three, two...

00:01:56.800 | Okay, everybody.

00:01:57.440 | It's been a while.

00:01:58.000 | 36 hours here.

00:01:59.200 | We're gonna get into Silicon Valley Bank imploding.

00:02:01.920 | The FDIC has shut down Silicon Valley Bank.

00:02:04.560 | And there's many different things we have to discuss with me today.

00:02:08.960 | As always, the dictator himself, Chamath Palihapitiya, the rain man, David Sacks,

00:02:13.200 | and the prince of panic attacks no more.

00:02:15.440 | His wires cleared.

00:02:16.800 | David Freeburg, the sultan of science.

00:02:18.880 | Welcome, boys.

00:02:19.600 | How is everybody, just to start this off, contextually, the last 24 hours,

00:02:26.240 | can you recall a time in our careers where it's felt this acute or insane or intense?

00:02:33.920 | 2008 and COVID.

00:02:35.760 | And I think that this is right up there, could be two, probably three,

00:02:40.560 | in terms of the level of panic and concern.

00:02:43.280 | The problem is we're in the middle of it.

00:02:45.200 | We don't know what's going to happen this weekend.

00:02:46.960 | So there's a lot of anxiety right now, a lot of panic going on.

00:02:51.120 | And a lot of, unlike COVID and '08, really acute effects that many companies and investors are

00:02:58.640 | actively dealing with right now, like not just a few, thousands of companies that are really in a

00:03:04.880 | state of distress right now.

00:03:06.800 | So it is potentially, from a Silicon Valley perspective, worse than '08 or COVID.

00:03:12.480 | Oh, for sure.

00:03:13.360 | For sure.

00:03:13.920 | I mean, this is basically a Lehman-sized event for Silicon Valley.

00:03:18.080 | Remember when Lehman Brothers went out, basically filed for bankruptcy in 2008,

00:03:21.840 | started the whole financial crisis.

00:03:23.280 | The federal authorities thought that the best plan for Lehman was to file for bankruptcy.

00:03:29.680 | They didn't try to save it.

00:03:31.200 | And that basically led to a cascade where the whole financial system almost collapsed.

00:03:35.440 | I think that SVB, this is a Lehman-sized event for Silicon Valley.

00:03:38.960 | And there's two big things happening.

00:03:41.360 | One is the impact on the startup ecosystem.

00:03:44.560 | So you're seeing probably thousands of companies now cannot make payroll in the next few weeks

00:03:50.080 | because their money is trapped and tied up at Silicon Valley Bank, which is now under receivership.

00:03:56.560 | So if you wired your money out yesterday, you're good.

00:04:00.160 | And a lot of people managed to do that.

00:04:02.080 | But there are a lot of people who had wires in the hopper, didn't make it.

00:04:07.120 | Today, logged into the website, can't log in.

00:04:09.760 | Their money's just frozen.

00:04:11.600 | And we don't know when they're gonna be able to get their money out or how many cents in

00:04:16.240 | the dollar you're gonna get.

00:04:17.360 | So basically, the whole startup ecosystem is in peril.

00:04:21.520 | I think Gary Tann called it an extinction level event.

00:04:24.240 | Yes, exactly.

00:04:24.880 | That was a good term.

00:04:25.600 | And just to be really clear, this is not big tech at risk.

00:04:29.040 | I know there's a lot of people out there who don't like the idea of bailing out big tech.

00:04:32.320 | This is not Google.

00:04:34.080 | It's not Amazon.

00:04:35.040 | Those companies have plenty of cash.

00:04:36.320 | They're fine.

00:04:36.880 | This is small companies, companies with 10 to 100 employees.

00:04:41.120 | And you're looking at maybe thousands of them just being wiped out for no reason.

00:04:45.840 | They didn't do anything wrong because of this.

00:04:47.920 | This could have a very damaging effect on the startup economy and the whole United States

00:04:52.320 | economy.

00:04:52.800 | This is little tech.

00:04:54.000 | These are the future companies that will keep the United States competitive versus China

00:05:00.160 | and the rest of the world.

00:05:02.000 | And then the other big thing that's happening, and it's all happening in real time,

00:05:05.280 | is a regional banking crisis.

00:05:07.600 | Because when depositors see that their money was not safe at SVB, which was a top 20 bank,

00:05:15.520 | that as far as everyone knows, was in regulatory compliance.

00:05:18.480 | Nobody has said that SVB wasn't compliant.

00:05:22.000 | As far as we know, they had a regulator's seal of approval.

00:05:24.800 | And now you find out your money was not safe and it's not FDIC insured above $250,000.

00:05:31.680 | So the conversations we're all seeing in our chat groups with leading investors is,

00:05:36.880 | why the hell would you keep your money anywhere but JP Morgan or a top four bank?

00:05:41.520 | And so I think that unless the Fed steps in here over the weekend, we're going to see

00:05:47.520 | potentially a run on the regional banking system, a cascade like we saw in 2008.

00:05:53.840 | Well, Sax, let's just take a step back before, because I think you're right,

00:05:57.200 | but we should talk about why that happens, the contagion drivers.

00:06:01.280 | And just so people know, Silicon Valley Bank is used by 50% of venture backed startups.

00:06:07.520 | And I would say the majority of venture firms also have their money there.

00:06:11.600 | So this morning, I got a note from a fund I'm an LPN, they have millions of dollars

00:06:17.600 | that they can access to invest in startups.

00:06:19.520 | So Chamath, there are many products and services that Silicon Valley provides.

00:06:25.680 | One is, you know, banking services to startups.

00:06:28.640 | Another is to venture capitalists.

00:06:30.480 | They do the mortgages for banker for venture capitalists, and for founders as well.

00:06:36.160 | They provide those kind of white glove services.

00:06:38.480 | But you also mentioned in our group chat, they also provide loans to GPS general partners,

00:06:43.120 | the people who run venture firms.

00:06:45.280 | So the impact could also hit there.

00:06:47.040 | Maybe you could explain what that is.

00:06:48.880 | And then we'll get into what happened here.

00:06:50.720 | Yeah, well, I think it's important, maybe actually just for

00:06:53.440 | Friedberg to just explain what's happening.

00:06:55.840 | But okay, can maybe maybe let me just do the lead in and then Friedberg can do the details.

00:07:00.160 | But for for those that are far away, and aren't even sure what's going on.

00:07:04.320 | The basic problem that we have right now is in the last 36 hours,

00:07:09.600 | a key part of the financial plumbing of Silicon Valley has basically been turned off.

00:07:14.880 | And as a result, billions of dollars of deposits have basically been frozen.

00:07:21.840 | It means that people can't pay their bills.

00:07:24.320 | It means that people can't access their deposits.

00:07:27.120 | It means that credit lines could be in default.

00:07:29.600 | It means that payroll can't be met.

00:07:32.240 | And so as a result, we have this potential contagion on our hands.

00:07:36.080 | But in order to understand it and unpack it, I think it's important to explain exactly

00:07:40.560 | how this came to pass.

00:07:42.160 | So let me just hand the ball to Friedberg.

00:07:43.920 | And then we can talk about some of the implications of which there are many.

00:07:46.480 | Yeah, before Friedberg starts with the why just the what that's happened as well.

00:07:50.960 | This all started on Wednesday evening, when Silicon Valley banks CEO published a letter

00:07:54.880 | to shareholders announcing that the bank was rebalancing its balance sheet by selling 10s

00:07:59.760 | of billions of dollars worth of mostly US securities, I'm sorry, treasuries.

00:08:04.240 | Then they announced they would raise some money and sell some shares in Silicon Valley Bank.

00:08:08.480 | Then the shares in Silicon Valley Bank is a publicly traded entity dropped 60% on Thursday,

00:08:14.000 | then another 60% on Friday.

00:08:16.080 | Of course, then the entire world got focused on this.

00:08:18.800 | And then every venture capitalist started telling or I would say the overwhelming majority

00:08:23.280 | of venture capitalists told their founders to get their money out of SCB.

00:08:27.440 | Then you had a classic run on the bank, a small number of venture capitalists gave advice to say,

00:08:31.440 | hey, we should support Silicon Valley Bank.

00:08:33.040 | I understand that, but it turned out to be really bad advice.

00:08:36.080 | And then trading was halted on Friday morning pending news.

00:08:40.960 | And then finally, the FDIC shut down Silicon Valley Bank at noon on Friday.

00:08:46.320 | And there's a lot of speculation of what will happen on the way over the weekend.

00:08:49.120 | But maybe you could walk us through technically, what happened to Silicon Valley Bank and why

00:08:54.800 | they had this cash shortfall.

00:08:56.480 | And this, we spend the run on the bank, basically, but what led up to this?

00:09:00.000 | The irony is, it really was and is prior to the quote run a financially solvent business.

00:09:06.560 | So I have a few slides.

00:09:07.920 | If you're on YouTube, you can see it that we pulled one slide that was kind of made

00:09:11.840 | by us and the other set that come from Silicon Valley Bank's actual presentations.

00:09:15.920 | But if you look at their balance sheet, this is from the end of the year 2022.

00:09:19.440 | You can kind of look at the stuff that they owe their liabilities, which is what they

00:09:25.040 | owe their customers that sits in deposits.

00:09:27.280 | Because when customers give you cash in a deposit, you owe them that money back.

00:09:31.280 | So that sits as a liability.

00:09:33.120 | And then they had some other debt.

00:09:34.480 | So in total, Silicon Valley Bank at the end of the year had about $195 billion in liabilities,

00:09:40.320 | 173 billion of customer deposits that they owe to customers and 22 billion of other debt.

00:09:46.400 | And then they take those customer deposits and they invest it in a number of securities.

00:09:50.880 | And the way that a balance sheet business like this bank would operate is, you know,

00:09:54.880 | the customers have access to their cash anytime they want.

00:09:58.720 | But in order for the bank to make money, they make longer duration investments.

00:10:02.720 | And those longer duration investments give them the ability to earn money on those longer

00:10:06.640 | duration investments, more than they're paying the customers for the deposit.

00:10:10.720 | So if you look at their longer duration investments, they had about $208 billion

00:10:14.880 | of total assets sitting on the balance sheet.

00:10:18.880 | So compare that to the 195 billion that they owe customers and other debt holders.

00:10:24.880 | So, you know, the difference here between 208 and 195 is about $13 billion.

00:10:30.880 | That's kind of the net what people would call book value of Silicon Valley Bank at the end

00:10:36.160 | of the year.

00:10:36.960 | And of the 208 billion of assets that they had, 74 billion were loans, and they've got

00:10:41.360 | a breakdown of the loan portfolio here in a minute.

00:10:43.600 | 91 billion were these hold to maturity securities, where they don't actually adjust the value

00:10:48.480 | of these on a quarterly basis.

00:10:49.840 | And 26 billion is what triggered this panic, which is available for sale securities, mostly

00:10:54.640 | treasuries.

00:10:55.200 | And what happened is Silicon Valley Banks deposits came in so quickly over the last

00:11:00.800 | couple of years that they went out and they bought a bunch of treasuries, you know, with

00:11:04.160 | the cash that they got.

00:11:05.040 | And the problem is that very quickly,

00:11:06.880 | Friedberg, it's actually NBS, they bought a bunch of NBS, 10 year duration NBS.

00:11:10.480 | And important to note of the 208 billion that they have the book value Friedberg, there

00:11:15.040 | was a whatever 10% if it's in cash or something.

00:11:18.480 | So they do have some cash there.

00:11:20.000 | That's right.

00:11:21.440 | Yeah, sorry, it's a good point.

00:11:22.320 | If you go back, so like, you know, let's say that of the hundred of the 173 billion of

00:11:26.960 | customer deposits, you know, they've got 14 billion of cash.

00:11:30.240 | And then they've got all these treasury securities, they can sell call it 40 billion.

00:11:35.120 | So if 25% of customers said tomorrow, hey, we want our cash back.

00:11:38.640 | Theoretically, they could just dump those treasury securities, distribute the cash and

00:11:42.240 | give it all back to customers.

00:11:43.760 | The problem is if suddenly more than 25% want to get their cash back, well, now they have

00:11:48.320 | a problem.

00:11:48.880 | And that is effectively what triggers the run on the bank.

00:11:51.920 | As soon as some folks think that others might be pulling money out, then everyone rushes

00:11:56.240 | to be the first money out the door.

00:11:58.400 | And that's what triggers a classic run on the bank.

00:12:00.800 | There's a statistic, I think, in the 1920s, there were several 100 banks that had runs

00:12:06.640 | every year for almost the entire decade.

00:12:08.800 | And these this was like a regular kind of occurrence that happened in the 1920s that

00:12:13.120 | ushered in a lot of our modern securities laws that are meant to kind of create the

00:12:16.880 | necessary liquidity provisions, and how these banks are able to operate to make cash available

00:12:21.520 | to customers.

00:12:22.560 | But what happened is so much so by the way, freeberg that they made a movie, it's a wonderful

00:12:26.800 | life about bank run.

00:12:28.880 | So basically, one of the bigger problems that Silicon Valley Bank, they ran into two big

00:12:33.040 | problems.

00:12:33.520 | Number one is deposit decline, where VCs were not investing new money.

00:12:39.840 | And when they were not investing new money, and startups were burning more money than

00:12:43.760 | Silicon Valley had modeled, they would be burning because they thought everyone's going

00:12:46.640 | to reduce spend and reduce burn and they didn't.

00:12:48.400 | So deposits were going down, all these startups were burning money, no VCs were investing.

00:12:54.240 | So total deposits were on the decline.

00:12:56.480 | Meanwhile, their bond portfolio, the assets that they hold on the balance sheet, also

00:13:00.800 | declined in value.

00:13:02.080 | And I and I kind of just put a really simple illustration here on why, if you have $100

00:13:06.480 | kind of face value bond that earns 2%, which is basically, you know, where these treasuries

00:13:11.840 | were a year ago, and you and you hold that for 10 years, that 10 year bond yields $122.

00:13:16.640 | If the interest rate goes up to 5%, then that that that bond should yield $163.

00:13:23.680 | So the value of the first bond actually goes down by 25%.

00:13:27.120 | Because of the market conditions, that's how significant the value changes with just a

00:13:32.240 | 3% change in the interest rates.

00:13:34.320 | And that's effectively what happened with that available for security segment of the

00:13:38.400 | Silicon Valley Bank portfolio balance sheet.

00:13:41.280 | They had this bond portfolio that suddenly got devalued, and they had declining deposits.

00:13:46.720 | So when deposits start to decline, you got to make sure you have enough assets sitting

00:13:50.560 | on the balance sheet.

00:13:51.200 | So they sold a bunch of them said we're going to raise more money.

00:13:53.520 | And at that point, everyone kind of perked their head up and said, Oh my gosh, what's

00:13:57.040 | crazy is in q4, by the way, seeking alpha this website, you guys know, they had actually

00:14:02.000 | done an analysis and said, is SVB about to blow up and they put together a bunch of slides

00:14:06.480 | that highlighted why this might be the case because they saw that deposits were declining,

00:14:10.240 | that their, their assets that they hold were basically declining in value because of the

00:14:14.880 | massive and very quick rise in interest rates.

00:14:17.600 | And that SVB had bought a bunch of bonds that were long, long durated bonds.

00:14:21.600 | So it led to a, you know, obviously a real short term problem.

00:14:24.560 | If you look at the rest of SVB is loan portfolio, there's also a question of how distressed

00:14:29.360 | that all is.

00:14:30.320 | So 10% of their 70 billion plus dollars of loans is in venture debt.

00:14:35.600 | And venture debt is very questionable in this market, right?

00:14:38.240 | Because historically, the way venture debt makes money is that they assume that VCs are

00:14:42.720 | going to keep funding the companies that they're providing debt to.

00:14:45.600 | And if the VC stopped funding the companies in the venture debt defaults, and so if you

00:14:49.280 | go to the last slide in this deck, you'll kind of see SVB performance on their venture

00:14:53.200 | debt portfolio.

00:14:54.160 | Yeah, so look at this.

00:14:54.960 | This is the performance results on just the warrants that they get on their venture debt.

00:14:59.520 | So when you when you issue venture debt, you take a write down, or you get paid back.

00:15:04.560 | And then you also get some warrants, you get some right to buy shares in the in the winners

00:15:08.720 | in the startups that work.

00:15:10.400 | And so the way that SVB is made money on their venture debt portfolio historically, is hopefully

00:15:15.280 | they get paid back on all their loans, some of them they don't.

00:15:18.400 | But then they'll make a bunch of money on selling their warrants or the companies going

00:15:21.600 | public or getting bought.

00:15:23.040 | And in Q4 of 2022, just fell off a cliff.

00:15:26.400 | And their venture debt portfolio really started to show distress.

00:15:28.880 | And that's 10%.

00:15:29.360 | Are these realized gains?

00:15:31.200 | Or these are marked to market gains?

00:15:33.040 | This is the net gains on their warrants.

00:15:35.200 | So they don't mark to market warrants.

00:15:36.480 | I think this is what they actually exercised and got out.

00:15:39.280 | So there was, there was obviously a ton of exits in 2021.

00:15:42.240 | So they made $560 million in profit on their warrants that they had in their venture debt

00:15:46.720 | portfolio in 2021.

00:15:48.160 | That number collapsed to 148 in 2022.

00:15:50.880 | And you better believe most of that was in the early part of 2022.

00:15:54.080 | So you know, they didn't do a quarterly breakdown on this.

00:15:57.520 | This was like their full year numbers.

00:15:59.840 | But their venture debt portfolio, which is another $7 billion of capital, also distressed,

00:16:04.480 | certainly wasn't going to perform as everyone had modeled.

00:16:07.520 | So when you kind of start to add this all up, and remember, you go back to the beginning,

00:16:10.640 | they only had $15 billion of true net book value, which is the difference between their

00:16:15.840 | assets and their liabilities.

00:16:17.440 | And so if you really start to adjust, what are those assets really worth?

00:16:20.320 | Are they really worth what they're holding them at the book at?

00:16:22.640 | And if people start to pull money out, and you got to sell them at a distressed price

00:16:26.240 | in order to give people their cash that they're owed on deposits, that's when you have a classic

00:16:30.640 | run on the bank problem.

00:16:31.840 | And then everyone tries to be the first out the door.

00:16:33.760 | And that's basically like what triggered this this week.

00:16:36.560 | Can I give you guys my little version of all of this?

00:16:39.840 | I think there are three buckets.

00:16:40.960 | But before I go into the three buckets, I just want to say to all of the employees at

00:16:46.480 | these companies, I think we the four of us are so truly sorry for what's going on, and

00:16:53.280 | what you guys are going through.

00:16:54.880 | And then to founders that are trying to navigate this, it must be unbelievably tough.

00:16:59.120 | There are a few founders in our portfolio.

00:17:01.440 | So, you know, from all of us, just know that we're thinking of you guys.

00:17:05.520 | And hopefully, everybody ends up on the other side of this by Monday or Tuesday, with not

00:17:11.840 | a lot of damage.

00:17:12.720 | So let's just put that out there as sort of like, goodwill and kind of good juju in the

00:17:18.400 | world for the next couple of days.

00:17:19.280 | This is going to be a really difficult weekend for people who are trying to navigate this.

00:17:22.320 | I think it's well said.

00:17:23.200 | Yeah.

00:17:23.520 | I mean, I've got founders who are in really, really tough shape right now trying to figure

00:17:28.800 | out how do I make payroll?

00:17:30.160 | And it's a big question.

00:17:32.720 | Okay, so just putting a pin in that because we'll come back to it.

00:17:35.520 | I think that this whole debacle, I guess, is the maybe the best word.

00:17:41.040 | There's a little bit of blame that you can put at the feet of three different groups

00:17:47.760 | of actors.

00:17:48.560 | And I just want to get your guys's reaction to this.

00:17:51.120 | So group number one, and free bird just mentioned this is we, the four of us have been talking

00:17:58.400 | for the last 18 months about the impact of rising rates.

00:18:02.960 | And, you know, we talked a lot about, for example, like in our portfolio, my partners

00:18:06.800 | and I walked into every company and made them have at least enough money to get through

00:18:13.200 | mid 2025.

00:18:14.640 | Right?

00:18:15.360 | I've said this a bunch of times.

00:18:16.960 | And so that was about having very difficult conversations about making sure that you were

00:18:23.120 | husbanding cash so that you had enough to weather any storm that came on the horizon.

00:18:30.800 | But it turns out that there was some group of VCs and companies that just didn't get

00:18:36.160 | that memo and just kept spending like nothing had changed.

00:18:40.640 | But when other VCs have stopped giving you money, and you're continuing to spend like

00:18:48.000 | it was 2020.

00:18:49.120 | That's what caused this mismatch.

00:18:52.080 | And it was really the spark that lit the fuse.

00:18:54.640 | So I think it's a really sad commentary at some level about the lack of governance that

00:19:00.480 | we have inside of some of these companies, where folks are just not doing the job that

00:19:05.440 | they're supposed to at these board levels.

00:19:07.360 | I think people and we've talked about this, have made venture too much of a popularity

00:19:11.840 | contest where they are, you know, glad handing and smiling, and not doing the hard work of

00:19:19.200 | holding folks accountable.

00:19:20.320 | And so some handful of VCs and some handful of founders just didn't get this memo.

00:19:25.920 | And it made what could have been a slower train wreck faster unnecessarily.

00:19:31.280 | So I think that that's worth talking about.

00:19:33.520 | Then, I think if you look at what actually practically happened over the last year and

00:19:40.560 | a half at SVB was that they were so desirous of profits, that they basically had a duration

00:19:48.000 | mismatch.

00:19:48.480 | So what is that?

00:19:50.160 | Imagine you get a job.

00:19:51.840 | And you know, somebody is like, hey, freeberg, I'll pay you $100,000 monthly over some number

00:19:58.400 | of months, right in normal pay every two weeks, or I'll pay you 200,000, but you only get

00:20:03.120 | paid once a year.

00:20:03.920 | Well, the problem with that second thing is you still have monthly bills that you have

00:20:08.400 | to make up for before you get paid.

00:20:09.920 | And so most people wouldn't take that job, even if they paid you a lot more, because

00:20:15.280 | you have this durational mismatch, you have to pay rent every month, you have to pay bills

00:20:19.520 | on a monthly basis, your credit card bills, all these things.

00:20:22.480 | And so you need to match the timing of your cash flows.

00:20:27.680 | And so I think somewhere along the way, the risk folks at SVB just made a really large

00:20:34.880 | miscalculation.

00:20:36.240 | They basically went and bought 10 year risk in order to pay back money that could be called

00:20:42.240 | on a daily or weekly basis.

00:20:44.320 | That, obviously, in hindsight was not a good idea.

00:20:47.600 | But more importantly, they didn't adjust fast enough.

00:20:50.800 | Well, they can't because they have these market assets that were just getting clobbered in

00:20:54.240 | the head as rates got raised.

00:20:56.240 | And then the third, the third thing is around regulators, you know, after the great financial

00:21:00.640 | crisis, we went through a period where there was hundreds of bank failures.

00:21:03.920 | And then for the last decade, they've been virtually none, right?

00:21:07.840 | They've been like a few here or there.

00:21:09.680 | And the last one was just during COVID.

00:21:11.760 | And so the regulators, I think, have done a really good job with Dodd-Frank and all of

00:21:16.640 | these other things to clean up the banking laws and the reporting requirements and the

00:21:23.440 | capital structures so that runs on banks are more and more infrequent.

00:21:28.000 | But they kept this crazy loophole around the accounting treatment of assets.

00:21:34.400 | And they allow these durational mismatches to appear in a bank's balance sheet.

00:21:41.920 | And so I think there's a piece here for the regulators, which is here's an opportunity

00:21:47.440 | that's glaring and obvious now and screaming about how we need to tighten some more of

00:21:53.280 | the transparency that's required.

00:21:54.720 | It shouldn't be a group of armchair sleuths on seeking alpha that sniffed this out three

00:22:01.120 | months before it happened.

00:22:02.240 | It should have actually been a regulator that said, hey, hold on a second, something is

00:22:06.320 | happening here that we don't like.

00:22:07.680 | And so we, I think, need to figure it out.

00:22:09.920 | But I think those are the three actors that are in play.

00:22:12.560 | And they each share a bit of the blame here.

00:22:14.560 | Greg Friberg, Saks, what do you think?

00:22:17.120 | Who, who, who is to blame here most for this blow up?

00:22:20.560 | Or is this just the extravagant event of the rate hikes happening in such a short,

00:22:25.280 | compressed period of time?

00:22:26.320 | No, I mean, look, I think that SVB's risk management was terrible.

00:22:31.920 | Obviously, they signed up for these long dated securities when the market they serve is

00:22:38.880 | incredibly volatile, like Jamal says, duration mismatch, really good point.

00:22:43.360 | I would also say that there's a weird regulatory treatment where apparently if you buy these

00:22:49.840 | 10 year bonds, these 10 year mortgage backed securities or 10 year treasuries, you don't

00:22:55.440 | have to recognize the loss until you sell them, which is just bizarre.

00:23:00.320 | So in other words, they should have been marking the positions to market.

00:23:05.200 | And instead, they just were allowing these losses to accrue.

00:23:09.600 | I don't understand how the regulators can allow that kind of system.

00:23:12.560 | I also don't understand how the regulators can allow a bank to take customer deposits

00:23:19.920 | and loan them out to startups with this venture debt that we've been talking about on the

00:23:24.320 | show, where 10% of their portfolio is basically being loaned out to startups who have no credit.

00:23:29.760 | That's crazy.

00:23:30.560 | We talked on the show a few months ago.

00:23:32.240 | Actually, it's a good time to play the clip here because what we saw and

00:23:35.200 | Sachs and I, you know, seeing at the Series A level, you have a lot of times founders

00:23:40.720 | would get this basically free money in their minds.

00:23:43.680 | I raised 10, I get five in venture debt, I can extend my runway.

00:23:47.280 | But that money comes due and here's the clip for when Sachs and I were talking about it

00:23:52.720 | just a couple episodes ago.

00:23:53.920 | What I don't trust is whether the return models on venture debt that were created

00:24:00.720 | over the last five to 10 years will be a good predictor of what the returns will be in the

00:24:04.960 | next five, 10 years, when a lot of the mortality that should have happened in the past now

00:24:10.560 | happens in the future.

00:24:11.520 | Yeah, I mean, this is just four or five episodes ago, we kind of nailed it.

00:24:16.880 | Startups have no collateral.

00:24:17.920 | They have no, there's no security for that loan.

00:24:19.760 | How does that make sense?

00:24:20.960 | No, not true.

00:24:21.440 | To make a loan to a creditless startup.

00:24:24.160 | Not true.

00:24:24.800 | Guys, look, I disagree with you on this point.

00:24:27.120 | Look, if you pull up the slide that breaks down, so let's talk about venture debt for

00:24:31.360 | a second, because I've actually invested in a venture debt fund, and I've seen the

00:24:34.320 | economics on it, the way that the the venture debt model typically works is the lender loans

00:24:40.160 | money to the startup.

00:24:41.600 | And what they underwrite is what the current VCs in the startup say they're going to do

00:24:46.400 | to support the company in the future.

00:24:48.240 | So their ability to get paid back in the future is largely predicated not on underwriting

00:24:52.640 | the company and the performance of the business or the assets they have.

00:24:55.360 | But it's underwrited by the fact that the VCs are committed to continuing to put money

00:24:59.040 | in and hopefully see that this thing has a big outcome.

00:25:01.040 | There is no commitment.

00:25:02.000 | There is no commitment.

00:25:03.040 | I've seen hundreds of...

00:25:04.240 | But, hold on, let me just finish.

00:25:07.600 | I get it.

00:25:08.560 | But the asset as an asset class, we can make fun of it all we want.

00:25:13.440 | It's actually performed pretty well.

00:25:14.880 | These guys have generated typically 18% as an industry kind of returns.

00:25:18.160 | In a bull market.

00:25:19.120 | And yeah, you're right.

00:25:21.120 | It's the same as venture.

00:25:22.080 | We're in sold boats.

00:25:23.200 | And the way that they generate those returns is that they're loaning money to the startups.

00:25:27.200 | A bunch of those startups fail, they don't get paid back.

00:25:29.760 | And then the ones that succeed, they actually take warrants in the startups.

00:25:33.280 | So they have some equity upside in the startup.

00:25:35.200 | And that's the way the model works.

00:25:36.320 | We can make fun of it all we want.

00:25:37.680 | It actually works as an industry.

00:25:39.440 | Okay, so let me tell you why that broke is it goes back to the point you made earlier

00:25:44.240 | in the show, which is the lender has this expectation that the VCs are going to keep

00:25:48.960 | investing.

00:25:49.360 | Well, what if they don't?

00:25:50.560 | Now, we've been in a generally up into the right bull market since the last.

00:25:54.640 | That's right.

00:25:55.120 | 14.

00:25:57.120 | I believe that the data for all these models is is skewed because it assumes, again, an

00:26:03.360 | environment in which companies keep raising up rounds.

00:26:06.320 | And as soon as you get into a crisis, in which that breaks, then the whole asset class breaks.

00:26:11.360 | And I think this was completely predictable.

00:26:13.200 | But even if you think that this asset class is legitimate, I don't understand why banking

00:26:18.720 | deposits could ever be used to fund it.

00:26:21.200 | If you want to be a venture debt fund, go out and raise money from LPS.

00:26:25.600 | Because what happens is when you raise it with customer deposits, you're creating systemic

00:26:29.920 | risk for the banking system.

00:26:30.800 | 100%

00:26:30.960 | You are so right.

00:26:31.760 | And the regulator should never have allowed that.

00:26:33.760 | Even worse, under two assets are correlated, because you're you're loaning it to people

00:26:39.840 | who are depositing it.

00:26:41.120 | And in every other part of the private credit market, that is exactly what you do.

00:26:46.800 | What SAC said, you can't use customer deposits to do some CLO deal or to do like, you know,

00:26:55.280 | to back a PE play.

00:26:56.720 | Right.

00:26:57.280 | These are all LP capital that goes towards that.

00:26:59.920 | This is the only sliver, as far as I know, where you take customer deposits to create

00:27:05.440 | very risky loans, wrapped with warrant coverage.

00:27:09.200 | And by the way, this stuff is never free, right?

00:27:11.440 | So they make you keep your money there.

00:27:13.920 | They make you have enough money to cover the size of the loan in the first place.

00:27:17.360 | So it's not even that valuable, because if they gave you $8 million loan, you have to

00:27:20.960 | have $8 million always on deposit.

00:27:23.040 | Otherwise, you violate the otherwise, you know, you breach the loan.

00:27:27.120 | So there is no free lunch in venture debt.

00:27:29.520 | There has never been.

00:27:30.880 | And I still think venture debt is very much like venture capital, which is most of these

00:27:35.840 | gains are on paper.

00:27:36.800 | Most of these gains haven't really been realized.

00:27:40.640 | And now we're going to go through this sorting process when all of this stuff gets whacked.

00:27:44.800 | I do want, Saxxy, your reaction to this, though, which is the thing that started this was the

00:27:50.240 | fact that VCs, seeing the markets imploding, stopped giving companies money, but they didn't

00:27:56.320 | do enough work to help founders cut burn.

00:27:59.360 | As we said it themselves, the burn stayed the same.

00:28:03.760 | What is going on inside of these boards?

00:28:05.360 | Well, I think that's crazy, because, listen, I mean, we started doing portfolio updates

00:28:10.320 | with our entire portfolio of founders in February last year, saying this is a regime change,

00:28:16.240 | you got to cut costs.

00:28:17.360 | We did another one in May.

00:28:18.560 | You can watch them both on YouTube, okay?

00:28:20.880 | And we were telling founders, cut your burn, do it now, don't wait.

00:28:24.240 | We were beating the drum on this so hard and in every board meeting and privately.

00:28:29.280 | And I like, you know, and it takes multiple times, frankly, to get through.

00:28:33.120 | I think your point, Chamath, about not wanting to be unpopular with the founder crowd, led

00:28:38.880 | some young capital allocators to maybe say, okay, yeah, let's try this ditch effort before

00:28:43.760 | we do, you know, another riff.

00:28:45.840 | Let's try this new product.

00:28:47.280 | Let's change our sales strategy.

00:28:49.280 | I don't think it's young versus old.

00:28:51.120 | I think it's experienced versus unexperienced.

00:28:53.200 | No, I think it's experienced.

00:28:53.840 | Okay, that's better.

00:28:54.640 | I think that's more accurate.

00:28:55.680 | I do think it's experienced versus unexperienced.

00:28:56.880 | I think there is an experience.

00:28:58.080 | Listen, if you've never lived through a bear market, you don't know how bad it can get.

00:29:01.440 | And tech is a boom bust cycle and the busts are really hard.

00:29:05.200 | Really hard.

00:29:06.000 | Really hard.

00:29:06.560 | And if you've never lived through a regime change before, like there was in 2008, 2009,

00:29:10.720 | or in 2000, 2001 was the worst.

00:29:13.440 | 2001 to 3.

00:29:14.400 | Then you're totally unprepared and you have no idea.

00:29:16.320 | And, you know, and I think experience does matter.

00:29:18.800 | And there aren't that many VCs around who lived through the dot-com crash.

00:29:22.800 | No, probably 85% of not.

00:29:24.720 | By the way, if you guys pull up just that slide on the loan portfolio at SVB, I just

00:29:28.560 | want to make the case, Saks, I hear you.

00:29:30.800 | It's a risky, it seems like a risky investment to make.

00:29:33.760 | But don't you guys agree that a balance sheet business like SVB or an insurance company,

00:29:40.320 | or any business that has, you know, some amount of money coming in that sits on the balance

00:29:44.560 | sheet, and then they invested for a period of time, there's a laddering of risk.

00:29:48.800 | And there's a laddering of duration that you have.

00:29:51.520 | And so if you look at Silicon Valley Bank from their from the update they did last week,

00:29:55.200 | that triggered all of this, if you look at SVB's loan portfolio, 70% are really these

00:30:00.000 | asset backed loans, which are 56% of the portfolio is like, you know, pre payments on LP commitments,

00:30:07.600 | and then 14% is private banking loans, which is loans against, you know, public securities

00:30:12.720 | that people have only 10% of the portfolio is venture debt, which is 7 billion.

00:30:18.240 | And, you know, look, if the asset historically is performed at an 18% kind of rate of return,

00:30:23.280 | what is the your venture debt portfolio going to look like in a distressed environment?

00:30:26.880 | Is it negative 100%?

00:30:28.400 | Is it negative 50%?

00:30:29.440 | I get a 40% I get a 30%.

00:30:30.640 | I mean, you guys can have a point of view on this.

00:30:32.960 | But look, I mean, for any business that's managing a large balance sheet of assets against,

00:30:39.120 | you know, a short kind of liability tree, they're going to have some riskier assets.

00:30:44.160 | I think, you know, the question is, was 10% too much of the loan portfolio?

00:30:47.920 | 1% too much.

00:30:50.080 | Yeah.

00:30:50.320 | And to that, you know, one of the issues here that we saw qualitatively, and sax and I both

00:30:55.920 | saw qualitatively, is the standard for giving these and the size of them got lower and lower.

00:31:01.760 | In fact, the covenants went away.

00:31:03.280 | And this is what we kept having hundreds say to us, it has no covenant, they offer me no

00:31:06.800 | covenants, I don't have to have a certain amount of cash, I don't have a half a certain

00:31:09.440 | amount of revenue.

00:31:10.320 | Those covenants were there for a reason to filter out the people who can't afford the

00:31:14.800 | house, right.

00:31:15.840 | And this is exactly what happened in 2008.

00:31:18.320 | When people started giving those no recourse or no background check mortgages, remember

00:31:23.440 | those were like, you didn't have to do a background check to get a mortgage.

00:31:26.400 | That's what happened in venture, they just gave these, I saw it firsthand, willy nilly,

00:31:30.320 | I begged founders to not take them.

00:31:32.000 | And I only won that discussion sacks one out of five times because founders are like money,

00:31:38.160 | we're having this debate, but there's no indication and there were no losses in this

00:31:41.840 | portfolio to date that show that venture debts underperforming we're saying

00:31:45.120 | what's the expression performance is no guarantee a future performance.

00:31:50.720 | Obvious to us on this podcast, you guys are arguing about venture debt, when the real

00:31:55.600 | loss that happened at SVB, no, we understand that they bought a bunch of treasuries and

00:31:59.680 | no one has rates went from 2% to 5%.

00:32:01.600 | Let me there's two things going on here.

00:32:04.960 | Okay, free bird when I see your chart, you talk about laddering this and laddering that

00:32:08.640 | and x percent in all this kind of stuff, I think about the smartest guys in the room.

00:32:13.040 | Okay, this is long term capital management.

00:32:15.200 | This is Enron, this is the 2008 bank failure, they think they can basically do financial

00:32:20.560 | engineering to make this work.

00:32:21.840 | You know why it doesn't work is because number one, they're not in fully liquid assets.

00:32:25.600 | Number two, they're not marking to market every day.

00:32:27.440 | If you're a deposit bank, you should be required to keep all of your assets in fully liquid

00:32:34.160 | securities that you mark to market every day.

00:32:36.480 | It's that simple.

00:32:37.840 | And what do they do?

00:32:38.880 | They put it in 10 year duration mortgage bonds, where the value got devastated with the rise

00:32:46.800 | in interest rates, they didn't have to mark that to market.

00:32:49.200 | And second, they put 10% of the portfolio in basically loans to creditless startups.

00:32:55.280 | So when there is a run on the bank, you have a what like roughly 30% gap between deposits

00:33:03.680 | and their actual the value of their portfolio.

00:33:06.560 | Yeah, and listen, that shouldn't be allowed.

00:33:09.280 | And the reason it's allowed is frankly, I think regulators are completely asleep at

00:33:12.560 | the wheel.

00:33:13.200 | Where's Powell?

00:33:14.240 | Where's Yellen?

00:33:15.360 | Two days ago, two days ago, Powell was testifying in front of the banking committee.

00:33:19.840 | And they asked him, do you see any systemic risk in the banking system?

00:33:23.360 | Because of the rapid rise in interest rates?

00:33:25.040 | He said, No, no systemic risk.

00:33:27.200 | Sachs is right.

00:33:28.000 | I agree that the rise in interest rates is the key driver here.

00:33:32.320 | It drove down venture investing, it drove down valuations.

00:33:35.680 | And it's driving down the value of long durated bond portfolios, which by the way, is the

00:33:39.920 | mainstay and the standard of how a lot of these businesses invest and operate.

00:33:43.760 | And it's caused distress and stress on the system.

00:33:46.320 | My biggest concern is the contagion effect that arises next.

00:33:49.200 | If you go in, and you continue to assume interest rates climb, and everyone's holding onto these

00:33:52.880 | bonds, and they're getting written down.

00:33:54.240 | Meanwhile, you owe people all this money in cash.

00:33:56.160 | And the other thing that's happening, if you hold cash today, you're likely want to

00:33:59.280 | higher interest rate to compete with treasuries, because you can invest in treasuries today.

00:34:03.280 | And make sure 5%

00:34:04.080 | Pause for a second here.

00:34:05.040 | I just want to make sure that the audience understands.

00:34:06.640 | And Yellen put out a statement today, Jake, I'll just to finish the thought that they're

00:34:10.640 | monitoring the situation.

00:34:12.400 | Yes.

00:34:12.800 | She's sitting there like a bump on a log.

00:34:14.640 | I mean, it's ridiculous.

00:34:15.680 | They need to be out front.

00:34:17.440 | They don't understand that this is a cascading situation.

00:34:21.360 | Either this weekend, they place SVB in the hands of a JP Morgan, they do basically a

00:34:29.600 | bearish or a long move.

00:34:32.000 | They either do that this weekend, or this thing keeps cascading next week.

00:34:36.160 | And look, I could be wrong.

00:34:37.760 | Maybe they're working on it right now behind the scenes.

00:34:39.840 | If they are, kudos to them.

00:34:41.200 | They'll have an announcement before the market opens on Monday.

00:34:43.440 | But if they're not, and Yellen's just like, we're monitoring the situation.

00:34:47.600 | While three days ago, she was in Ukraine.

00:34:49.920 | This is incompetence at work.

00:34:51.760 | All right, hold on.

00:34:52.960 | We'll figure out a way for you to dump this into January 6 next.

00:34:56.240 | Take a playa.

00:34:56.880 | He connected Silicon Valley Bank to Ukraine.

00:34:59.680 | It was beautiful.

00:35:01.360 | The piece here that's important to understand.

00:35:02.160 | What is our Secretary of the Treasury doing in Ukraine?

00:35:04.240 | I mean, seriously.

00:35:04.880 | Take it easy.

00:35:05.520 | Take it easy.

00:35:06.240 | Here's what happened.

00:35:08.400 | Just so people understand, US Treasuries were at 102.

00:35:12.560 | You get like a 2% a year.

00:35:14.560 | They bought a bunch of those.

00:35:16.080 | That was actually when you think about it, you would say that's a safe bet.

00:35:20.400 | The problem is those are locked up for 10 years.

00:35:22.880 | And nobody anticipated on the Silicon Valley Bank team that the rate hike would happen so

00:35:28.000 | quickly, so violently.

00:35:29.760 | Remember, we saw the 25, 25, 50, 50, 75, 75, all those increases.

00:35:34.320 | Now what happens to a 2% US Treasury when the interest rate goes up is they get devalued.

00:35:41.600 | They're not worth as much.

00:35:42.480 | So if you did need to sell them, you would have to sell them at a discount.

00:35:45.680 | If you held them to maturity, you would get that complete return.

00:35:48.640 | And what happened here is they needed to sell these early.

00:35:52.720 | And they sold them early and they took a massive loss, billions of dollars.

00:35:55.920 | And that's what lit the fuse.

00:35:57.360 | That's the slide I showed, like the price basically goes down.

00:35:58.880 | I just want to make sure the audience understands that.

00:36:00.800 | If they had sold these earlier, or if they hadn't bought these.

00:36:03.680 | But hold on, hold on.

00:36:04.640 | They would have not had this problem.

00:36:05.600 | Wait, wait, wait.

00:36:05.840 | Go ahead, Shama.

00:36:06.400 | Now, why, why in that meeting did they have to decide to emergency sell?

00:36:11.120 | It's because VCs stopped giving startups money.

00:36:16.080 | So startups couldn't deposit more money into the bank,

00:36:20.000 | but they kept spending at the same rate that they were spending.

00:36:22.800 | In other words, the deposits went down.

00:36:24.960 | Yeah.

00:36:25.440 | In the last 18 months, not enough folks read the memo.

00:36:28.560 | Yes.

00:36:30.480 | And by the way, the tragedy of that is let's just say that you did get the memo

00:36:34.560 | and you did make the hard cuts right now.

00:36:38.000 | And let's say you're working on something and you can fill in the blank on the thing

00:36:41.440 | that you care about.

00:36:42.320 | Okay.

00:36:42.480 | So for the listeners, let's say it's climate change.

00:36:44.160 | Let's say it's breast cancer research, whatever it is.

00:36:45.920 | This had nothing to do with you four days ago.

00:36:49.520 | You had your money in the bank.

00:36:51.680 | You did everything you needed to do to go and, you know, figure out product market fit,

00:36:55.680 | you know, try to get to market, try to sell your product.

00:36:58.720 | And all of a sudden, because of some other set of folks and actors who couldn't get their act

00:37:04.800 | together, now you're on the precipice of bankruptcy in 3648 hours.

00:37:10.640 | That's crazy to me.

00:37:11.600 | This is the challenge, sex.

00:37:12.880 | I think you could speak to this as well is we did all this portfolio management over the last year.

00:37:17.840 | These were the troubled companies.

00:37:19.360 | And then you have the companies, a large portion who did the right thing.

00:37:22.960 | They had a big war chest and they had set the burn at the right pace.

00:37:28.240 | And now they, the other portion of our portfolio that had big war chest, they're now at risk.

00:37:34.000 | So if you're a capital allocator right now, you're looking at a group of companies that

00:37:37.520 | you tried your best to save and they're, and they're ankled and they're wounded.

00:37:41.600 | And now the strong ones are wounded too.

00:37:43.920 | This is cataclysmic for Silicon Valley.

00:37:46.240 | If this does not get stopped this weekend, not only, and I don't want to be hysterical.

00:37:51.600 | You're right.

00:37:51.920 | This is a meteor hitting the dinosaur.

00:37:53.760 | It's extinction level event.

00:37:55.120 | You're right, Jay Cal, listen, we have portfolio companies.

00:37:58.160 | That had tens or millions or more in Silicon Valley bank.

00:38:04.320 | And their account showed that their money was in the safest money market funds, money

00:38:09.840 | market funds with a publicly traded ticker symbol that were managed by BlackRock or Morgan

00:38:15.520 | Stanley.

00:38:16.160 | Okay.

00:38:16.960 | That's what their accounts showed them they had.

00:38:18.800 | And then they're told all of a sudden, no, you're only protected up to $250,000.

00:38:23.840 | Everything above that, that your, your money market fund is just an asset of SVB, which

00:38:29.200 | is in receivership.

00:38:30.160 | You get a certificate.

00:38:31.440 | Yeah.

00:38:31.600 | And you get a certificate.

00:38:32.480 | Do you see this announcement?

00:38:33.440 | By the way, I mean, the California regulator made things worse.

00:38:36.480 | The California regulator stepped in and they froze everything.

00:38:39.680 | So our companies were in the process.

00:38:41.440 | We have companies that submitted a wire yesterday, by the way, we spent all day yesterday on

00:38:46.080 | the phone with our portfolio companies, trying to get them out.

00:38:48.640 | We had wire requests that went in before the deadline.

00:38:51.120 | And for some reason, we're in a queue.

00:38:53.200 | They didn't get through and they didn't get out.

00:38:54.720 | They didn't get through.

00:38:55.840 | And then the California regulator steps in this morning and freezes everything.

00:39:00.160 | And what did they announce?

00:39:01.120 | They said, Oh, you're good.

00:39:02.400 | You're good for your insured amounts.

00:39:04.000 | How much is that $250,000 for your uninsured amounts, which is everything above 250.

00:39:08.720 | You're going to get a certificate, a certificate.

00:39:11.200 | What does that mean?

00:39:11.840 | That means you're a creditor in bankruptcy.

00:39:14.480 | So the mutual fund that you thought you owned was actually not hypothecated in your name.

00:39:20.400 | It was in SVB's name at BlackRock.

00:39:22.800 | And so our companies have been calling BlackRock and calling Morgan Stanley saying, Hey, do you

00:39:26.800 | have my money market fund?

00:39:28.080 | And they're like, No, sorry, that's SVB.

00:39:30.320 | So now they're sitting in a in a creditor line in bankruptcy.

00:39:34.800 | We got to explain this.

00:39:35.840 | These were called sweep accounts.

00:39:37.520 | So what Silicon Valley Bank did with some of these large portfolio holders, let's say

00:39:42.480 | Saks and a bunch of other VCs gave you 30 million bucks.

00:39:45.280 | Yes.

00:39:46.560 | And they would, they took your money and they said, you know what, just to be safe,

00:39:50.720 | we're going to take your money will automatically sweep it and distribute it across two other

00:39:54.480 | accounts.

00:39:55.200 | So we got this BlackRock over here for you.

00:39:56.880 | Great.

00:39:57.200 | We got this Morgan Stanley over here.

00:39:58.640 | Great.

00:39:59.280 | Whatever it is, you could only get to those through the Silicon Valley Bank interface.

00:40:05.040 | And so it was supposed to protect you.

00:40:07.520 | But there is no recourse.

00:40:08.640 | It seems those are frozen too.

00:40:10.720 | So the only thing you can do that's logical.

00:40:12.960 | And I had a mentor 30 years ago when I had the magazine and we started hitting millions

00:40:16.400 | of dollars in revenue.

00:40:17.600 | And he said, I said, How much money we have in the bank?

00:40:19.360 | He's like, which bank account?

00:40:20.560 | And he had four bank accounts, and he would load balance them.

00:40:23.440 | And he did it every Friday.

00:40:25.120 | God bless Elliot Cook.

00:40:26.400 | He did it every Friday for me.

00:40:28.000 | And I've always done that.

00:40:28.880 | I've always had multiple bank accounts and load balance them.

00:40:31.120 | But in this case, Silicon Valley Bank did it through one interface.

00:40:34.720 | I have multiple startups today who did this exact thing, Saks.

00:40:37.920 | And they couldn't even log into Silicon Valley Bank today to even see where they're at.

00:40:43.040 | I mean, I think you can log in now.

00:40:44.400 | Everything got frozen and the California regulator froze them and they brought in the FDIC.

00:40:48.400 | So there's a couple of problems now with the working out of this.

00:40:50.560 | This is basically a bankruptcy process, a receivership process.

00:40:53.520 | It's that we've got all these companies that need to make payroll in the next few weeks,

00:40:57.200 | right?

00:40:57.520 | And so these processes don't work at startup time.

00:41:00.800 | If you could just figure out like over the weekend, okay, SVB lost 30 cents on the dollar,

00:41:06.560 | and everyone's just going to be prorated, and you're going to get 70 cents on the dollar,

00:41:09.520 | and you get your money on Monday, it would be a hit to the startup ecosystem,

00:41:13.840 | but people would recover and move on.

00:41:15.600 | But the fact of the matter is, it's not going to be on Monday.

00:41:18.160 | It could take weeks or months to figure out how many cents on the dollar you have.

00:41:21.600 | Are they liquidating Silicon Valley Bank?

00:41:23.680 | Are they selling the desk?

00:41:24.880 | Is everybody getting laid off?

00:41:26.640 | FDIC is going to liquidate everything.

00:41:28.400 | Well, you have two paths here.

00:41:29.840 | Path number one is if you actually try to sell these assets.

00:41:33.040 | But the problem is, who do you think the buyer is?

00:41:35.680 | The buyer are the sharpest sharps on Wall Street, who will purposefully underbid these assets.

00:41:44.240 | And so that then takes you to path two, which is then the only other real solution is for the Fed

00:41:49.680 | to warehouse them and guarantee them.

00:41:51.280 | And that's an equivalent version of what they had to do during the great financial crisis,

00:41:56.640 | which was this thing called TARP, which is the Troubled Asset Relief Plan.

00:42:00.080 | It was just a backstop and a mechanism so that these, at the time, those toxic assets,

00:42:05.760 | which were a bunch of mortgage-backed loans, could be cleared through the system over time,

00:42:10.480 | which effectively meant that the Fed basically warehoused that risk.

00:42:14.080 | So I think what we need to see now is, Saks, it could be 50 cents on the dollar.

00:42:19.520 | It could be 60 cents if you want immediate liquidity.

00:42:23.120 | You know, a friend in our group chat was mentioning that there was one claim,

00:42:26.480 | a company that had $100 million inside of SVB, was offered 60 cents on the dollar today for that

00:42:34.640 | claim. Now, that's a really… From a third party.

00:42:38.080 | From a third party who said, "I will take you, I will give you 60 million today in return for

00:42:43.440 | that certificate, plus the 250,000 that says you're owed 100 million," because they're willing

00:42:49.600 | to take the risk that they'll get, you know, 80 million, right? And then they take the difference.

00:42:54.320 | Now, the point is that if you're seeing today that kind of a discount, that's not a good sign,

00:42:59.200 | I think. And it does speak to the fact that regulators have to step in.

00:43:02.480 | Now, here's the other reason why I think it's important.

00:43:04.640 | I think what regulators, and I think the people, and there's a lot of them in Washington that

00:43:09.600 | listen to this, what this does is it torches years of US innovation. And you should not let that

00:43:17.600 | happen. There are companies working on really important things for the United States and for

00:43:24.800 | the rest of the world. And if the company fails because they can't make the product work, so be

00:43:31.920 | it. We take that risk every day. If the company fails because customers don't want to buy it,

00:43:36.240 | so be it. If the product fails because a better product comes out, so be it. But it shouldn't

00:43:42.560 | fail because we can't get money that is in a deposit. That should not be why we torch

00:43:50.480 | hundreds of startups and what they're working on, maybe thousands.

00:43:54.080 | >> Yeah, this would be a lost decade, a lost decade for Silicon Valley.

00:43:57.680 | >> J. Cal, first of all, do you guys want to talk about second and third order effects,

00:44:01.440 | just so folks really understand those? Because I think it's important to highlight

00:44:05.280 | why it's not just about a couple hundred tech bros in Silicon Valley not being able to make

00:44:10.320 | payroll, but there's important downstream consequences. For example, there are payment

00:44:15.040 | processing companies in Silicon Valley that use Silicon Valley Bank to store their capital and to

00:44:21.280 | move money around. There are payroll companies that do payroll for many businesses, not just tech

00:44:26.640 | businesses, but many businesses in different parts of the economy that store their cash at Silicon

00:44:31.440 | Valley Bank and process money through Silicon Valley Bank. Today, it was announced that Rippling,

00:44:35.840 | one of those companies, could not hit their payroll cycle today because they had money

00:44:40.000 | tied up at Silicon Valley Bank. Fortunately, they announced that they also have money at

00:44:43.360 | J.P. Morgan and other places, so they will be able to kind of get the payroll processed early

00:44:48.480 | next week and get everyone back on track. But this is hundreds and potentially thousands of companies

00:44:53.760 | that use their payroll software to process and pay their employees. And then there's all the

00:44:59.760 | payment processors. We don't know how many of them have what level of exposure and a lot of

00:45:03.840 | infrastructure companies that move money in and through Silicon Valley Bank. And so if they start

00:45:09.040 | to go down, and then payroll doesn't hit the air conditioning company that's using the tool in some,

00:45:14.720 | you know, in Arizona, and then, you know, the stripe service isn't able to process e commerce

00:45:19.840 | payments for a small business owner that runs a website, you can start to see how there can be

00:45:23.760 | very significant trickling effects. And more importantly, like we saw in a weight, perhaps to

00:45:28.160 | a different degree, but still a significant concern is the contagion of panic, where people

00:45:34.240 | say if there isn't reliability in the things that I thought were reliable before, I start to have

00:45:39.600 | real questions in the soundness of the system overall. And that's why it's so important to

00:45:43.840 | sack said to step in shore up the problem this weekend, I don't think it's about bidding 50

00:45:48.480 | cents or 60 cents on the dollar, every depositor needs to get paid 100% of their money. And that

00:45:53.680 | cash needs to be made available to them by early next week. And if that money is not available to

00:45:58.080 | them, within the first 48 or 72 hours of the end of this weekend, then we're gonna have a real

00:46:03.680 | crisis on our hands, because then you will see a lot of people trying to move money away from

00:46:08.000 | any institution that stores their money in some sort of security that's not 100% liquid like cash.

00:46:12.960 | And that's gonna, that's not that's gonna cause a massive run. And so some what has to happen,

00:46:18.640 | the only way this can happen is if someone takes over Silicon Valley Bank this weekend,

00:46:24.400 | and that the federal government, unfortunately, as much as I hate to say it, because I absolutely

00:46:29.120 | hate the federal government having a role in this stuff has to say, we will guarantee 100%

00:46:33.360 | of those deposits to the company that takes over the bank that takes over this portfolio,

00:46:37.840 | and says, let the portfolio of assets run its lifetime, see what you get paid, whatever the

00:46:42.400 | delta is, we'll make it up to you. But we need to make sure that there's cash here today for all of

00:46:46.960 | these depositors to get to my head something you want to say, if not, I have something I want to

00:46:50.400 | say. Yeah. The other big thing that SVB was, was an on ramp for a lot of investors, including many

00:46:59.760 | US investors to get money into China. And without commenting on whether that's right, wrong or

00:47:04.880 | indifferent. The point is that China has a very complicated capital market structure, which

00:47:09.280 | requires you to basically use an offshore bank, ie non domesticated Chinese bank, and to be able to

00:47:16.400 | get those dollars. And so what would happen is Chinese startups that raise money would raise

00:47:20.400 | money from US investors and abroad using these bank accounts. And so this issue now doesn't just

00:47:26.240 | touch the United States innovation economy, it also touches China's innovation economy, which,

00:47:30.720 | you know, creates actually a complicated set of trade offs for the US government and Treasury as

00:47:36.160 | they think about what they want to do in this heightening great power conflict that Saks talked

00:47:40.080 | about last week. And I want to just make a very important nuance point here. I know there is no

00:47:44.320 | bank that the public, specifically, you know, people who don't want to support, you know, rich

00:47:50.640 | people already like big tech or billionaires. The reason to backstop this with public money is

00:47:57.440 | because we have a roadmap for this. People don't know this widely, but tarp was just over $400

00:48:03.360 | billion. It actually returned a $15 billion profit to the American people. This would require maybe

00:48:11.600 | 25 or $50 billion 10%, maybe 5-10% of the totality of tarp would be enough to cover what's happening

00:48:20.160 | here with Silicon Valley Bank and work this out. That's $50 billion for the people listening in

00:48:24.320 | Washington or for the people who will say, Hey, why are we, you know, bailing out big tech,

00:48:29.360 | you're bailing out small tech, as Chamath said, you're bailing out innovation on breast cancer on,

00:48:35.360 | you know, renewable energy. But most importantly, this can easily be structured

00:48:40.800 | so that the American people return 20%, 30%, maybe even double their money, you could structure this

00:48:47.600 | so it is senior to everything else. And is exactly what the government is supposed to do when there

00:48:52.640 | is a crisis. That doesn't mean the people who run Silicon Valley Bank should have their equity worth

00:48:58.000 | a lot, they should get wiped out. They didn't do their job properly. The equity, the people who

00:49:03.280 | ran the management team there, if they don't get anything, that's okay. They understand that. But

00:49:07.840 | the people who had their money at deposit to pay the salaries and to pay for this innovation,

00:49:13.040 | it is unconscionable that we wouldn't backstop it. And the guarantee you, the US government

00:49:18.880 | could get some warrants on those companies or warrants and ownership and Silicon Valley Bank

00:49:24.400 | and make at least 50 cents on the dollar, maybe even double. And that's the way this bailout

00:49:30.000 | should be structured. And it has to be done this weekend. You bring up a great idea. I think,

00:49:34.560 | I think if the US balance sheet does step in over the weekend, I'm going to say on behalf

00:49:41.520 | of the US taxpayer, you must get a piece of these companies. And the reason why is that that's the

00:49:49.680 | way to make it fair for everybody that's not in tech who's on the outside looking in. And if you

00:49:56.400 | look inside of Twitter, as an example, there's a lot of negative sentiment around even the idea of

00:50:02.560 | a bailout happening. And it's for this exact reason, because I think people believe that it

00:50:08.480 | will benefit just a small sliver of people, right? So to step in and to save these companies, Jason

00:50:13.840 | would still be, you know, really only helping, say, several hundred thousand or several, you know,

00:50:19.360 | and and the thing that that gets wrong, in my opinion, is that these companies, if they're,

00:50:25.280 | if they're allowed to germinate, should be building things that actually help everybody.

00:50:30.880 | And so including taxes, including and so if you can view it that way, and if you can view a share

00:50:36.640 | of it, now, obviously, look, we're very, we have a very deep incentive for that to happen. But I

00:50:43.120 | think it's important to present the other side of it. And the other side would say, this industry

00:50:47.600 | has a little bit run amok. It's not well regulated. You know, you guys push the

00:50:55.680 | boundaries and get away with a lot. And there haven't been a lot of consequences. You're saying

00:51:01.120 | the banking, the tech industry, no, no, I'm saying that the average person that's on the outside,

00:51:05.200 | looking into the tech industry can make that claim. And now they would be pointing at big tech.

00:51:10.640 | But the problem is, we all get swept in together under the same thing. And then what they would

00:51:14.720 | say is, I don't think it's right to step in. And I think that you have to give the US taxpayer an

00:51:20.480 | incentive if they are going to do it. And I think the the incentive should be that they should just

00:51:24.880 | get a share in all this innovation. If they take over the venture debt portfolio, then they would

00:51:29.680 | have that right, the venture debt portfolio comes with warrants, so they would have that I think

00:51:33.600 | there's a big risk here that precisely because tech is unpopular. And people I think are confusing

00:51:39.680 | big tech with small tech, that the government doesn't step in here and the the dominoes start

00:51:45.760 | falling and we start getting all the systemic risk playing out. Remember, the beneficiaries

00:51:50.880 | here aren't just these, the sort of current generation of tech companies, and everyone they

00:51:56.000 | do business with. It's also wherever the contagion goes next. And we're already seeing, I think

00:52:02.800 | multiple regional banks under pressure, their stock down people asking questions. We know people

00:52:08.480 | in our chat groups who are wiring money out as fast as they can. Just because why take a chance?

00:52:14.480 | You know, by the way, you have to understand that the game theory around these bank runs,

00:52:20.080 | people describe them as a panic, but that implies that it's irrational. It's not irrational. It's

00:52:25.360 | actually rational. And what this what this is really highlighted is that what you said earlier

00:52:30.560 | at the beginning, Saks, which is that the regulatory oversight is actually extremely pristine

00:52:36.720 | at the biggest banks. But the smaller and smaller you get, there's a level of opacity. And

00:52:43.840 | lack of regulatory follow through that allows us to build to the Wall Street Journal right now is

00:52:48.880 | reporting that US banks have 620 billion of unrealized losses just on treasuries.

00:52:54.000 | I don't know what the unrealized losses are on these long dated mortgage backed securities.

00:52:58.560 | Like I said, I have no idea why regulators allow banks to hold these bonds at their book value

00:53:05.920 | instead of marking them to market every day. That's crazy.

00:53:08.480 | And on the equity side, you have to do it. Buffett talks about this all the time. The equity side,

00:53:13.280 | you have to mark to market the equity portfolio at the end of every quarter.

00:53:17.360 | And he sees these wild swings and he complains about it. But it's the right thing to do for

00:53:21.920 | exactly this reason, right? So think about the game theory here. Okay, the banking system,

00:53:26.080 | the bank regulators have created this opacity in the system. You've got all these assets are being

00:53:32.080 | held by these banks that are not marked to market. So nobody really knows what the true

00:53:36.640 | level of exposure is. So what's the response? Why take a chance? Let's move your money to JP

00:53:40.800 | Morgan. So I think there's a chance that if the federal government doesn't step in here,

00:53:45.200 | the whole regional banking system could be decimated and just be left with four too big

00:53:49.440 | to fail banks. How's that benefit? Anybody that doesn't benefit the little guy,

00:53:53.680 | this guy's there's a there's a pretty good set of regulatory disclosures that happen. But I do

00:53:58.080 | think that the real question is, you know, are the ratios right? Do they should they really be

00:54:02.640 | allowed to invest in these types of assets with depositor capital? And if so, with what percent

00:54:08.560 | of the depositor capital should they be allowed to do it? And maybe, you know, that seems to be

00:54:12.480 | where the biggest, you know, issue is we've come a long way. I mean, I just pulled up the statistic.

00:54:17.600 | It's insane. There were 505 banks that failed. In 1921, failures continue to rise in the early 20s,

00:54:25.600 | and averaged 680 banks per year failed between 1923 and 1929. So obviously, you're coming out

00:54:33.360 | of a wait, there was a lot of controversy around, hey, banks can't make money anymore. It's too

00:54:37.520 | restrictive, the disclosures and so on. The disclosures are actually quite good. You know,

00:54:41.440 | you guys can go to these these sites that regulate the banks, you can go to the SEC site,

00:54:45.920 | you can get a very detailed schedule of every asset held by every one of these banks. It's good

00:54:50.400 | transparency, I would argue, but should they be allowed to invest in securities that are effectively

00:54:55.600 | not fully liquid, that are risky that are long dated with short dated deposits, right? It seems

00:55:01.440 | it's a fundamental question about what banks are supposed to be doing in a world of computers that

00:55:05.280 | can calculate everything. The idea that you can't solve duration matching doesn't seem like one of

00:55:10.800 | those problems that's intractable in 2023. I mean, if people can make an AI version of the podcast,

00:55:16.000 | they could do that. Yeah. I mean, freeburger also like take this, I think venture debt's

00:55:21.840 | the most extreme example. How do you mark to market a loan to a series a startup? I mean,

00:55:26.960 | that just 100% depends on whether you're gonna raise the street.

00:55:29.360 | I actually I'm a believer, you can underwrite anything I think you can under for the right

00:55:33.600 | interest rate for the right premium, you can underwrite insurance, you can underwrite loans.

00:55:36.800 | I mean, there's a lot of ways that you could kind of do you mark that to market on a daily basis.

00:55:41.120 | You're right. No, you cannot. You're right. Absolutely. Yeah. And so from a reporting

00:55:45.360 | perspective, it how does that solve the problem? No, that's why they've got different. They've

00:55:49.520 | got different tiers of regulatory capital guys. And so you know, there are rules around what the

00:55:53.360 | ratios need to be and where you need to fall. And so they bucket this stuff up differently, right?

00:55:58.160 | If you're a bank, and you want to buy securities, you want to invest in something that's not

00:56:03.760 | liquid and mark to market every day, you should have to package it up in some period of time and

00:56:08.800 | sell it. If you're going to make a loan to a, you know, to a venture backed startup, package those

00:56:14.640 | up and syndicate that and sell it as a security. And if you can't do that, you probably shouldn't

00:56:18.720 | be investing in the asset class anyway. Same thing with like, you know, mortgage, these mortgages

00:56:23.040 | already get packaged up and sold, right? So I just doesn't make sense to me that like customer

00:56:27.680 | deposits, that's what we're talking about, which you assume should always be 100% safe, right?

00:56:33.760 | This is not a source of capital where anyone's ever expecting to lose money. If you want to

00:56:38.080 | use risk capital to get some sort of outsized return, go raise that from LPS. But to like take

00:56:44.640 | customer deposits and use it on on risky non liquid investments. Yeah, it makes sense.

00:56:50.720 | There's one thing I could I could just help people frame this. The aggregate amount of dollars in

00:56:57.680 | these bank accounts, I would estimate equals 10% of the value of the startups they represent.

00:57:03.280 | Would we all agree on that? It's about 10% of the value of those startups, maybe 20.

00:57:08.400 | If you were what, how do you how do you calculate?

00:57:11.360 | About the startups who recently did a round of funding, they diluted 10%.

00:57:16.000 | That represents all of their treasury or half of their treasury. So if that cash for the startup

00:57:22.400 | portion of this equals 10% of the value of startups, I can guarantee you those startups

00:57:26.640 | with access to that capital again, Monday, will be able to outperform the backstop that the

00:57:32.240 | government would provide. This sounds like Enron math to me. No. Okay, if you want to start up to

00:57:38.000 | take any of your startups, they have 30 million. We don't have time. Listen, we don't have time

00:57:42.240 | here for the government to figure out how to be a partner in or an investor in all these startups.

00:57:47.760 | I'm sorry, we don't step in or they don't. If they don't step in, you'll have systemic failure.

00:57:53.760 | No, no, but do the math with me here. Of one of the companies pick one of the companies that has

00:57:58.160 | 20 you have a company that has 20 million there are 30 million there. What does that represent?

00:58:01.920 | If you were to take their valuation from last year, when they raised that money,

00:58:04.400 | I didn't have it doesn't matter. It doesn't matter who's the depositor. It does not matter.

00:58:08.800 | It matters for people to understand how much value is going to be lost. And how easily recoverable it

00:58:16.720 | is if these companies are allowed in aggregate to deploy that capital. That's the point you're not

00:58:21.280 | getting or I'm not explaining to properly. If allowed to deploy that it's going to return a

00:58:27.840 | multiple and a venture multiple 2345 x but if we destroy that money, these companies are going out

00:58:34.880 | of business next month. That money is their money. That's their deposit. I agree with you. I'm trying

00:58:39.920 | to create a framing here for people to understand exactly how much value is going to be better

00:58:44.400 | framing is that when you put your money in a FDIC insured bank and you put it in a customer deposit

00:58:50.160 | that's supposed to be completely safe, that's paying you a couple of percent interest. And

00:58:54.080 | that is reflected even as a money market fund on your account. You do not expect that money to be

00:58:59.040 | turned around by the bank and put in risk. No sense. Raise the FDIC. Banks should not work that way.

00:59:06.800 | Okay. Look, I think it's crazy that you could set up a bank account, okay, because you just want to

00:59:11.280 | write checks. And you could lose that money because the bankers decided to loan it to some startup.

00:59:16.400 | That's insane. Or the bankers decided to buy a 10 year mortgage backed security who doesn't

00:59:21.280 | understand interest rate risk. That's not the way the system is supposed to work. And you've

00:59:24.560 | got all these people on Twitter pushing back no bailouts or whatever. That's the depositor's money.

00:59:28.960 | I agree. No bailout for SVB. They should lose everything. All those executives,

00:59:32.720 | their stock options are worthless. All the stockholders of that company, their shares

00:59:36.800 | are worthless. But the question is, should depositors lose money in these banks? They

00:59:41.120 | just thought they were signing for a checking account. I mean, are you kidding me? And if you

00:59:44.880 | let that happen, there will be a cascade here because the logical consequence will be everybody's

00:59:51.600 | going to say, put my money in JP Morgan or Wells Fargo or Bank of America, there'll be four banks,

00:59:56.000 | that's it. And all the regional banks are going to shut down.

00:59:58.320 | 10s of 1000s of highly paid workers, and not just tech workers are going to be out of

01:00:04.560 | jobs, and they don't have jobs waiting for them at Amazon, or Google to bail them out. And this is

01:00:10.000 | the start of a contagion if it doesn't get stopped. What do they do wrong? Nothing. They used what is

01:00:17.040 | considered one of the most reputable banks in the world. They used a top 20 bank that the regulators

01:00:21.440 | said was in compliance. So did they do something wrong? Or were the regulators asleep at the wheel?

01:00:27.040 | I don't know. Some way I think it's this is Biden's fault or Zelensky's.

01:00:32.080 | It's Biden or Zelensky's fault. What do you guys think this means for VC?

01:00:39.280 | It is a chilling effect. I talked with some LPs in the last two days in the VC world. I'll give

01:00:44.240 | you a couple anecdotes. I have a friend runs a fund. He looked at his portfolio, they have $270

01:00:51.760 | million or sorry, $350 million tied up at Silicon Valley Bank. They need $27 million for cash for

01:00:59.440 | the next 30 days. So he's called his LPs and he's trying to get his LPs to front him money to wire

01:01:06.720 | money so that he can front his company's money so they can actually pay their operating expenses and

01:01:12.240 | cover their payroll. And then I spoke with a couple of LPs in the last 48 hours. They have

01:01:17.200 | gotten dozens of calls from various venture funds. Everyone is asking the same question, can we do a

01:01:23.120 | capital call? Can we get money delivered early? Can we use that money to support our companies?

01:01:27.600 | Because their cash is stuck. Coming out of this, the uncertainty that this creates in the investment

01:01:34.160 | environment, I think it's going to have a real chilling effect, not just with the GPS and their,

01:01:39.680 | you know, proclivity to sign term sheets right now and wire new money over, but also with the LPs,

01:01:45.200 | as they're making capital commitments and actually following through with with capital commitments

01:01:49.600 | that have already been made. Given, you know, where's the capital actually going to land up?

01:01:54.080 | That was never a question mark before. It was never anything that anyone even considered

01:01:58.080 | that capital could be disappeared or locked up or tied up. And the fact that this is adding this

01:02:03.360 | unique friction in the market is a layer on top of an already distressed and challenged

01:02:08.720 | environment for fundraising for GPS for LPS. And it seems to be exactly the icing on the cake we

01:02:16.640 | did not need right now. No matter how this gets resolved. I think private markets and VC could

01:02:22.160 | seize I think you're going to see people pull term sheets, maybe half as many fundings are

01:02:27.040 | going to occur as people try to do triage. Another VC friend of mine just sent me a text,

01:02:31.440 | he can't make payroll next week. He has a fun small VC fund, his VC fund, their employees

01:02:36.800 | cannot he cannot pay his employees on Monday, Lord. And so, yes, I do think funds could shut down.

01:02:43.520 | Coming out of this it I think that companies that were call it, you know, 75% distressed

01:02:50.320 | are done for now, no one's going to step in and bridge them and fund them. It's going to

01:02:54.480 | accelerate a lot of shutdowns, because people are now cash is king now cash is Kinger, right? It's

01:03:00.000 | like a big shift. I think that was really well said. I think you're right about all that. Jay,

01:03:04.480 | how you tweeted that you think this is a cause of 68 freeze and dealmaking activity. I think

01:03:09.280 | that's more or less right. You're right. Because you know, all the VCs out there have to think

01:03:13.680 | about shoring up their existing portfolios. Exactly. What if you got companies that are

01:03:17.360 | now in distress, they're perfectly good companies. You got to focus on maybe you're going to make

01:03:21.200 | winners, you're picking one or two winners, you know, you're and you're going to focus on that,

01:03:25.200 | you're going to say, you know what, the rest of them could be good, but I can't,

01:03:28.000 | it's going to be a tough decision. I have three open deals right now. That we're doing, I now have

01:03:34.400 | to figure out how to get those deals done. And I have four companies that are in this payroll

01:03:39.280 | situation in a major way. So now I've got capital. And I've got to, and we're not personally affected

01:03:46.240 | by the Silicon Valley Bank thing, thank God. But now we have to do triage the known winners in your

01:03:52.480 | portfolio that did nothing wrong. Or do you make the next three investments or four investments,

01:03:58.000 | and I'm going to make good on those three investments. But next month, maybe not. Maybe

01:04:03.360 | next month, I'm taking off and I'm focusing on the portfolio. And I think that's what's

01:04:07.200 | going to happen writ large. We're in triage mode now, full on triage mode. If this doesn't get

01:04:14.480 | resolved, if they can't get those, Jim, what do you think? This dark, I had a meeting three weeks

01:04:20.480 | ago with a US LP. And you know, you guys know how I run this business here. But it's there's,

01:04:28.800 | there's like a lot of risk management, you know, we think about this stuff a lot. And

01:04:33.680 | the message that came back to me was, I don't think risk management is worthwhile in venture,

01:04:39.600 | I didn't understand where that was coming from. Because if you're investing your money across

01:04:45.840 | a very risky asset class, you have to be always thinking about how you could lose money.

01:04:51.280 | And I think that venture has always romantically been described as like buying lottery tickets.

01:04:56.480 | And so it doesn't matter if you lose. But when you have that kind of attitude, you just become

01:05:02.960 | super complacent. And you don't think about left tail risk, you only think about right tail

01:05:07.600 | outcomes. And this is an example of like left tail risk that came out of nowhere that could

01:05:13.120 | wipe out entire portfolios. So you had, you know, folks invest into funds that spent a few years,

01:05:21.360 | probably 2019 2020 2021, really misallocating money, right, writing ginormous checks into

01:05:29.920 | companies that valuations that didn't make sense, who then went and burned it. And now what little

01:05:35.920 | cash they had left may also be gone, which means those valuations are even more impaired, which

01:05:40.800 | means that the LPs that gave them the money are even more underwater. And that cycle, I think,

01:05:45.520 | is really terrible. That'll take a so maybe this is the wake up call, where now risk management is

01:05:52.000 | actually in vogue and cool. And it's important to know this stuff. I don't know, we have breaking

01:05:56.160 | news. While we're taping this, the Department of Financial Protection and Innovation of the

01:06:00.160 | state of California has published findings on SVB, we'll pull it up on the screen for the besties to

01:06:05.280 | respond to on March 8 2023. The bank announced a loss of approximately 1.8 billion from the sale of

01:06:11.360 | investments. We've talked about that already. On March 8 2023, the banks holding company announced

01:06:17.680 | it was conducting a capital raise despite the bank being in sound financial condition prior to March

01:06:22.320 | 9 2023. Investors and deposits reacted by initiating withdrawals of $42 billion in deposits.

01:06:30.240 | So that would be over 20% I think of the of the total deposits from the bank on March 9,

01:06:35.600 | or even more 2023 causing a run on the bank. As of the close of business on March 9, the bank had a

01:06:42.080 | negative cash balance of approximately 958 million. Despite attempts from the bank, with the

01:06:47.680 | assistance of regulators to transfer collateral from various sources, the bank did not meet

01:06:52.000 | its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the

01:06:57.280 | bank to be incapable of paying its obligations as they come due. Right. And the bank is now

01:07:00.880 | in some beginning $42 billion withdrawals is 25% of total deposits. But 42 billion is greater than

01:07:10.080 | the 14 billion of cash they had on hand, and the 26 billion of liquid securities that they had.

01:07:16.000 | So you add those two up together, you're at 40 billion. And then to get more cash,

01:07:20.240 | they're gonna have to sell a bunch of loan portfolios. And selling loan portfolios,

01:07:24.160 | you got to package them up, it takes weeks or months to do that, and they're going to be sold

01:07:27.040 | at distressed prices. So this is where a classic run on the bank problem actually causes a decline

01:07:33.440 | in the asset value of the business and the assets that they own. Because if you have to go and turn

01:07:38.080 | around and sell those assets in the market, super fast, you're going to take a huge loss. You guys

01:07:42.000 | remember that movie, Margin Call with Demi Moore, and what's his name, and they make this plan to

01:07:48.080 | go and mark and they're like, we gotta sell. Swayze. No, not Patrick Swayze. No, the Jeremy

01:07:53.920 | Irons, Jeremy Irons, he plays the best character. He's like the chairman of the bank. And they're

01:07:57.920 | like, we have to sell all this, but we're going to take a huge loss. And they make this big trade

01:08:01.840 | that happens at the beginning of the morning. But that's what happens when you have to sell a lot of

01:08:05.520 | assets very fast. As you guys know, you end up selling them at a discount. So the rate at which

01:08:10.160 | deposits are coming out of the bank can actually impact the asset value held at the bank. And

01:08:15.680 | that's fundamentally what a run on the bank causes. And the irony is, as they point out,

01:08:19.840 | the company was fundamentally financially sound, they had enough assets marked at the current

01:08:24.320 | market value or whatever, to meet all of their obligations. But the rate at which assets started

01:08:28.720 | to get pulled out is what drove those that drove the company, the bank into distress. And if you

01:08:33.920 | think about it, it's an ironic point of view on Silicon Valley. Because Silicon Valley operates

01:08:41.040 | with such we all joke about what a herd mentality and what an incredibly tied and deep network

01:08:47.360 | Silicon Valley is. We all got dozens and hundreds of texts and messages from friends, colleagues,

01:08:53.120 | co workers yesterday, all relaying the news about what they were going to do. And as soon as that

01:08:58.960 | happened, that's how tightly intertwined Silicon Valley is. Within 24 hours, every CEO and every

01:09:04.880 | venture capitalist was on a chat group or on a message group with other people in the valley.

01:09:10.720 | And once there was any indication of panic, the entire market flipped. And you guys saw this,

01:09:15.680 | we all saw this within 24 hours, the beginning of the day yesterday, it was like it, they'll get

01:09:19.120 | through it, it'll be fine. They just took a little markdown on their portfolio, they got plenty of

01:09:22.880 | assets. But then it's like, well, founders fund said we should probably get out. Okay, well,

01:09:26.960 | founders fund is getting out, maybe we should get out before everyone else does. Well, we got to get

01:09:30.320 | up before everyone else does. Let's go now. I'm getting out right now. I'm telling my best friend,

01:09:33.440 | I'm getting out right now. And then everyone tells their second best friend. And then all of a sudden,

01:09:36.720 | the whole valley knows it. And then the whole valley is running for the door. And this is a

01:09:40.080 | really interesting and unique scenario. It's not like the classic consumer run on the bank.

01:09:45.600 | Where you're trying to pull cash out. It's the Silicon Valley 24 hour cycle of we all got to do

01:09:50.960 | it because everyone else is doing like what we're seeing with investing cycles in Silicon Valley,

01:09:54.880 | where everyone chases and these bubbles emerge. The reverse I think happened yesterday,

01:09:59.200 | where the herd mentality drove us all to rush for the door as quickly as possible. You know,

01:10:03.360 | I'm not sure that that might be why it's not as much of a contagion, you know, as you might expect

01:10:09.040 | elsewhere, because places other kind of regional banks don't have the same sort of intertwined

01:10:14.080 | in this, as we saw with all the depositors here in Silicon Valley Bank, I don't know.

01:10:17.840 | This is where I think that describing what happens to panic kind of misses the

01:10:25.440 | fundamental rationality of the response. So true, by the way. Yeah. So it does seem like a panic.

01:10:31.680 | But that doesn't mean that each individual decision makers motivation is panic. I actually

01:10:36.000 | think it's a rational upside downside calculation. I mean, this is all game theory. So if you think

01:10:43.200 | that there's a risk of other people pulling out their assets, and in fact, you're hearing

01:10:47.200 | that they are, you don't want to wait and be the last one to leave. And so you think about it,

01:10:52.880 | there's no penalty or downside to taking your money out. Right? So the downside of taking

01:10:59.840 | your funds out immediately is zero. And the upside is you might save 100% of your money.

01:11:04.240 | So it's a rational decision when confidence is lost to take out your money. And in fact,

01:11:10.560 | it was rational. There were a bunch of VCs, not a lot, but some of them tweeting yesterday,

01:11:15.120 | that, you know, SVB has been a great player in the ecosystem for 30 years,

01:11:18.880 | we should show our support right now by not taking our money out. Well, guess what,

01:11:23.120 | what happened to them? They got stuck. And now their money is frozen. And they're not sure

01:11:27.680 | whether they're gonna get, you know, pennies on the dollar or not. Whereas the people who

01:11:31.280 | rushed for the exits yesterday got their money out. It's prisoner's dilemma. It is a prisoner's

01:11:35.680 | dilemma. But here's the thing. It's not even about anymore, whether the institution is solvent.

01:11:42.880 | It's about whether there's confidence. And I think there is a risk now of contagion spreading

01:11:49.040 | to these other regional banks, because people aren't sure. And there's already huge cash outflows

01:11:54.000 | leaving these other banks, because why take a chance? The game theory of it is,

01:11:58.000 | move your money out until this is over. And if you're okay with, you know, moving it back

01:12:03.520 | in a few weeks, if it turns out not to be around the bank, that's fine. So, a lot of this can be

01:12:07.760 | self-fulfilling. You have to remember that runs on the bank, Friedberg, you said this 100 years ago,

01:12:12.560 | were extremely common. Every decade, there would be a giant financial panic, and there'd be a run

01:12:18.160 | on the bank, run on many banks. And the only way that the federal government stopped it was by

01:12:22.320 | introducing FDIC. And they said to depositors, your money is safe. And at that time, $250,000

01:12:28.640 | was enough. The problem we have is that with these business banks, $250,000 is not enough.

01:12:33.440 | So, all of a sudden, there's going to be a crisis of confidence. If you think a business bank can

01:12:38.480 | go under, again, you're just going to leave all these regional banks, you're going to go to the

01:12:42.720 | top four, and that's going to be it. So, I think that the situation right now is really dynamic.

01:12:48.720 | And if the Fed does nothing and just says, "Oh, you know, these depositors should have known

01:12:56.560 | better," you know, the losses on them, then I think the rational reaction for depositors at all

01:13:03.280 | of these other banks would be just to leave. Because I don't think depositors are in a good

01:13:07.520 | position to assess the liquidity and creditworthiness of a bank. I just don't think they

01:13:14.320 | are. I think stockholders are. They're the people who should lose all their money if the bank goes

01:13:18.640 | under, but not depositors. Any advice or takeaways for founders and capital allocators going forward?

01:13:24.560 | Obviously, have your money in multiple bank accounts.

01:13:27.680 | I sent you guys a list that was just published of all of the funds that custody at SVB,

01:13:32.480 | and it's unbelievable, the list. It's every single major VC in Silicon Valley.

01:13:39.120 | Wow. Where'd you get this?

01:13:40.400 | I have my ways.

01:13:41.200 | Oh, extracted from SEC filings. Got it. Okay. Thank you. Yeah. This is amazing. Wow.

01:13:46.560 | Holy shit.

01:13:47.520 | I mean, everybody's in there.

01:13:48.560 | [crosstalk 00:10:50]

01:13:49.280 | Excel, 500, Sequoia. We're going pretty fast here, but yeah. Trying to get a fund.

01:13:56.160 | I mean, this is my point. By the way, all these guys-

01:13:59.360 | I feel very fortunate that we were out. A few months ago, when we were talking about venture

01:14:04.240 | debt on the pod, I didn't believe that SVB should be in this business. So I told-

01:14:09.200 | Oh, look, there's Kraft. There's Kraft.

01:14:10.800 | No. Well, hold on. I'll tell you. Does it say how much money we got in there?

01:14:15.040 | Yeah. Go to the right.

01:14:16.800 | I'll tell you what happened is, so after the conversation we had on the show about venture

01:14:20.640 | debt, I'm like, "I don't really like that SVB is in this business." So I told my guys,

01:14:24.720 | "Set up an account somewhere else." So we did that. So we moved our firm accounts over,

01:14:28.720 | and we were just using SVB to make warehouse loans or whatever. So I thought they were just

01:14:34.560 | a lender to us. So yesterday, when all this stuff went down, I said to our guys, "We're out of there."

01:14:41.120 | They're like, "Well, actually, we had about $45 million that we were about to distribute to LPs."

01:14:46.400 | And I'm like, "Whoa, that's crazy." So we were able to sweep that to

01:14:49.680 | an account we used to make in-kind distributions. And then we got on the phone, and we called as

01:14:55.200 | many portfolio companies as we could to get them out. And we got a huge number of them out. But

01:15:00.240 | unfortunately, some of them didn't get out. Here's the thing that I think people in Washington don't

01:15:03.520 | understand. We're doing this with the next set of banks. The triage is still happening.

01:15:08.400 | Guys, I will tell you, look, Sax, I appreciate the siren call, but I think the only way that

01:15:15.040 | what you're saying, because you're saying that triggers the next siren call and the

01:15:20.080 | contagion spreads, I'm not blaming you. I'm just saying it's a reality. And you're right.

01:15:24.080 | The game theory optimal way to play this as a depositor is to move your money out and get it

01:15:28.880 | somewhere that it's completely safe. And you know, you have your cash secured or buy a security in a

01:15:32.400 | brokerage account where it's totally safe, and it's registered with a securities exchange or

01:15:36.800 | something. But in the meantime, for this to get resolved, there has to be a bear hug solution

01:15:44.800 | offered up this weekend. I'll say it again. Yeah. In order to stop the next set of siren calls,

01:15:50.480 | to drive the next siren call, listen, this is the thing I hate about the run on the bank

01:15:56.320 | conversation is that if you warn people that there's a possible run on the bank happening,

01:16:01.440 | you're actually creating the run on the bank. That's why it's so pernicious when these things

01:16:05.520 | get started. And yesterday, we were calling all of our portfolio companies, because we were warning

01:16:10.960 | them because our obligation was to them. But we weren't, you know, I don't think we were putting

01:16:15.200 | out like a siren to the world. And by the afternoon, it was really clear that if they listened and got

01:16:20.640 | their money out, they were in much better shape than ones who didn't listen. So this is the

01:16:24.160 | pernicious thing is that every individual actor has to do what's in their best interest. And

01:16:29.280 | we're not trying to start a run. Sorry, hold on. But we know things we know,

01:16:35.680 | that people are very close to us big players are withdrawing their money from other banks right now.

01:16:40.320 | So let me just finish my point. My point is, what you're saying makes a ton of sense. And

01:16:48.480 | it's gonna cause this, as you described, kind of pernicious escalatory problem. And the only way

01:16:54.480 | to stop it is a bear hug, which may not cost the taxpayer anything. If the Fed or some federal

01:17:00.800 | agency stepped in and said, we are going to backstop all of these banks with all of these

01:17:05.840 | deposits with cash, and we're going to guarantee it today. And here's a $500 billion facility.

01:17:11.280 | And just by saying that, everyone stops trying to pull their money out. And you don't actually

01:17:16.720 | need to backstop it with any money. It's, it's, it's already started. So,

01:17:20.960 | Nick, if you just the link that I sent you in the in the group chat, can you just throw that link up

01:17:25.920 | there? I think this is the best proxy for what Saks is talking about. So sort of, I think,

01:17:31.120 | very unemotionally, how would we know that there is a contagion that's afoot, you would look at the

01:17:37.600 | equity layer of all these regional banks. So what is this, this is the iShares regional banks ETF.

01:17:43.520 | And what you start to see is this decay, and go to the one week view, Nick, please,

01:17:49.600 | it just starts to fall off of a cliff. And so why is this happening? Well, it's happening because

01:17:54.640 | the equity tier of these banks are now increasingly worried that their equity will get wiped out.

01:18:02.000 | And so that's why they're selling. And so the I think what David said is already afoot,

01:18:07.520 | unfortunately, it starts at SVB, but forget the name for a second and take Silicon Valley out of

01:18:13.520 | it. This is a top 20 bank that now is in the receivership of, you know, the authorities.

01:18:19.440 | And so there does need to be something that needs to happen in really short order, because

01:18:24.560 | what's to prevent bank number 35. Let me just say it again, if a federal agency comes in,

01:18:29.520 | if the Fed comes in and says, you know what, we're going to backstop all of these banks.

01:18:34.000 | And we're going to put $500 billion behind it. And we're going to guarantee that all these deposits

01:18:38.080 | are going to be made whole. It stops the panic at that point. And you don't even have to put up any

01:18:43.360 | money. Because as soon as it's a first derivative problem, it's a feedback loop. As soon as you stop

01:18:47.760 | people from doing the withdrawals, the whole market subsides, you don't actually need to

01:18:51.760 | unplug it. And I think that's what needs to happen this weekend. That's what should happen

01:18:55.040 | plug it today is they number one need to go get Silicon Valley Bank handed over to a big balance

01:19:00.720 | sheet and guarantee that balance sheet that they're going to make money by taking this thing

01:19:03.920 | on. And number two, they got to make a statement, we got another 500 Billy for you. Where's the

01:19:07.840 | president? Where's the Allen? Well, they'll make a profit on it, too. So I mean, they don't need

01:19:11.600 | to use any money to do it. Right? The thing that's missing in our system is that there's no FDIC for

01:19:17.600 | $25 million accounts. What like 250 is not an effective amount. That's a personal account.

01:19:23.120 | It's for a small business. Businesses need confidence in our economy and our banking

01:19:27.520 | system, or the whole thing starts to unspool. So what the quid pro quo should be is you can get a

01:19:32.560 | 25 million FDIC business banking account, and the bank is highly restricted in what it can do with

01:19:38.640 | that money. You can't put that money in fugazi venture debt, you can't put that money in laddered

01:19:43.760 | 10 year bonds that don't get marked to market. It's only highly liquid, secure, mark to market

01:19:49.280 | assets. And the downside of that for the bank is they'll make less money and pass on less interest

01:19:54.880 | to the business, the depositor, the shareholders. So what? That's the way it should work.

01:20:00.480 | How are stable coins looking like a better option right now? I mean, the crypto guys right now are

01:20:05.120 | like, what did you say? They're not, J Cal. They're not. It was a joke.

01:20:08.720 | Nothing can revive the crypto market as we're seeing today, even in a run on the bank,

01:20:12.480 | which is exactly what everybody was afraid of in a Bitcoin world. That thing is down 10%.

01:20:16.320 | So I just want to recap whenever whenever liquidity, whatever the reason for that

01:20:22.240 | Chamath is just that what we've seen is that liquidity is all correlated. So when people

01:20:27.680 | are panicking about the state of their finances, and worried about getting access to their cash,

01:20:32.080 | the first thing they dump is crypto, because it is very liquid. So everyone is trying to free up

01:20:36.720 | cash right now. I just want to be clear as the end of the show here, we were dancing around,

01:20:40.880 | is this going to be a contagion? And I think what we know, and what we're seeing is

01:20:46.560 | the the next dominoes are already falling. And so

01:20:51.600 | I'll be a contagion. It cannot be a contagion. We have to stop it. That's

01:20:55.440 | the point. That's your feeling. And I agree with you. But I just want to make sure people

01:21:00.160 | understand we started this. We didn't want to go there. You know, I think with some reticent

01:21:05.520 | reticence to going there. Let's let's put it this way. If you if anybody,

01:21:10.240 | if you have initiated a wire in the last 24 hours, you are worried about contagion. Yes,

01:21:17.200 | if you're in DC, and you have any ability management matters, and if you have any

01:21:21.120 | risk management, influence what's going to happen this weekend, we strongly advise

01:21:26.080 | unplanned someone comes in and bear hugs the market this weekend and says, we will not let

01:21:32.880 | contagion happen with a very big slug of capital to support it, that will likely not even be needed

01:21:39.120 | to support it. Because once you say that the contagion will start got a comma.

01:21:42.720 | Yeah, free freeberg, we're gonna know on Monday, whether these regulators have in the administration

01:21:48.000 | know what they're doing at all. The other black swan problem is that this weekend,

01:21:52.720 | we will find out what some of the unintended second and third order consequences are going to be

01:21:57.680 | of SVB being in receivership. This weekend, we talked a little bit about the pipes problem.

01:22:03.040 | But there may be several other businesses and other other institutions and companies that we don't

01:22:07.280 | know about that may trigger another set of cascading effects that are unrelated to a banking

01:22:12.640 | problem, but could drive some more significant business and economic problems that we're going

01:22:16.800 | to kind of probably end up talking about next week. So you know, this weekend, I think with

01:22:21.600 | payroll, but there are other things that this money goes towards, you know, mortgages or rents.

01:22:27.840 | So the cascading effect of this if people stop paying their rents, if people stop paying mortgages,

01:22:32.320 | I mean, real estate. Yeah.

01:22:34.320 | Listen, Biden, Biden visited Kiev instead of East Palestine. Yellen visited Kiev instead

01:22:40.560 | of Silicon Valley. Do these people know what's going on here?

01:22:43.440 | Come home.

01:22:44.000 | They promised more financial assistance for Ukraine. And they're saying they're monitoring

01:22:48.880 | the situation here. We're in the process of what could be a run of banking failure.

01:22:54.320 | What's the bill for Ukraine this month? Yeah.

01:22:54.880 | Get on the case.

01:22:57.440 | The bill for Ukraine this month versus this bailout is, you know,

01:23:01.440 | probably the same. So I think we have to really think this through, folks.

01:23:04.400 | Yeah, you're gonna get

01:23:06.720 | Well, no, on Monday, where these people have a clue or not.

01:23:09.280 | No, they have to be on TV tonight or tomorrow. This this has to be a presser on Sunday.

01:23:14.000 | Hold on. I think I think a lot of these guys do know what they're doing. So let me just say it

01:23:18.000 | to them in language they understand. Folks, when you look at the equity tier of these regional banks,

01:23:24.400 | people are liquidating the equity tier, because they know that that is the first domino to fall.

01:23:31.200 | If banks go into receivership, please act accordingly. You can see it in the ETFs.

01:23:37.520 | You can see it in the trade flows. This is not a Silicon Valley problem anymore.

01:23:41.760 | It is a regional bank problem. And it will get worse unless you do something to make it better.

01:23:48.080 | Right. And I and Jake, I just use the word bail. I don't like that word because

01:23:51.600 | No, not a bailout, backstop.

01:23:53.200 | There were big, you know, too big to fail banks in 2008. In the financial crisis,

01:23:57.920 | who did get bailed out, those people should have lost the value of their stock.

01:24:01.440 | Okay, that was wrong. That's not what we're talking about here.

01:24:03.760 | Depositors.

01:24:04.000 | SGB is wiped out already. What we're talking about is protecting depositors.

01:24:07.680 | These are people who trusted that when they put their money in a top 20 bank,

01:24:11.760 | that our regulatory system is compliant, that they will not lose their money. When it says on

01:24:16.960 | their computer screen that my money is in a BlackRock or a Morgan Stanley mutual fund,

01:24:22.480 | or money market fund, rather, the safest instrument there is, that that money is

01:24:27.360 | where it's supposed to be. And if regulators allow that bank to put their money in stupid

01:24:32.480 | assets that are not marked to market, and that's why they shut down, that is not a good reason

01:24:37.200 | for depositors to not get their money.

01:24:39.360 | 100%.

01:24:39.680 | We're taking care of depositors here and not bailing out stockholders.

01:24:43.120 | Yes. This is not for the executives at the banks. It's for the depositors who did nothing wrong,

01:24:48.400 | and nor did their employees and their customers and the innovation that they're working on. All

01:24:52.320 | right. This has been a great all-in podcast. Sorry we didn't have time to talk about the

01:24:56.720 | shaman, QAnon shaman. I know that's a passion project for Hugh Sachs,

01:25:02.000 | but you can announce your Kickstarter for him and your GoFundMe for the QAnon shaman.

01:25:06.320 | For you, the shaman.

01:25:07.760 | For the shaman. But where's the bulldog? Give me that bulldog one more time.

01:25:11.200 | The shaman is an intersection of three, of a very interesting Venn diagram. He is

01:25:18.880 | very athletically fit, incredibly hairy, and oddly tattooed. That's a trifecta that you rarely see.

01:25:26.800 | You rarely see that.

01:25:28.480 | Also cultural appropriation. So yeah, we have to keep that in mind. And conspiracy theories. I

01:25:32.960 | mean, this guy's got it all. Are we going to play poker this weekend and just, like as the meteor is

01:25:39.120 | coming towards Silicon Valley?

01:25:39.520 | It's kind of sad. He's kind of an odd, seriously, the shaman, what's his name? Jake?

01:25:45.520 | He doesn't seem like he's all that.

01:25:48.160 | No, he's a guy who has diagnosed mental illness, but he's completely non-violent. He's completely

01:25:53.120 | non-violent. He actually believes in the philosophy of Mahatma Gandhi of no violence towards any

01:25:58.080 | creatures.

01:25:59.760 | He's a vegetarian.

01:26:00.960 | Yeah.

01:26:01.440 | He, you know, he's a bit of an odd duck.

01:26:03.120 | He's a Freiburg of QAnon.

01:26:05.040 | And he didn't assault anyone. He just wandered through the capital, apparently getting a tour

01:26:10.240 | from police officers who were just guiding him through it.

01:26:13.440 | He's the January 6th Freiburg.

01:26:14.080 | And he got four years, hold on a second, he got four years in jail for that because

01:26:17.600 | he became the face of an insurrection because he just looks so weird with the Viking horns

01:26:23.120 | and the face paint or whatever.

01:26:24.160 | He also made some threats to the politicians too, but yeah, I mean, it does seem like it

01:26:28.400 | might not be the appropriate sentence. He wrote a note saying, "We're coming for you." I think on,

01:26:32.160 | you have to look into the case, but he was sentenced by a Republican judge from Texas,

01:26:36.800 | and he had made threats, written threats and put them on the desks of folks.

01:26:39.760 | And he was one of the first people into the building. So I think they got him for that.

01:26:43.680 | But I agree with you. There is some compassion.

01:26:46.320 | That's how he got into the building. If he didn't break a door down or didn't smash a window,

01:26:50.000 | if he damaged property, that's one thing. If he assaulted someone, that's one thing. But if he

01:26:53.520 | just wandered through the capital, I think four years is kind of excessive. And I think the reason

01:26:57.840 | why the guy got four years is because of his mental illness. He's not able to defend himself

01:27:02.640 | the way that he should be. This is just a fundamental civil liberties issue. If you

01:27:05.920 | have any compassion at all, you shouldn't let a guy like that get scapegoated.

01:27:09.920 | There's 400 people who, of the thousands of people who broke in, who were violent and who

01:27:15.200 | got sentences of some degree, they were all settled, like, plea bargained, including his,

01:27:21.680 | they didn't go to trial. And if, you know, I think we can all agree, the violence that occurred that

01:27:26.560 | day is, you know, should be punished and the nonviolent stuff should be a speeding ticket,

01:27:32.080 | you know, we don't need to –

01:27:33.320 | I think three categories, Jason. I think violence, the assault on cops and so forth,

01:27:38.000 | punished most severely.

01:27:38.640 | Full extent of the law.

01:27:39.600 | Yeah.

01:27:40.080 | Then damage of property and then –

01:27:41.680 | Full extent of the law.

01:27:42.880 | People who just trespassed or wandered through who may not even have known

01:27:46.560 | they were trespassing.

01:27:47.440 | Probation.

01:27:48.000 | That's not, that's not jail time. That's not a felony.

01:27:50.720 | Yeah, I mean, we want to promote peaceful protests. If they had come

01:27:54.160 | with guitars and sang Kumbaya and We Shall Overcome, we'd be having a different discussion

01:27:59.120 | here. Instead, they beat cops, you know, and you can't beat cops up. Sorry.

01:28:02.480 | Those ones go to jail.

01:28:03.680 | Yeah, period. Full stop. We're in agreement. Okay, everybody, this has been another amazing

01:28:07.360 | all-in podcast. Sorry we couldn't get to all the news, but we felt that this required

01:28:12.160 | a big unpacking for the sultan of science, the dictator, and the Rain Man. I am the

01:28:20.240 | undisputed world's greatest moderator. We'll see you next time on the all-in podcast.

01:28:23.520 | Not this week.

01:28:24.480 | Not this week.

01:28:26.640 | [Music]

01:28:28.800 | [Music]

01:28:31.520 | Rain Man David Sacks.

01:28:32.960 | [Music]

01:28:58.960 | We should all just get a room and just have one big huge orgy because they're all just useless.

01:29:02.960 | It's like this like sexual tension that they just need to release somehow.

01:29:05.840 | [Music]

01:29:08.000 | That'll be. You're a B. We need to get merch.

01:29:14.720 | [Music]

01:29:16.720 | [Music]

01:29:19.600 | [Music]

01:29:21.840 | I'm going all in.

01:29:25.040 | ♪ ♪ ♪

E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

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