硅谷银行崩塌：初创企业的灭绝事件

David Sacks (00:00:00): Hey, guys. I got a little friend here. Jason Calacanis (00:00:03): What? Aw. David Friedberg (00:00:04): Yeah. I David Sacks (00:00:04): think I'm gonna start a new podcast. Jason Calacanis (00:00:06): Is that a Bulldog? David Sacks (00:00:07): And I'm gonna have a Bulldog as my mascot. Jason Calacanis (00:00:10): You bought a bulldog? Oh my god. You got my mascot. David Sacks (00:00:14): Yeah. I went I took over your mascot. Jason Calacanis (00:00:16): Well, look at that. Now you're actually likable, Zach, David Friedberg (00:00:19): Are you trying to improve your image? Yeah. That's all I just say. Jason Calacanis (00:00:22): Saks is so unlikable that he has gotten a bulldog. Chamath Palihapitiya (00:00:26): Oh my god. Saks show me his face again? Is it David Sacks (00:00:28): him or her? Him. Chamath Palihapitiya (00:00:30): What's his name? David Sacks (00:00:31): His name is Moose. Jason Calacanis (00:00:32): Oh my god. Oh my god. You got a bulldog so Speaker 5 (00:00:36): cute. It's my David Sacks (00:00:36): it's really my mascot, Jake. I'm going solo with my podcast. I'm gonna call it this week in technology. David Friedberg (00:00:40): And in order to exist, it's it's Jason Calacanis (00:00:42): Leo reporting podcast. Please don't start anymore trademark watches. Alright, everybody. It's an emergency podcast. Silicon Valley Bank has been taken over by the FDIC. I am David Sacks (00:00:52): -- Chamath Palihapitiya (00:00:52): Is this the Twist live stream? Am I on the twist livestream? Jason Calacanis (00:00:55): I mean, guys, if you couldn't just interrupt me well, I'm never gonna get through this. It's a lot to get through. The world needs to hear our opinions. If you care David Friedberg (00:01:02): about us, click like and subscribe. Yeah. You can click the like and subscribe button to like and subscribe. Make sure Jason Calacanis (00:01:07): you search for this week in startups and -- Right. Right. Chamath Palihapitiya (00:01:10): And really David Sacks (00:01:10): -- -- Chamath Palihapitiya (00:01:10): in the comments. Jason Calacanis (00:01:11): If you don't get enough Jay Cal, Speaker 5 (00:01:13): you can Jason Calacanis (00:01:13): get me four more times a week. The name of the other podcast is this week in startups. Thanks for the free promo, guys. It is a huge day today in Silicon Valley. We haven't seen a black swan like event happen here in a long time since David Sacks (00:01:26): 2008 Chamath Palihapitiya (00:01:27): thought the last time was when you published The Book Angel. David Friedberg (00:01:30): Oh, god. We have to get Jason Calacanis (00:01:33): to work Chamath. I saved the jokes. Chamath Palihapitiya (00:01:36): I'm trying to give you a call to open. Jason Calacanis (00:01:38): We did that earlier. Here we go. David Sacks (00:01:39): 3, 2. David Friedberg (00:01:42): Witter's ride. Rainman, Jason Calacanis (00:01:44): David Sachs. And I said, Speaker 6 (00:01:49): open source it to fans Jason Calacanis (00:01:56): Okay, everybody. It's been a while 36 hours here. We're gonna get into Silicon Valley Bank imploding. The FDIC has shut down Silicon Valley Bank. And there's many different things we have to discuss. With me today, as always, the dictator himself, Chamappaleh Papatia, the rainman David Saxx, and the prince of panic attacks no more, his wired's cleared David Friedberg, the Sultan of Science. Welcome boys. How is everybody just to start this off? Contextually, the last twenty 4 hours, can you can you recall a time in our careers where it felt this acute or insane or intense? 2008 and COVID. Okay. David Friedberg (00:02:36): And I think that this is right up there. Could be 2, probably David Sacks (00:02:40): 3, David Friedberg (00:02:41): In terms of the level of panic and concern, the problem is we're in the middle of it. We don't know what's gonna happen this weekend, so there's a lot of anxiety right now, a lot of panic going on. And a lot of like, unlike COVID and o 8, really acute effects that many companies and investors are actively dealing with right now, like, not just a few, thousands of companies that are really in a state of, like, distress right now. So it is potentially from its Silicon Valley perspective worse than 08 or COVID. David Sacks (00:03:12): Oh, for sure. For sure. I mean, this this is basically a Lehman sized event for Silicon Valley. Remember when Lehman Brothers went out of basically filed for bankruptcy in 2008 started the whole financial crisis. the federal authorities thought that the best plan for Lehman was to file for bankruptcy. They didn't try to save it. And that basically led to a cascade where the whole financial system almost collapsed. I think that SVB, this is a Lehman sized event for Silicon Valley. And there's there's 2 big things happening. 1 is the impact on the startup ecosystem. So you're seeing probably thousands of companies now cannot make payroll in the next few weeks because their money is trapped and tied up at Silicon Valley Bank, which is now under receivership. So if you wired your money out yesterday, you're good. And a lot of people managed to do that, but there are a lot of people who were had wires in the hopper didn't make it. Today, logged into the website, can't log in. The money is just frozen. And we don't know when they're gonna be able to get their money out or how many cents of the dollar you're gonna get. So, basically, the whole startup ecosystem is in peril. I think Gary Tan called it an -- Jason Calacanis (00:04:23): Extinction level event. David Sacks (00:04:24): Yes. Exactly. That was a good term. And just to be really clear, this is not Big Tech at risk. I know there's a lot of people out there who don't like the idea of bailing out Big Tech. Jason Calacanis (00:04:33): This is not Google. It's not Amazon. David Sacks (00:04:35): Those companies have plenty of cash. They're fine. This is small companies. Companies with 10 to a 100 employees, and you're looking at maybe thousands of them just being wiped out for no reason, they didn't do anything wrong because of this. This could have a very damaging effect on the startup economy and the whole United States economy. This is LittleTech. These are the future companies that will keep the United States competitive versus China and the rest of the world. And then the other big thing that's happening and this all happening in real time is a regional banking crisis. Because when depositors see that their money was not safe at SVB, which was a top 20 bank, that far as everyone knows was in regulatory compliance. Nobody has said that SVB wasn't compliant. As far as we know, they had a regulator seal of approval. And now you find out your money was not safe and it's not FDIC insured above $250,000. So the conversations we're all seeing in our Chamath groups with leading investors is why the hell would you keep your money anywhere but JPMorgan or a top 4 bank? And so I think that unless the Fed steps in here over the weekend, we're gonna see potentially a a run on the regional banking system, a cascade like we saw in 2008. David Friedberg (00:05:53): Well, Saks, let's let's just take a step back before because I think that you're right, but we should talk about why that happens, the contagion drivers. Jason Calacanis (00:06:01): And just so people know, Silicon Valley Bank is used by 50% of venture backed startups end, I would say, the majority of venture firms also have their money there. So this morning, I got a note from a fund I'm an LP in they had 1,000,000 of dollars that they can't access to invest in start ups. So, Shamalff, there are many products and services that Silicon Valley provides. 1 is, you know, banking services to start ups. Another is to venture capitalists. They do the mortgages for banker for venture capitalists and for founders as well. They provide those kind of white glove services. But you also mentioned in our group chat, They also provide loans to GPS, general partners to people who run venture firms. So the impact could also hit there. Maybe you could explain what that is. and then we'll get it to what happened here. Chamath Palihapitiya (00:06:50): Yeah. Well, I think it's important maybe actually just for Friedberg to just explain what's happening. But Okay. And maybe maybe let me just do the lead in and then Friedberg can do the details. But for for those that are far away and aren't even sure what's going on, The basic problem that we have right now is in the last thirty six hours, a key part of the financial plumbing of Silicon Valley has basically been turned off. And as a result, 1,000,000,000 of dollars of deposits have basically been frozen. It means that people can't pay their bills. It means that people can't access their deposits. It means that credit lines could be in default. It means that payroll can't be met. And so as a result, we have this potential contagion on our hands. But in order to understand it on a packet, I think it's important to explain exactly how this came to pass. So let me just hand the ball to Friedberg, and then we can talk about some of the implications of which there are many. Jason Calacanis (00:07:47): Yeah. Before Freeburg starts with the why, just the what that's happened as well, this all started on Wednesday evening when Silicon Valley Bank's CEO published a letter to shareholders announcing that the bank was rebalancing its balance sheet by selling tens of 1,000,000,000 of dollars, worth of mostly US securities. I'm sorry. Treasuries. And then they announced they would raise some money and sell some shares in Silicon Valley Bank the then the shares in Silicon Valley Bank as a publicly traded entity dropped 60% on Thursday, then another 60% on Friedberg course, then the entire world got focused on this, and then every venture capitalist started telling or, I would say, the overwhelming majority of venture capitalists told their founders to get their money out of SCB, then you had a classic run on the bank. A small number of venture capitals gave advice to say, hey. We should support Silicon Valley Bank. I understand that, but it turned out to be really bad advice. And then trading was halted on Friday morning, pending news. And then finally, the FDIC shut down Silicon Valley Bank at noon on Friday, and there's a lot of speculation of what will happen on the over the weekend. But maybe you could walk us through technically what happened to Silicon Valley Bank and why they had this cash shortfall and this yeah. We explained the run of the bank, basically. But what led up to this David Friedberg (00:09:00): The irony is it really was and is prior to the, quote, run, a financially solvent business. So I I have a few slides. If you're on YouTube, you can see that we pulled one slide that was kind of made by us and the other set that come from Silicon Valley Bank's actual presentations. But if you look at their balance cheap. This is from the end of the year David Sacks (00:09:18): 2022. David Friedberg (00:09:20): You can kind of look at the, you know, stuff that they owe their their liabilities, which is what they owe their customers that sits in deposits. because when customers give you cash and a deposit, you owe them that money back. So that sits as a liability, and then they had some other debt. So in total, Silicon Valley Bank at the end of the year had about a David Sacks (00:09:37): $195,000,000,000 David Friedberg (00:09:39): in liabilities, a 173,000,000,000 of customer deposits that they owe to customers and $22,000,000,000 of other debt. And then they take those customer deposits and they invest it in in a number of securities. And the way that a balance sheet business like this bank would operate is, you know, the customers have access to their cash anytime they want, but in order for the bank to make money, they make longer duration investments. And those longer duration investments give them the ability to earn money on those longer duration investments more than they're paying the customers for the deposits. So if you look at their longer duration investments, they had about David Sacks (00:10:13): $208,000,000,000 David Friedberg (00:10:16): of total assets sitting on the balance sheet. So compare that to the David Sacks (00:10:20): 195,000,000,000 David Friedberg (00:10:22): that they owe customers and and and other debt holders. So, you know, the difference here between David Sacks (00:10:28): 208195 David Friedberg (00:10:29): is about $13,000,000,000. That's kind of the net what people would call book value of Silicon Valley Bank. at the end of the year. And of the 208,000,000,000 of assets that they had, 9 74,000,000,000 were loans, and they've got a breakdown of the loan portfolio here in a minute. 91,000,000,000 were these hold to maturity securities where they don't actually adjust the value of these on a quarterly basis, and 26,000,000,000 is what triggered this panic, which is available for sale securities, mostly treasuries. And what happened is Silicon Valley Banks deposits came in so quickly over the last couple of years that they went out and they bought a bunch of treasuries, you know, with with the cash that they got. And the problem is that very quickly David Sacks (00:11:06): -- Chamath Palihapitiya (00:11:07): Friedberg, it's actually MBS. They bought a bunch of MBS. David Sacks (00:11:09): 10 Chamath Palihapitiya (00:11:09): year duration of bills. Jason Calacanis (00:11:10): An important to note, of the David Sacks (00:11:11): 208,000,000,000 Jason Calacanis (00:11:13): that they have the book value, Friedberg, there was a a whatever, 10% if it's in cash or something. So they do have some cash there. David Friedberg (00:11:20): That's right. Yeah. Sorry. It's a good point. If you go back, so, like, you know, let's say that of the 100 of the 173,000,000,000 of customer deposits, You know, they've got 14,000,000,000 of cash, and then they've got all these treasury securities they can sell, call it, 40,000,000,000. So if 25% of customers said tomorrow, hey. We want our cash back. Theoretically, they could just dump those treasury securities, distribute the cash, and give it all back to customers. The problem is if suddenly more than 25%, wanna get their cash back, well, now they have a problem. And that is effectively what triggers the run on the bank. As soon as some folks think that others might be pulling money out then everyone rushes to be the first money out the door. And that's what triggers a classic run on the bank. There's a a statistic, I think, In the 19 twenties, there were several 100 banks that had runs every year for almost the entire decade. And these this was like a regular kind of occurrence that happened in the 19 twenties. that are shared in a lot of our modern securities laws that are meant to kind of create the necessary liquidity provisions and how these banks are able to operate to make cash available to customers. But what happened is David Sacks (00:12:23): -- Jason Calacanis (00:12:24): So much so, by the way, Friedberg, that they made a movie. It's a wonderful life about the bank run. David Friedberg (00:12:28): So, basically, one of the bigger problems that Silicon Valley Bank. They ran into 2 big problems. Number 1 is deposit decline where VCs were not investing new money. And when they were not investing new money and startups were burning more money, then Silicon Valley had modeled they would be burning because they thought everyone was gonna reduce spend and reduce burn, and they didn't. So deposits were going down, while all these startups were burning money, no VCs were investing. So total deposits were on the decline Meanwhile, their bond portfolio, the assets that they hold on the balance sheet, also declined in value. And I and I kinda just put a really simple illustration here on why. If you have a $100 kind of face value bond that earns 2%, which is basically, you know, where these treasuries were a year ago and you and you hold that for 10 years, that 10 year bond yields a $122. If the interest rate goes up to 5%, then the that that that bond should yield a David Sacks (00:13:22): $163. David Friedberg (00:13:23): So the value of the first bond actually goes down by 25% because of the market conditions. That's how significant the value changes with just a 3% change in the interest rates. And that's effectively what happened with that available for security segment of the Silicon Valley Bank portfolio balance sheet. they had this bond portfolio that suddenly got devalued, and they had declining deposits. So when deposits start to decline, gotta make sure you have enough assets sitting on the balance sheet. So they sold a bunch of them, said we're gonna raise more money. And at that point, everyone kinda pricked their head up and said, Oh my gosh. What's crazy is in q 4, by the way, seeking alpha, this website you guys know. They had actually done an analysis and set as SVB about to blow up, and they put together a bunch of slides that highlighted why this might be the case because they saw the deposits were declining that their Their assets that they hold were basically declining in value because of the massive and very quick rise in interest rates and that SVB had bought a bunch of bonds that were long long duration bonds. So it led to a, you know, obviously, a real short term problem. If you look at the rest of SVB's loan portfolio, there's also a question of how distressed that all is. So 10% of their 70,000,000,000 plus dollars of loans is in venture debt. And venture debt is very questionable in this market. Right? because Historically, the way venture debt makes money is that they assume that VCs are gonna keep funding the companies that they're providing debt to. And if the VC stops funding the companies, then the venture debt defaults, And so if you go to the last slide in the stack, you'll kinda see SVP's performance on their venture debt portfolio. Yeah. So look at this. This is the the performance results on just the warrants that they get on their venture debt. So when you when you issue venture debt, you take a write down or you get paid back. David Friedberg (00:15:04): And then you also get some warrants. You get some a right to buy shares in the in the winners and the the start ups at work. And so the way that SVPs made money on their venture debt portfolio historically is, hopefully, they get paid back on all their loans. Some of them, they don't, but then they'll make a bunch of money on selling their warrants or or the pub companies going public, we're getting bought. And in q4 of 2022, it just fell off a cliff, and their venture debt portfolio really started to show distress. And that's David Sacks (00:15:29): 10% Chamath Palihapitiya (00:15:30): Are these realized gains, or these are mark to market gains? David Friedberg (00:15:33): This is the net gains on on their warrants. So they don't mark to market warrants. I think this is what they actually exercised and got out. So there was there was obviously a ton of exits in 2021. So they made $560,000,000 in profit on their warrants that they had in their venture debt portfolio on 2021. That number collapsed to 148 in 2022, and you better believe most of that was in the early part of David Sacks (00:15:53): 2022. David Friedberg (00:15:55): So, you know, they they didn't do a quarterly breakdown on this. This was, like, their full year numbers. But their ventured at portfolio, which is another $7,000,000,000 of capital, also distressed. Certainly wasn't gonna perform as everyone had modeled. So when you kinda start to add this all up and remember, if you go back to the beginning, they only had $15,000,000,000 of true net book value, which is the difference between their assets and their liabilities. And so if you really start to adjust, what are those assets really worth? Are they really worth what they're holding them at the book at? if people start to pull money out and you gotta sell them at a distressed price in order to give people their cash that they're owed on deposits, that's when you have a classic run on the bank problem. and then everyone tries to be the first out the door. And that's basically, like, what triggered us this week. Chamath Palihapitiya (00:16:36): Can I give you guys my little version of all of this. I think there are David Sacks (00:16:40): 3 Chamath Palihapitiya (00:16:40): buckets, but before I go into the 3 buckets, I just wanna say to David Sacks (00:16:45): all of Chamath Palihapitiya (00:16:45): the employees at these companies, I think we, the 4 of us are so truly sorry for what's going on and what you guys are going through. And then to founders that are trying to navigate this, it must be unbelievably tough. There are a few founders in our portfolio. So you know, from all of us, just know that we're thinking of you guys, and, hopefully, everybody ends up on the other side of this by Monday or Tuesday with not a lot of damage. So let let's just put that out there as sort of like goodwill and kind of good juju in the world. for the next Jason Calacanis (00:17:19): couple of years here. -- difficult weekend for people who are trying to navigate this. Yeah. I think it's well said. Yeah. David Friedberg (00:17:23): I mean, I I who didn't get paid in session center Jason Calacanis (00:17:26): in really, really tough shape right now trying to figure out how do I make payroll? And it's a big question. Chamath Palihapitiya (00:17:32): Okay. So just putting a pin in that because we'll come back to it. I think that this whole debacle, I guess, is maybe the best word. There's a little bit of blame that you can put at the feet of 3 different groups of actors, and I just wanna get your guys' reaction to this. So group number 1, and Friedberg just mentioned this, is we, the four of us have been talking for the last 18 months about the impact of rising rates. And you know we talked a lot about for example like in our portfolio my partners and I walked into every company and made them have at least enough money to get through mid 2025. Right? I've said this a bunch of times. And so that was about having very difficult conversations about making sure that you were husband in cash so that you had enough to weather any storm that came on the horizon. But it turns out that there was some group of VCs in companies that just didn't get that memo and just kept spending like nothing had changed. But when other VCs have stopped giving you money and you're continuing to spend like it was 2020, That's what caused this mismatch, and it was really the spark that lit the fuse. So I think it's a really sad commentary at some level. about the lack of governance that we have inside of some of these companies where folks are just not doing the job that they're supposed to at these board levels I think people and we've talked about this have made venture too much of a popularity contest where they are you know, glad handing and smiling and not doing the hard work of holding folks accountable. And so some handful of VCs and some handful of founders just didn't get this memo and it made what could have been a slower train wreck faster unnecessarily. So I think that that's worth talking about. Then I think if you look at what actually practically happened over the last year and a half at SVB was that they were so desirous of profits that they basically had a duration mismatch. So what is that? They imagine you get a job And, you know, somebody's like, hey, Friedberg. I'll pay you a David Sacks (00:19:54): $100,000 Chamath Palihapitiya (00:19:57): monthly over some number of months, right, in in normal pay every 2 weeks. or I'll pay you 200,000 but you'll only get paid once a year. Well, the problem with that second thing is you still have monthly bills that you have to make up for before you get paid. And so most people wouldn't take that job even if they paid you a lot more because you have this durational mismatch. You have to pay rent every month. You have to pay bills on a monthly basis. You have credit card bills. All these things. And so you need to match the timing of your cash flows. And so I think somewhere along the way, the risk folks at SVB just made a really large miscalculation. They basically went and bought 10 year risk in order to pay back money that could be called on a daily or weekly basis. That obviously, in hindsight, was not a good idea. David Friedberg (00:20:47): But but more importantly, Chemak, they didn't they didn't adjust fast enough. Chamath Palihapitiya (00:20:50): Well, they can't because they have these mark to market assets that were just getting clobbered in the head as rates got raised. And then the third the third thing is around regulators, you know, after the great financial crisis went through a period where there was hundreds of bank failures. And then for the last decade they've been virtually none, right? They've been like a few here or there and the last one was just during COVID. And so the the regulators I think have done a really good job with Dodd Frank and all of these other things to clean up The banking laws and the reporting requirements and the capital structures so that runs on banks are more and more infrequent. But they kept this crazy loophole around the accounting treatment of assets and they allow these durational mismatches to appear in a bank's balance sheet. And so I think there's a piece here for the regulators, which is here's an opportunity that's glaring and obvious now and screaming about how we need to tighten some more of the transparency that's required. It shouldn't be a group of armchair sleoots on Seeking Alpha that sniffed this out 3 months before it happened. It should have actually been a regulator that said, hey, hold on a second. Something is happening here that we don't like. And so we need to figure it out. But I think those are the 3 actors that are in play and they each share a bit of the blame here. Jason Calacanis (00:22:15): Friedberg, Sacks, what do you think? Who who who is to blame here most for this? blow up, or is this just the extragynous event of the rate hikes happening in such a short compressed period of time? David Sacks (00:22:27): No. I mean, look. I think that SVB's risk management was terrible, obviously. They signed up for these long dated securities when the market they serve is incredibly volatile like Jamas says, duration mismatch. Really good point. I would also say that there's a weird regulatory treatment where apparently if you buy these 10 year bonds, these 10 year mortgage backed securities or 10 year treasuries, you don't have to recognize the loss until you sell them, which is just bizarre. So in other words, they should have been marking the the positions to market. And instead, they just were allowing these losses to accrue. I don't understand how the regulators can allow that kind of system. I also don't understand how the regulators can allow a bank to take customer deposits and loan them out to start ups with this venture debt that we've been talking about on the show, where 10% of their portfolio is basically being loaned out to start ups who have no credit That's crazy. We talked on this show a few months ago. Jason Calacanis (00:23:32): Actually, it's a good time to play the clip here because what we saw and Saks and I, you know, seeing at the series a level, you have a lot of times founders would get this basically free money in their minds. I raise David Sacks (00:23:44): 10. Jason Calacanis (00:23:44): I get 5 in venture debt. I can extend my runway. But that money comes due. And and here's the clip for when Saks and I were talking about it just a couple episodes ago. David Sacks (00:23:54): What I don't trust is whether the the Return models on venture debt that were created over the last 5 to 10 years will be a good predictor of what the returns will be in the next 5 to 10 years when a lot of the mortality that shoulda happened in the past now happens in the future. Jason Calacanis (00:24:12): Yeah. I mean, this is just David Sacks (00:24:14): 4 Jason Calacanis (00:24:15): or 5 episodes ago, we kinda nailed it. David Sacks (00:24:16): Startups have no collateral. They have no there's no security for that loan. How does that make sense David Friedberg (00:24:21): to make a David Sacks (00:24:22): loan to a credit for startup. David Friedberg (00:24:24): Not true. Guys, look. I I I disagree with you on this point. Look. If you pull up the the slide that breaks down so let's talk about venture debt for a second because I've actually invested in a venture debt fund, and I've seen the economics on it. The way that the the venture debt model typically works is the lender loans money to the start up And what they underwrite is what the current VCs in the startup say they're gonna do to support the company in the future. So their ability to get paid back in the future is largely predicated not on underwriting the company and the performance of the business or the assets they have, but it's underwriting by the fact that the VCs are committed to continuing to put money in and hopefully see that this thing has a big outcome. David Sacks (00:25:01): There is no commitment. There is no commitment. I've spent under it. Chamath Palihapitiya (00:25:04): But -- No. David Sacks (00:25:04): Let me tell you. I've -- No. Well, give me a finish. David Friedberg (00:25:06): on. Let me just finish. I I get it. But the but the asset as a as an asset class, we can make fun of it all we want. It's actually formed pretty well. These guys have generated typically David Sacks (00:25:16): 18% David Friedberg (00:25:17): as an industry kind of a David Sacks (00:25:18): bull market. And yeah. And a bull market. David Friedberg (00:25:20): You're right. It's the same as venture and Jason Calacanis (00:25:22): the way boats. And the David Friedberg (00:25:23): way that they generate those returns is that they're loaning money to the startups, a bunch of those startups fail they don't get paid back. And then the ones that succeed, they actually take warrants in the startups So they have some equity upside in the startup. And that's the way the model works. We can make fun of it all we want. It actually works as an industry. Okay. So let me tell you Jason Calacanis (00:25:40): let me David Sacks (00:25:40): tell you why that broke. is it goes back to the point you made earlier in the show, which is the the the lender has this expectation that the VCs are gonna keep investing. But what if they don't? You know, we've been in a generally up into the right bull market since the last -- David Friedberg (00:25:54): That's right. David Sacks (00:25:55): -- crash in 2020. Jason Calacanis (00:25:56): Yeah. For So David Sacks (00:25:57): I believe that the data for all these models is is skewed because it assumes, again, an environment in which companies keep raising up rounds. And as soon as you get into a crisis, in which that breaks, then the whole asset class breaks. Speaker 5 (00:26:11): That's right. David Sacks (00:26:11): And I think this was completely predictable. But even if you think that this asset class is legitimate, I don't understand why banking deposits could ever be used to fund it. If you wanna be a venture debt fund, go out and raise money from LPs Because what happens is when you raise it with customer deposits, you're creating systemic risk for the banking system. 100%. Jason Calacanis (00:26:31): You are so should never have David Sacks (00:26:33): allowed that. Chamath Palihapitiya (00:26:33): Even worse -- 100%. -- 2 assets are correlated because you're you're loaning it to people who are depositing it. And in every other part of the private credit market, that is exactly what you do, what Saks said. You can't use customer customer deposits to do some CLO deal or to do, like, you know, to back a PE play. These are all LP capital that goes towards that. This is the only sliver as far as I know where you take customer deposits to create very risky loans Wrapped with warrant coverage. And by the way, this stuff is never free. Right? So they make you keep your money there. They make you have enough money to cover the size of the loan in the first place. So it's not even that valuable because if they gave you $8,000,000 loan, you have to have $8,000,000 always on deposit. Otherwise, you violate the otherwise, you're you're, you know, you breached the loan. So there is no free lunch in venture debt. There has never been. And I still think venture debt is very much like venture capital, which is most of these gains are on paper. Most of these gains haven't really been realized. And now we're gonna go through this sorting process when all of this stuff gets whacked. I do want Saxi your reaction to this though, which is the thing that started this was the fact that VCs seeing the markets imploding stopped giving companies money, but they didn't do enough work to help founders cut burn. As we can set it themselves, the burn stayed the same. What is going on inside of these boards? David Sacks (00:28:05): I think that's crazy because listen. I mean, we started doing portfolio updates with our entire portfolio of founders in February last year saying this is a regime change. You gotta cut costs. We did another one in May. You can watch them both on YouTube. Okay? And we were telling founders, cut your burn. Do it now. Don't wait. We were beating the drum on this so hard. And in every board meeting, and privately. Yeah. And I I like you know, and it takes multiple times frankly to get through. Jason Calacanis (00:28:33): I think your point, Chamath, about not wanting to be unpopular with the founder crowd led some young capital allocators to maybe say, okay. Yeah. Let's try this ditch effort before we do you know, another riff. Let's try this new product. Let's change Chamath Palihapitiya (00:28:48): our sales strategy. I don't think it's young versus old. Jason Calacanis (00:28:51): I think it's experience versus unexperience. No. I think it's -- Okay. David Sacks (00:28:54): -- Chamath Palihapitiya (00:28:54): that's better. I think that's why David Sacks (00:28:55): -- Speaker 6 (00:28:55): I think the case is experienced. -- experience. Listen. David Sacks (00:28:58): If you've never lived through a bear market, you don't know how bad I can get. and tech is a boom bust cycle, and the bus are really hard. Chamath Palihapitiya (00:29:05): Really hard. David Sacks (00:29:06): Really hard. And if you've never lived through a regime change before like there was in 2008, 9, or 2000 And 2001 was the worst. Yeah. 1001 David Friedberg (00:29:14): to 3. Then you're Chamath Palihapitiya (00:29:14): totally a millionaire, David Sacks (00:29:15): and you have no idea. And, you know, and and I think experience does matter. And there there aren't that many VCs around who live through the dotcom crash. David Friedberg (00:29:23): No. Probably 85% if not. By the way, if you guys pull up just that slide on the loan portfolio at SVB. I just wanna make the case. Sacks, I hear you. It's a risky it seems like a risky investment to make. But would don't you guys agree that a balance sheet business like SVB or an insurance company or any business that has, you know, some amount of money coming in that sits on the balance sheet they invested for a period of time, there's a laddering of risk, and there's a laddering of duration that you have and so if you look at Silicon Valley Bank from their from the update they did last week that triggered all of this. If you look at SVB's loan portfolio, 70% are really these asset backed loans, which are 56 percent of the portfolio, is, like, you know, prepayments on on LP commitments and then 14% is is private banking loans, which is loans against, you know, public securities that people have. Only 10% of the portfolio is venture debt, which is 7,000,000,000, And, you know, look, if the asset historically is performed at an 18% kind of rate of return, what is the you ventured debt portfolio gonna look like in a distressed environment? Is it negative a 100%, is it negative 50%, negative 40%, negative 30%. I mean, you guys can have a point of view on this. But, you look. I mean, for any business that's managing a large balance sheet of assets against, you know, a short kinda liability tree, they're gonna have some riskier assets. I think the question is, was David Sacks (00:30:45): 10% David Friedberg (00:30:46): too much of the loan portfolio? David Sacks (00:30:48): I think 1% is too much. Jason Calacanis (00:30:50): Yeah. And I'll I'll add to that. You know, one of the issues here that we saw qualitatively, and Saks and I both saw qualitatively is the standard for giving these and the size of them got lower and lower. In fact, the covenants went away, and this is what we kept having Hunter say to us, it has no covenants. They offered me no covenants. I don't have to have a certain amount of cash. I don't have a half a certain amount of revenue. those covenants were there for a reason to filter out the people who can't afford the house. Right? And this is exactly what happened in 2008 when people started giving those no recourse or no background check, mortgages. Remember those where, like, you didn't have to do a background check to get a mortgage? That's what happened in Venture. They just gave these I saw it firsthand Willy Nilly. I begged founders to not take them, and I only won that discussion sacks 1 out of 5 times because founders are like money. David Friedberg (00:31:38): We're having this debate, but there's no indication, and there were no losses in this portfolio to date that showed adventure underperforming. We're we're we're saying this is stupid. David Sacks (00:31:46): What's so special? Past performance is no guarantee of future performance. Exactly. -- obvious to us on the podcast. David Friedberg (00:31:52): You guys are arguing about venture debt. When the real loss that happened at SVB -- No. Jason Calacanis (00:31:57): We understand. -- that they bought David Friedberg (00:31:58): a bunch of treasuries And the health rates went from 2% to 5%. Let me And there's a reason Speaker 5 (00:32:03): why it says David Sacks (00:32:03): -- There's two things going on here. Okay, Friedberg. When when I see your chart and you talk about laddering this and laddering that and expert percent. And all this kind of stuff, I think about the smartest guys in the room. Okay? This is long term capital management. This is Enron. This is the 2008. bank failure, they think they can basically do financial engineering to make this work. You know why it doesn't work? It's because number 1, they're not in fully liquid assets. Number 2, they're not marking to market every day. If you're a deposit bank, you should be required to keep all of your assets in fully liquid securities that you mark to market every day. It's that simple. And what do they do? They put it in 10 year duration mortgage bonds. explain this. Where the value got devastated with the rising interest rates, they didn't have to mark that to market. And second, they put 10% of the portfolio in basically loans to credit less start ups. So when there is a run on the Speaker 5 (00:32:56): bank, you have a, what, like, roughly David Sacks (00:32:56): 30% gap between deposits and their actual the value of their portfolio. Jason Calacanis (00:33:07): Yeah. And and listen. David Sacks (00:33:08): That shouldn't be allowed. And and the reason it's allowed is, frankly, I think regulators are completely asleep at the wheel. Where's Powell? Where's yelling? 2 days ago, 2 days ago, Powell was testifying in front of the banking committee. And they asked him, do you see any systemic risk in the banking system because of the rapid rise in interest rates? He said no. no systemic risk. David Friedberg (00:33:27): Saks is right. I agree. The the the rise in interest rates is the key driver here. It drove down venture investing. It drove down valuations. And it's driving down the value of long dated bond portfolios, which by the way is the main standard of how a lot of these businesses invest and operate. and it's caused distress and stress on the system. My biggest concern is the contagion effect that arises next. If you go in and you continue to assume interest rates and everyone's holding onto these bonds and they're getting written down. Meanwhile, you owe people all this money in cash. And the other thing that's happening, if you hold cash today, you'll likely wanna higher interest rate to compete with treasuries. because you can invest in treasuries today and make David Sacks (00:34:03): 4 Speaker 5 (00:34:03): or 5 percent. David Friedberg (00:34:04): So -- -- for Jason Calacanis (00:34:04): a second here. I just wanna make sure that the audience understands. David Sacks (00:34:06): And Yellen put out a statement today, Jake, just to finish the the thought that they're they're monitoring the situation. Chamath Palihapitiya (00:34:12): Yes. David Sacks (00:34:12): She's sitting there like a bump on a log. I mean, it's ridiculous. Jason Calacanis (00:34:16): They need to be out front David Sacks (00:34:17): of understand, like, that this is a cascading situation. Chamath Palihapitiya (00:34:21): This David Sacks (00:34:21): So listen either this weekend either this weekend, they place Speaker 5 (00:34:23): SVB in David Sacks (00:34:23): the hands of a JPMorgan. They do basically David Friedberg (00:34:29): a car service or David Sacks (00:34:31): a Wahoo. They either do that this weekend or this thing keeps cascading next week. And look, I could be wrong. Maybe they're working on it right now behind the scenes. If they are kudos to them, they'll have an announcement before the market opens on Monday. But if they're not, and yelling's just like we're monitoring the situation. While 3 days ago, she was in Ukraine, this is incompetence at work. Jason Calacanis (00:34:52): Alright. Hold on. We'll figure out a way for you to delve this into January 6 next. Take a pause. David Friedberg (00:34:57): He connected Silicon Valley Bank to Ukraine. It was -- Yeah. Jason Calacanis (00:35:00): Exactly. It was beautiful. piece here that's David Friedberg (00:35:02): important for the David Sacks (00:35:02): treasury -- -- treasury doing in Ukraine. I mean, seriously. David Friedberg (00:35:05): Take it easy. Take it easy. Jason Calacanis (00:35:07): Here's what happened. Just so people understand, US treasuries were at 102. You get like a 2% a year. They bought a bunch of those. That was actually when you think about it. you would say that's a safe bet. The problem is those are locked up for 10 years, and nobody anticipated on the Silicon Valley Bank team that the rate hike would happen so quickly, so violently. Remember we saw the David Sacks (00:35:30): 25, 25, 50, 50, 75, 75, Jason Calacanis (00:35:32): all those increases? Now what happens to a David Sacks (00:35:36): 2% Jason Calacanis (00:35:37): US treasury when the interest rate goes up is they get devalued. They're not worth as much. So if you did need to sell them, you would have to sell them at a discount. If you held them to maturity, you would get that complete return. And what happened here is they needed to sell these early, and they sold them early, and they took a massive loss, 1,000,000,000 of dollars, and that's what lit diffused. David Friedberg (00:35:57): That's the slide I show. Like, the price page Jason Calacanis (00:35:59): goes down on. -- sure the audience understands that. Yeah. If they had sold these earlier or if they hadn't bought these, Chamath Palihapitiya (00:36:04): they would have not had this problem. Jason Calacanis (00:36:05): Go ahead, Jamov. Chamath Palihapitiya (00:36:06): Now why why in that meeting did they have to decide to emergency cell? It's because David Friedberg (00:36:13): VCs stopped giving startups money. Chamath Palihapitiya (00:36:13): So startups couldn't deposit more money into the bank. but they kept spending at the same rate that they were spending, Jason Calacanis (00:36:23): which means that the deposits went down. Chamath Palihapitiya (00:36:25): Yeah. In the last 18 months, not enough folks read the memo. Speaker 5 (00:36:29): Mhmm. Chamath Palihapitiya (00:36:30): Yes. And by the way, the tragedy of that is let's just say that you did get the memo and you did make the hard cuts Right? Now, then let's say you're working on something. And you can fill in the blank on the thing that you care about. Okay. So for the listeners, let's say it's climate change. Let's say it's breast cancer research. Whatever it is, This had nothing to do with you 4 days ago. You had your money in the bank. You did everything you needed to do to go and, you know, figure out product market fit. try to get to market, try to sell your product. And all of a sudden, because of some other set of folks and actors, who couldn't get their act together. Now, you're on the precipice of bankruptcy in 36:48 hours. That's crazy to me. Jason Calacanis (00:37:11): This is the challenge, Saks, I think you could speak to this as well, is we did all this portfolio management over the last year. These were the troubled companies And then yet the companies, a large portion who did the right thing, they had a big war chest, and they had set the burn at the right pace And now they the other portion of our portfolio that had big war chest, they're now at risk. So if you're a capital allocator right now, you're looking at a group of companies that you tried your best to save and they're and they're ankleed and they're wounded. And now the strong ones are wounded too. This is cataclysmic for Silicon Valley. If this does not get stopped this weekend, not only and I I I I don't wanna be Theracle. Speaker 6 (00:37:51): You're right. David Sacks (00:37:52): This is a meteor hitting the dinosaurs. It's extension level event. You're right, Jake. How listen. We have portfolio companies that had tens or, you know, millions or more in -- Yes. -- Silicon Valley Bank. And their account showed that their money was in the safest money market funds. Money market funds with a publicly traded ticker symbol that were managed by BlackRock or Morgan Stanley. Okay? That's what their account showed them they had. And then they're told all of a sudden, no. You're only protective to $250,000. everything above that that your your money market fund is just an asset of SVB, which is in receivership. Chamath Palihapitiya (00:38:30): You get a certificate Yeah. David Sacks (00:38:31): And you get a certificate. Do you see this announcement? Jason Calacanis (00:38:33): By the way -- I mean David Sacks (00:38:34): -- -- the California regulator made things worse. The California regulator stepped in and they froze everything. So Our companies were in the process. We have companies that submitted a wire yesterday. By the way, we spent all day yesterday on the phone with our portfolio companies trying to get them out. we had wire requests that went in before the deadline. And for some reason, we're in Chamath Palihapitiya (00:38:52): a queue. They didn't get through. David Sacks (00:38:53): And they didn't get out. They didn't get through. And then the California regulator steps in this morning and freezes everything. And what did they announce? They said, oh, you're good. You're good for your insured amounts. How much is that? $250,000. For your uninsured amounts, which is everything above 250, you're gonna get a certificate. A certificate What does that mean? That means you're a creditor in bankruptcy. So the mutual fund that you thought you owned was actually not hypothesized in your name, It was in SDB's name at BlackRock. And so our companies have been calling BlackRock and calling Morgan Stanley saying, hey. Do you have my money market fund? And they're like, no. Sorry. That's SVB. So now -- Jason Calacanis (00:39:30): This is the crazy thing. David Sacks (00:39:31): -- sitting in a in a creditor line in bankruptcy. Jason Calacanis (00:39:34): We gotta explain this. These were called sweep accounts. So what Silicon Valley Bank did with some of these large portfolio hold holders? Let's say Saks and a bunch of other VCs gave you 30,000,000 bucks. Yes. And they would they took your money, and they said, you know what? Just to be safe, we're gonna take your money. We'll automatically sweep it and distribute it across 2 other accounts. So we got this BlackRock over here for you great. We got this Morgan Stanley over here great. Whatever it is. You could only get to those through the Silicon Valley Bank interface And so it was supposed to protect you, but there is no recourse, it seems. Those are frozen too. So the only thing you can do that's logical, and I had a mentor 30 years ago when I had the magazine and we started hitting 1,000,000 of dollars in revenue. And he said, I said, how much money do we have in the bank? He said, which bank account? And he had 4 bank accounts, and he would load balance them. and he did it every Friday. God bless Elliot Cook. He did it every Friday for me, and I've always done that. I've always had multiple bank accounts and load bounced them. But in this case, Silicon Valley Bank did it through one interface, I have multiple startups today who did this exact thing, Saks, and they they couldn't even log in to Silicon Valley Bank today to even see where they're at. mean, I think you said right now. David Sacks (00:40:44): got frozen. And the California regular frozen, and they brought in the FDIC. So there's a couple of problems now with the working out of this. This is basically a bankruptcy process or receivership process. It's that we've got all these companies that need to make payroll in the next few weeks. Right? And so these processes don't work at start up time. if you could just figure out, like, over the weekend, okay, SVB lost 30¢ on the dollar and everyone's just gonna be prorated. You're gonna get 70¢ on the dollar. and then you get your money on Monday, it would be a hit to the StarBeat ecosystem, but people would recover and move on. But the fact of the matter is it's not gonna be on Monday. It could take weeks or months to figure out how many cents of the dollar you have. Jason Calacanis (00:41:21): Are they liquidating Silicon Valley Bank? Are they selling the debt? Is everybody getting laid out? David Sacks (00:41:26): FDIC is gonna liquidate everything. David Friedberg (00:41:28): Well, you Chamath Palihapitiya (00:41:28): have 2 paths here. Path number 1 is if you actually try to sell these assets, but the problem is who do you think the buyer is? The buyer are the sharpest sharps on Wall Street who will purposefully underbid these assets? And so that then takes you to path 2, which is then the only other real solution is for the fed to warehouse them and guarantee them. And that's an equivalent version of what they had to do during the great financial crisis, which it was this thing called TARP, which is the troubled asset relief plan. It was just a backstop and a mechanism so that these at the time those toxic assets which were a bunch of mortgage backed loans could be cleared through the system over time which effectively meant that the fed basically warehouse that risk. So I think what we need to see now is Sachs, it could be 50¢ on the dollar. It could be 60¢ if you want immediate liquidity. You know, a friend in our group chat was mentioning that there was one claim a company that had a $100,000,000 inside of SVB was offered $0.60 on the dollar, today for that claim. Now from a third party who said, I will take you I will give you 60,000,000 today in return for that certificate plus the David Sacks (00:42:45): 250,000 Chamath Palihapitiya (00:42:46): that says, you're owed a 100,000,000 because they're willing to take the risk that they'll get, you know, David Sacks (00:42:52): 80,000,000. Chamath Palihapitiya (00:42:53): Right? And then they take the difference. Now the point is that if you're if you're seeing today that kind of a discount, that's not a good sign, I think. And it does speak to the fact that regulators have to step in. Now here's the other reason why I think it's important. I think what regulators and I think the people then there's a lot of them in Washington that listen to this What this does is it torches years of US Innovation, and you should not let that happen. There are companies working on really important things for the United States and for the rest of the world. And if it's If the company fails because they can't make the product work, so be it. We take that risk every day. If the company fails because customers don't wanna buy it, so be it. If the product fails because a better product comes out so be it. But it shouldn't fail because we can't get money that is Jason Calacanis (00:43:46): in -- Because you forgot your pay goes. David Sacks (00:43:47): -- Chamath Palihapitiya (00:43:47): pause it. That should not be why we torch David Sacks (00:43:51): 100 Chamath Palihapitiya (00:43:51): of startups in what they're working on. Jason Calacanis (00:43:53): This is Maybe thousands. Yeah. This is a this would be a lost decade a lost decade for so compelling. David Friedberg (00:43:57): Hey, Cal. First of all, do do you guys wanna talk about second and third or third order effects just to folks really understand those? Because I think it's important to highlight why it's not just about a couple 100 tech bros in Silicon Valley not being able to make payroll, but there's important downstream consequences For example, there are payment processing companies in Silicon Valley that use Silicon Valley Bank to store their capital and to to to move money around. There are payroll companies that do payroll for many businesses, not just tech businesses, but many businesses in different parts of the economy, that store their cash at Silicon Valley Bank and process money through Silicon Valley Bank. Today, it was announced that Rippling, one of those companies could not hit their payroll cycle today because they had money tied up at Silicon Valley Bank. Fortunately, they announced that they also have money at JPMorgan and other places So they will be able to kinda get the the the payroll processed early next week and and get everyone back on track. But this is 100 and potentially thousands of companies that use their payroll software to to process and and pay their employees. And then there's all the payment processors. We don't know how many of them have what level of exposure. and a lot of infrastructure companies that move money in and through Silicon Valley Bank. And so if they start to go down and then payroll doesn't hit the air conditioning company that's using the the the tool and some you know, in Arizona. And then, you know, the the Stripe service isn't able to process ecommerce payments for small business owner that runs a website, you can start to see how there can be very significant trickling effects, and more importantly, like we saw in o 8, Perhaps to a different degree, but still a significant concern is the the the the contagion of panicked where people say if there isn't reliability in the things that I thought, were reliable before, I start to have real questions in the soundness of the system overall, and that's why it's so important to Saks Ed to step in shore up the problem this weekend. I don't think it's about bidding 50¢ or 60¢ on the dollar. Every depositor needs to get paid a 100% of their money. And that cash needs to be made available to them by early next week. David Friedberg (00:45:56): And if that money is not available to them, within the first David Sacks (00:45:59): 48 David Friedberg (00:46:00): or 72 hours of the end of this weekend, Then we are gonna have a real crisis on our hands because then you will see a lot of people trying to move money away from any institution that stores their money in some sort of security that's not a 100% liquid like cash. And that's gonna cause that's gonna cause that's gonna cause a massive run. And so so what has to happen, the only way this can happen is if someone takes over Silicon Valley Bank this weekend and that the federal government, unfortunately, as much as I hate to say it, because I absolutely hate the federal government having a role in this stuff, has to say, we will guarantee a 100% of those deposits to the company that takes over, the bank that takes over this portfolio, and says, let the portfolio of assets run its lifetime, see what you get paid, whatever the delta is. We'll make it up to you, but we need to make sure that there's cash here today for all of these depositors to get taken Speaker 5 (00:46:48): care of. David Sacks (00:46:48): -- Jason Calacanis (00:46:48): something you want to say? If not, I have something I wanna say. Yeah. Chamath Palihapitiya (00:46:51): The other big thing that SVB was was an on ramp for a lot of investors including many US investors to get money into China. And without commenting on whether that's right wrong or indifferent, the point is that China has a very complicated capital market structure which requires you to basically use an offshore bank, i. e. non domesticated Chinese bank, and to be able to get those dollars. And so what would happen Chinese startups that raise money would raise money from US investors and abroad using these bank accounts. And so this issue now doesn't just touch the United States Innovation Economy. It also touches China's Innovation Economy, which creates actually a complicated set of trade offs for the US government and treasury as they think about what they want to do in this heightening great power conflict that Saks talked about last week. Jason Calacanis (00:47:40): And I want to just make a very important nuanced point here. I know there is no bank that the public, specifically, you know, people who don't wanna support, you know, rich people already, like Big Tech or billionaires. The reason to backstop this with public money is because we have a road map for this. People don't know this widely, but TARP was just over David Sacks (00:48:02): $400,000,000,000. Jason Calacanis (00:48:04): It actually returned a $15,000,000,000 profit to the American people. This would require maybe 25 or David Sacks (00:48:12): $50,000,000,000, 10%, Jason Calacanis (00:48:15): maybe 5, 10% of the totality of tarped. would be enough to cover what's happening here with Silicon Valley Bank and work this out. That's $50,000,000,000 for the people listening in Washington or for the people who will say, hey. Why are we, you know, bailing out big tech? You're bailing out small tech, as Tremont said, you're bailing out innovation on breast cancer, on you know, renewable energy. But most importantly, this can easily be structured so that the American people return 20%, 30%, maybe even double their money. You could structure this so it is senior to everything else and is exact what the government is supposed to do when there is a crisis. That doesn't mean the people who run Silicon Valley Bank should have their equity worth a lot. they should get wiped out. They didn't do their job properly. The equity, the people who ran the management team there, if they don't get anything, that's okay. They understand that, but the people who had their money at deposit to pay the salaries and to pay for this innovation, it is unconscionable that we wouldn't backstop it. And the I guarantee you, the US government could get some warrants on those companies or warrants in ownership in Silicon Valley Bank and make at least 50¢ on the dollar, maybe even double, and that's the way this bailout should be structured. And it has to be done this weekend. Chamath Palihapitiya (00:49:32): You bring up a great idea. I think I think if the US balance sheet does step in over the weekend, I'm gonna say on behalf of the US taxpayer, you must get a piece of these companies. And the reason why is that that's the way to make it fair for everybody that's not in tech who's on the outside looking in. And if you look inside of Twitter as an example, there's a lot of negative sentiment around even the idea of a bailout happening and it's for this exact reason because I think people believe that it will benefit just a small sliver of people. Right? So to step in and to save these companies, Jason would still be you know, really only helping say several 100,000 or several You know? And and and the thing that that gets wrong in my opinion is that these companies, if they're if they're allowed to germinate, should be building things that actually help everybody. And so if you can use that waxes. including And so if you can view it that way and if you can view a share of it. Now obviously, look, we're very we have a very deep incentive for that to happen. But I think it's important to present the other side of it. The other side would say, this industry has a little bit run amok. It's not well regulated. You know, you guys push the boundaries and get away with a lot. And there's having been a lot of consequences? David Friedberg (00:51:00): You're saying the No. Chamath Palihapitiya (00:51:01): I'm saying the tech industry. No. No. No. I'm saying the the average person that's on the outside looking into the tech industry can make that claim and now they would be pointing at Big Tech but the problem is we all get swept in together under the same thing. And then what they would say is I don't think it's right to step in. And I think that you have to give the US taxpayer an incentive if they are going to do it. And I think the the incentive should be that they should just get a share in all this innovation. David Sacks (00:51:26): If they take over the venture debt portfolio, then they would have that. Right? The venture debt portfolio comes with Warren. so they would have that. I think there's a big risk here that precisely because tech is unpopular and people I think are confusing big tech with small tech, that the government doesn't step in here and the the dominoes start falling and we start getting all the systemic risk playing out. Remember, the beneficiaries here aren't just these these sort of current generation of tech companies and everyone they do business with. It's also wherever the contagion goes next. And we're already seeing, I think, multiple regional banks under pressure they're stocked down, people asking questions. We know people in our tech groups who are wiring money out as fast as they can just because why take a chance? You know, the and David Friedberg (00:52:16): by the way David Sacks (00:52:16): -- You have to understand the the game theory around these bank runs. People describe them as a panic, but that implies that it's irrational. It's not irrational. It's actually rational. Chamath Palihapitiya (00:52:27): And what this what this has really highlighted is that what you said earlier at the beginning, Saks, which is that The regulatory oversight is actually extremely pristine at the biggest banks, but the smaller and smaller you get there's a level of opacity and David Sacks (00:52:44): -- Chamath Palihapitiya (00:52:44): Well, here -- -- lack of regulatory follow through that allows this stuff to build -- So David Sacks (00:52:47): the Wall Street Journal right now is reporting that US banks have 620,000,000,000 of unrealized losses just on treasuries. I don't know what the unrealized losses are on these long dated mortgage backed securities. Like I said, I have no idea why regulators allow banks to hold these bonds at their book value instead of marking them to market every day. That's crazy. Chamath Palihapitiya (00:53:08): And and on the equity side, you have to do it. Buffett talks about this all the time. The equity side, you have to mark to market the equity portfolio at the end of every quarter. Right. And he sees these wild swings, and he complains about it, but it's the right thing to do for exactly this reason. David Sacks (00:53:23): Right. So so think about the game theory here. Okay? The banking the bank union regulators have created this opacity in the system. You've got all of these assets that are being held by these banks that are not mark to market So nobody really knows what the true level of exposure is. So what's the response? Why take a chance? Just move your money to JPMorgan. So I think there's a chance that if the federal government doesn't step in here, the whole regional banking system can be decimated and just to be left with 4 too big to fail banks. How's that benefit anybody? That doesn't benefit the little guy? David Friedberg (00:53:53): Guys, there's a there's a pretty good set of regulatory disclosures that happened, but I do think that the real question is you know, are the ratios right? Do they should they really be allowed to invest in these types of assets with depositor capital? And if so, with what percent of the depositor capital should maybe be allowed to do it? And maybe, you know, that seems to be where the biggest, you know, issue is. We've we've come a long way. I mean, I just pulled up the statistic. It's insane. There were 505 banks that failed in David Sacks (00:54:21): 1921. David Friedberg (00:54:22): Failure continued to rise in the early twenties and averaged 680 banks per year failed between 19231929. So, obviously, you know, coming out of 08, There was a lot of controversy around, hey. Banks can't make money anymore. It's too restrictive. The disclosures and so on. The disclosures are actually quite good. You know, you guys can go to these these sites that regulate the banks. You can go to the SEC site. You can get a very detailed schedule of every asset held by every one of these banks. it's good transparency, I would argue. But should they be allowed to invest in securities that are effectively not fully liquid, that are risky, that are long dated, with a short dated deposits. Right? It seems it's a fundamental question about what banks are supposed to be doing. Chamath Palihapitiya (00:55:04): In a world of computers that can calculate everything The idea that you can't solve duration matching doesn't seem like one of those problems that's intractable in 2023. I Jason Calacanis (00:55:13): mean, if people can make an AI version of the podcast, They could do that. Yeah. David Sacks (00:55:18): I mean, Friedberg also, like, take this, I think, venture depth is the most extreme example. how do you mark to market alone to a series a start up? I mean, that just a 100% depends on whether they're gonna raise Speaker 5 (00:55:29): a series b David Friedberg (00:55:29): or not. I I'm a I'm a believer you can underwrite anything. I think you can under for the right interest rate, for the right premium, you can underwrite insurance, you can underwrite loans. I mean, there's a lot of ways that you could kind of -- How do you mark David Sacks (00:55:38): that to mark that to mark it on a daily basis. David Friedberg (00:55:41): You're right. No. You cannot. You're you're right. Absolutely. Yeah. Yeah. Yeah. And so from a reporting perspective, Speaker 5 (00:55:45): that's why David Friedberg (00:55:46): I think David Sacks (00:55:46): How does that solve the problem? David Friedberg (00:55:48): No one knows how to market it. they've got different tiers of regulatory capital guys, and so, you know, there are rules around what the ratios need to be and where you need to fall. And so they they they bucket this stuff up differently. David Sacks (00:55:58): if you're a bank and you wanna buy securities, you wanna invest in something that's not liquid and mark to market every day, you should have to package it up in some period of time and sell it. If you wanna make a loan to a, you know, to a venture backed start up, package those up and syndicate that and sell it as a security. And if you can't do that, you probably shouldn't be investing in the asset class anyway. Same thing with, like, know, mortgage these mortgages already get packaged up and sold. Right? So I just doesn't make sense to me that, like, customer deposits, that's what we're talking about, which you assume should always be a 100% safe. Right? This is not a source of capital where anyone's ever expecting to lose money. If you want to use risk capital, to get some sort of outsized return, go raise that from LPs. But to, like, take Speaker 5 (00:56:43): customer deposits David Sacks (00:56:43): and use it on on risk non liquid investments makes a sense. Jason Calacanis (00:56:50): It makes no sense. There's one thing I could I could just help people frame this. The aggregate amount of dollars in these bank accounts, I would estimate equals 10% of the value of the start ups they represent. Would we all agree on that? It's about 10% of the value of those startups, maybe David Sacks (00:57:08): 20. Jason Calacanis (00:57:09): If -- How do you work -- What? How do you how do you calculate? Speaker 5 (00:57:11): I don't know Jason Calacanis (00:57:11): what -- I'm thinking about the startups who recently did a round of funding. They diluted David Sacks (00:57:15): 10%. Jason Calacanis (00:57:17): That represents all of their treasury or half of their treasury. So if that cash for the startup portion of this equals 10% of the value of service, I can guarantee you those startups with access to that capital again, Monday, will be able to outperform the back stop that the government would provide. David Sacks (00:57:33): This this sounds like enron math to me. Jason Calacanis (00:57:35): No. Okay. If you one of your start ups just take any of your start ups. They have 30,000,000 in something David Friedberg (00:57:40): about that. David Sacks (00:57:40): -- time. Listen. We don't time here for the government to figure out how to be a -- David Friedberg (00:57:44): No. No. David Sacks (00:57:44): -- partner in or an investor in all these startups. I'm sorry. We don't. Jason Calacanis (00:57:48): But I'm not saying that. David Sacks (00:57:49): Step in or they don't? If they use -- -- step in, you'll have systemic failure. Jason Calacanis (00:57:53): No. No. But do the math for me here. Of one of the companies, pick one of the companies that has you have a company that has 20,000,000 there or 30,000,000 there? What does that represent if you were to take their valuation from last year when they raise that money and cut in half? David Friedberg (00:58:05): It doesn't matter. It doesn't matter who's the depository. It does not matter. We think the depository. David Sacks (00:58:09): -- Jason Calacanis (00:58:09): for people to understand how much value is going to be lost and how easily recoverable it is if these companies are allowed in aggregate to deploy that capital. That's the point you're not getting, or I'm not explaining to you properly. If allowed to deploy that, it's going to return a a multiple, an David Friedberg (00:58:28): adventure multiple, 2, 3, 4, 5 x. Jason Calacanis (00:58:32): But if we destroy that money, these companies are going out of business next month. David Sacks (00:58:35): But, Jake, out, that money is their money that's their deposit. Jason Calacanis (00:58:38): I'm trying to create framing here for people to understand exactly how much value is gonna David Sacks (00:58:44): be lost. -- framing is that when you put your money in a FDIC insured bank, you put it in a customer deposit that's supposed to be completely safe that's paying you a couple of percent interest and that is reflected even as a money market fund on your account, you do not expect that money to be turned around by the bank and put in Jason Calacanis (00:59:02): risky assets. raise the FDIC limits. David Sacks (00:59:04): No sense. Jason Calacanis (00:59:04): Raise the FDIC David Sacks (00:59:05): should not work that way. David Friedberg (00:59:06): Okay. David Sacks (00:59:07): Look, I think it's crazy that you could set up a bank account, okay, because you just wanna write checks. And you could lose that money because the bankers decided to loan it to some start That's insane. Or the bankers decided to buy a 10 year mortgage backed security who doesn't understand interest rate risk. That's not the way this is supposed to And you got all these people on Twitter pushing back no bailouts or whatever. That's the depositor's money. I agree. No bail out for SCB. They should lose everything. All those executives or stock options are worthless. All the stockholders of that company, their shares are worthless. But the question is, should depositors lose money in these banks? They just thought they're signing for a checking account. I mean, are you kidding me? And if you let that happen, there will be a cascade here because there the logical consequence will be everybody's gonna say, put my money in JPMorgan or Wells Fargo or Bank of America. There'll be 4 banks. That's it. And all the regional banks are gonna shut down. Jason Calacanis (00:59:58): that will have tens of tens of 1000 of highly paid workers and not just tech workers are gonna be out of jobs, and they don't have jobs waiting for them at Amazon. or Google to bail them out, and this is the start of a a contagion if it doesn't get signed by any Speaker 5 (01:00:13): of that. David Sacks (01:00:13): -- wrong, Jake? What did they do wrong? Jason Calacanis (01:00:15): Nothing. They used a what is considered one of the most reputable banks in the world. David Sacks (01:00:19): They used a top 20 bank that the regulators said was in compliance. So did they do something wrong, or were the regulators asleep at the at the wheel. Jason Calacanis (01:00:27): I don't know. Some way, I think, it's this is Biden's fault, o o r. It's Zelensky's fault. Chamath Palihapitiya (01:00:35): What do you guys think this means for VC? David Friedberg (01:00:39): It is a chilling effect. I I talked with some LPs in the last 2 days in the VC world. I'll give you a couple anecdotes. I have a friend who runs a fund. He looked at his portfolio. They have $270,000,000 or sorry. $350,000,000 tied up at Silicon Valley Bank. They need David Sacks (01:00:57): $27,000,000 David Friedberg (01:00:58): for cash for the next 30 days. So he's called his LPs, and he's trying to get his LPs to front him money, to wire money so that he confront his company's money so they can actually pay their operating expenses and and cover their payroll. And then I spoke with a couple of LPs in the last 48 hours. They have gotten dozens of calls from various venture funds. Everyone is asking the same question. Can we do a capital call? Can we get money delivered early? Can we use that money to support our company's because their cash is stuck. Coming out of this, the the the the uncertainty that this creates in the investment environment, I think it's gonna have a real chilling effect. not just with the GPs and their, you know, proclivity to sign term sheets right now and wire new money over, but also with the LPs as they're making capital commitments and actually following through with with capital commitments that have already been made, given, you know, where's the capital actually gonna land up? That was never Genmark before. It was never anything that anyone even considered that capital could be disappeared or locked up or tied up. And the fact that this is adding this unique friction in the market is is a layer on top of an already distressed and challenged environment for fundraising, for GPs, for LPs, and it seems to be exactly the icing on the cake we did not need right now no matter how this gets resolved. Jason Calacanis (01:02:20): I I think private markets in VC could seize. I think you're gonna see people pull term sheets, maybe half as many fundings are gonna occur. as people try to do triage. David Friedberg (01:02:29): Another VC friend of mine just sent me a text, he can't make payroll next week. He has a fund. Jason Calacanis (01:02:33): For VC fund. David Friedberg (01:02:34): His VC fund their employees cannot he cannot pay his employees on Monday. Lord. And so, yes, I do think funds could shut down. coming out of this. It I I think that companies that were, call it, you know, 75% distressed are done for now. No one's gonna step in and bridge them and fund them. it's gonna accelerate a lot of shutdowns because people are now cash is king. Now cash is king. Right? It's like David Sacks (01:03:00): -- David Friedberg (01:03:00): Right. -- a big shift. David Sacks (01:03:01): think that was really well said. I think you're you're right about all that. Jake, how you tweeted that you think this is gonna cause a 68 freeze in in deal making activity? I think that's more or less. Right? You're right. Because, you know, all all the VCs out there have to think about showing up their existing portfolios. Jason Calacanis (01:03:15): Exactly. David Sacks (01:03:16): What if you got companies that are now in distress that are perfectly good companies? You gotta focus on maybe you're gonna Jason Calacanis (01:03:21): give investors that. David Sacks (01:03:22): -- 2 David Friedberg (01:03:22): winners. You're picking 1 or David Sacks (01:03:23): 2 David Friedberg (01:03:23): winners. You know? You're and you're gonna focus on that. You're gonna say, you know what? The rest of them could be good, but I can't It's it's gonna be a tough decision. Jason Calacanis (01:03:29): I have 3 open deals right now that we're doing. I now have to figure out how to get those deals done and I have 4 companies that are in this payroll situation in a major way. So now I've got capital, and I've got to And and we're not personally affected by the Silicon Valley Bank thing. Thank god. But now we have to do triage the known winners in your portfolio that did nothing wrong, or do you make the next 3 investments or 4 investments? And I'm gonna make good on those 3 investments But next month, maybe not. Maybe next month, I'm taking off, and I'm focusing on the portfolio. And I think that's what's gonna happen, writ large. We're in triage mode now. Full on triage mode. If this doesn't get resolved. If they can't get those Chamath Palihapitiya (01:04:16): Jamath, what do you think? This dark. I had a meeting 3 weeks ago with the US LP. And, you know, you guys know how I run this business here, but it's there's like a lot of risk management. You know? We think about this stuff a lot. And the message that came back to me was I don't think risk management is worthwhile in venture. I didn't understand where that was coming from because if you're investing your money across a very risky asset class, you have to be always thinking about how you could lose money. And I think that venture has always romantically been described as, like, buying lottery tickets. And so it doesn't matter if you lose. But when you have that kind of attitude, you just become super complacent. and you don't think about left tail risk. You only think about right tail outcomes. And this is an example of like left tail risk that came out of nowhere that could wipe out entire portfolios. So you had folks invest into funds that spent a few years probably David Sacks (01:05:22): 2019 2020, 2021, Chamath Palihapitiya (01:05:25): really misallocating money. Right? Writing ginormous checks into companies at valuations that didn't make sense. who then went and burned it. And now what little cash they had left may also be gone, which means those valuations are even more impaired. which means that the LPs that gave them the money are even more underwater. And that cycle I think is really terrible. That'll take a So maybe this is the wake up call where now risk management is actually in Vogue and cool, and it's important to know this stuff. Jason Calacanis (01:05:55): I don't know. We have breaking news while we're taping this. The Department of Financial Protection And Innovation of the State of California has published findings on SVB. We'll pull it up on the screen. for the besties to respond to. On March 8 2023, the bank announced a loss of approximately 1,800,000,000 from the sale of investments. We've talked about that already. On March 8 2023, the bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9 2023, deposits reacted by initiating withdrawals of David Sacks (01:06:27): $42,000,000,000 Jason Calacanis (01:06:29): in deposits. So that would be over David Sacks (01:06:31): 20%, Jason Calacanis (01:06:32): I think of the of the total deposits from the bank on March 9th were even more 2023 causing a run on the bank. As of the close of business on March 9th, the bank had a negative cash balance of approximately David Sacks (01:06:44): 958,000,000. Jason Calacanis (01:06:45): Despite attempts from the bank, With the assistance of regulators to transfer collateral from various sources to bank, it did not meet its cash letter with the Federal Reserve, the precipitous deposit withdrawal has caused the bank to be incapable of paying its obligations as they come due. Speaker 5 (01:06:59): Right. Jason Calacanis (01:07:00): And the bank is now insoluble. -- the beginning. David Sacks (01:07:02): $42,000,000,000 David Friedberg (01:07:03): of withdrawals is 25 percent of total deposits, but David Sacks (01:07:07): 42,000,000,000 David Friedberg (01:07:09): is greater than the 14,000,000,000 of cash they had on hand. and the 26,000,000,000 of liquid securities that they had. So you add those 2 up together, you're at 40,000,000,000. And then to get more cash, they're gonna have to sell a bunch of loan folios and selling loan portfolios, you gotta package them up. It takes weeks or months to do that, then they're gonna be sold at distressed prices. So this is where a classic run on the bank problem actually causes a decline in the asset value of the business and the assets that they own. Because if you have to go and turn around and sell those assets in the market, Super fast. You're gonna take a huge loss. You guys remember that movie margin call with Demi Moore. And what's his name? And they they make this plan to go and market We got to sell -- What's Chamath Palihapitiya (01:07:50): going -- -- Swazzy? David Friedberg (01:07:51): No. Not Patrick Swazzy. No. The Jeremy Irons. Jeremy Irons, he plays the best character. He's like the chairman of the bank. And they're like, we have to sell all this, but we're gonna take a huge loss and they they make this big trade that happens at the beginning of the morning. But that's what happens when you to sell a lot of assets very fast. As you guys know, you end up selling them at a discount. So the rate at which deposits are coming out of the bank can actually impact the asset value held at the bank, and that's fundamentally what a run on the bank causes. And the irony is, as they point out, the company was fundamentally financially sound. They had enough assets marked at the current market value or whatever to meet all of their obligations, but the rate at which asset started to get pulled out is what drove those that drove the company the bank into distress. And if you think about it, it it's it's an ironic point of view on Silicon Valley. Because Silicon Valley operates with such we all joke about what a herd mentality. and and what an incredibly tied and deep network Silicon Valley is. We all got dozens and hundreds of texts and messages from friends colleagues, coworkers yesterday, all relaying the news about what they were going to do. And as soon as that happened, that's how tightly intertwined Silicon Valley is. Within 24 hours, every CEO and every venture capitalist was on a chat group or on a message group with other people in the valley. And once there was any indication of panic, the entire market flipped. And you guys saw this. We all saw this within 24 hours. At the beginning of the day yesterday, was like, it they'll get through it, and it'll be fine. They just took a little markdown on their portfolio. They got plenty of assets. But then it's like, well, founders Fun said we should probably get Okay. David Friedberg (01:09:26): Well, founder's fund is getting out. Maybe we should get out before everyone else does. Well, if we gotta get out before everyone else does, let's do it now. I'm getting out right now. I'm telling my best friend. I'm getting out right now. And then everyone tells their second best friend. And then all of a sudden, the whole valley knows it. And then the whole valley is running for the door. And this is a really interesting and unique scenario. It's not like the classic consumer run on the bank. where you're trying to pull cash out, it's the Silicon Valley 24 hour cycle of we all gotta do it because everyone else is doing like what we're seeing with investing cycles in Silicon Valley where everyone chases and these bubbles emerge, the reverse I think happened yesterday, where the herd mentality drove us all to rush for the door as quickly as possible. You know, I'm not sure that that might be why it's not as much of a contagion, you know, as you might expect elsewhere because places other kind of regional banks don't have the same sort of intertwinedness as we saw with all the the depositors here in Silicon Valley Bank? I don't know. Speaker 5 (01:10:18): I mean, I David Sacks (01:10:18): don't know. Speaker 6 (01:10:19): So -- I'm just here right in David Friedberg (01:10:19): your life yet. David Sacks (01:10:20): This is where I think that describing what happened as a panic kinda misses the fundamental rationality of the response. So -- Those David Friedberg (01:10:28): are true, by the way. Yeah. David Sacks (01:10:29): Yeah. So it it does seem like a panic, but that doesn't mean that each individual decision maker's motivation is panic. I actually think it's a rational upside downside calculation. I mean, this is all game theory. So if you think that there's a risk of other people pulling out their assets. And in fact, you're hearing that they are, you don't wanna wait and be the last one to leave. And so if you think about it, there's no penalty or downside to taking your money out. Right? So the the downside of taking your funds out immediately is 0, and the upside is you might save a 100% of your money. So it's a rational decision when confidence is lost to take out your money. And in fact, it was rational. There were a bunch of VCs, not a lot, but some of them tweeted yesterday that, you know, SGB has been a great player in the ecosystem for 30 years. We should show our support right now by not taking our money out. Well, guess what? What happened to them? they got stuck, and now their money is frozen, and they're not sure whether they get, you know, pennies on the dollar or not. Whereas the people who rushed for the exits yesterday got their money out. Jason Calacanis (01:11:33): It's prisoner's dilemma. David Sacks (01:11:34): It is a prisoner's dilemma. But here's the thing, it's it's not even about anymore whether the institution is solvent. it's about whether there's confidence. And I think there is a risk now of contagion spreading to these other regional banks because people aren't sure and there's already huge cash outflows leaving these other banks because why take a chance? The game theory of it is, move your money out until this is over, And if you're okay with, you know, moving it back in a few weeks, if it turns out not to be around the bank, that's fine. So a lot of this can be self fulfilling. You have to remember that runs on the bank, figure you said this, a 100 years ago, were extremely common. Every decade, there was be a giant financial panic, and there'd be a run on the bank, run on many banks. And the only way that the federal government stopped it was by introducing FDIC, and they they said to depositors, your money is safe. And at that time, $250,000 was enough. The problem we have is that with these business banks, $250,000 is not enough. So all of a sudden, there's gonna be a crisis of confidence. If you think a business bank can go under again, you're just gonna leave all these regional banks. You're gonna go to the top 4, and that's gonna be it. So I I think that that the situation right now is really dynamic. And if the fed does nothing and just says, oh, you know, these depositors should have known better, you know, the losses on them, then I think the rational reaction for depositors at all of these other banks would be just to leave. because I don't think depositors are in a good position to assess the liquidity and credit worthiness of a bank. just don't think they are. I think stockholders are. They're the people who should lose all their money if the bank goes under, but not depositors. Jason Calacanis (01:13:20): Any advice or takeaways for founders and capital allocators going forward? Obviously, have your money in multiple bank accounts. Chamath Palihapitiya (01:13:27): I sent you guys a list that was just published of all of the funds that custody at SVB, and it's unbelievable, the list. It's every single major VC in Silicon Valley. David Friedberg (01:13:39): Wow. Where'd you get this? I have my ways. Oh, extracted from SEC filings. Got it. Jason Calacanis (01:13:44): Okay. Thank you. David Friedberg (01:13:45): Yeah. This is amazing. Wow. Holy shit. Chamath Palihapitiya (01:13:47): I mean, everybody's in there. Jason Calacanis (01:13:49): So Harley 500. Sequoia. We're going pretty fast here, but yeah. Yeah. Every day to fund. I mean, this is my point, by the way, David Friedberg (01:13:58): all these guys David Sacks (01:13:59): -- -- that we were we were out. Jason Calacanis (01:14:01): We only had a few a few David Sacks (01:14:02): months ago when we were talking about venture debt, on the pod. I didn't believe that SGB should be in this business. So I told -- Chamath Palihapitiya (01:14:09): Well, look. There's craft. There's craft. David Sacks (01:14:11): No. Well, hold on. I'll I'll tell you. Does it say how much money we got in there? Chamath Palihapitiya (01:14:16): Yeah. Go to the right. David Sacks (01:14:16): I'll tell you what happened is so after the conversation we had about miss the show about VentureDebt, I'm like, I don't really like that SVB is in this business. So I told my guys, set up an account somewhere else so we did that. So we moved our firm accounts over And we were just using SGB to make, you know, warehouse loans or whatever. So I thought they were just a lender to us. So yesterday when all this stuff went down, I I said to our guys, like, we're out of there. Right? They're like, well, actually, we had about $45,000,000 that we're about to distribute to LPs. And I'm like, woah. That's crazy. So we were able to sweep that to an account we used to make in kind distributions. And then we got on the phone And we called as many portfolio companies that we could to get them out. And we got a huge number of them out, but, unfortunately, some of them didn't get out. Here's the thing that I think people in Washington don't understand. we're doing this with the next set of banks. The triage is still happening. David Friedberg (01:15:08): Guys, I will tell you look, Sax, I appreciate the the siren call, but I think the only way that what you're saying because you're saying that triggers this the next siren call and the contagion spreads I'm not blaming you. I'm just saying it's a reality, and you're you're right. The game theory optimal way to play this as a depositor is to move your money out. get it somewhere that it's completely safe. And, you know, you have your cash secured or buy a security in a brokerage account where it's totally safe, and it's registered with the securities exchange with something. But in the meantime, for this to get resolved, there has to be a bear hug solution offered up this weekend. I'll say it again. David Sacks (01:15:46): Yeah. David Friedberg (01:15:47): in in order to stop the next set of siren calls to drive David Sacks (01:15:51): the next train next to Speaker 6 (01:15:52): the next David Sacks (01:15:52): -- Listen. This is the thing I hate about the the run on the bank conversation is that if you warn people that there's a possible run on the bank happening, you're actually creating the run on the bank. That's why it's so pernicious when these things get started. And yesterday, we were calling all of our portfolio companies because we were warning them, because our obligation was to them, but we weren't you know, I don't think we were putting out like a siren to the world. And by the afternoon, it was really clear that if they listen and got their money out, they were in much better shape than ones who didn't listen. So this is the pernicious thing is that every individual actor has to do what's in their best interest, and we're not trying to start a another month. Sorry. David Friedberg (01:16:32): What was that? David Sacks (01:16:33): Hold on. But we know things. We know that people are very close to us, big players, are withdrawing their money from other banks right now out of an abundance of caution. David Friedberg (01:16:41): So let me just finish my point. My my point is what you're saying makes a ton of sense. And it's gonna cause this as you describe kind of pernicious escalatory problem. And the only way to stop it is a bear hug, which may not cost the taxpayer anything if the Fed or some federal agency stepped in and said we are gonna backstop. all of these banks with all of these deposits with cash, and we're gonna guarantee it today. And here's a $500,000,000,000 facility. And just by saying that, everyone stops trying to pull their money out. And you don't actually need to backstop it with any money. Chamath Palihapitiya (01:17:18): It's it's it's already started. So, Nick, if you just the link that I sent you in the in the group Chamath, can you just throw that link up there? I think this is the best proxy for what Saks is talking about. So sort of I think very unemotionally, how would we know that there is a contagion that's a foot? You would look at the equity layer of all these regional banks. So what is this? This is the iShares regional bank ETF. And what you start to see is this decay and go to the 1 week view, Nick, please. It just starts to fall off of a cliff. And so why is this happening? Well, it's happening because the equity tier of these banks are now increasingly worried that their equity will get wiped out. And so that's why they're selling. And so I think what David said is already a foot unfortunately. It starts at SVB, but forget the name for a second and take Silicon Valley out of it. This is a top 20 bank that now is in the receivership of, you know, the authorities. And so there does need to be something that needs to happen in really short because what's to prevent bank number David Sacks (01:18:26): 35? David Friedberg (01:18:26): Let me just say it again. If a federal agency comes in, if the Fed comes in and says, you know what? we are gonna backstop all of these banks, and we are gonna put $500,000,000,000 behind it, and we're gonna guarantee that all these deposits are gonna be made whole. it stops the panic. At that point, you don't even have to put up any money. Because as soon as it's a first derivative problem, it's a feedback loop. As soon as you stop people from doing the withdrawals, the whole market subsides. You don't actually need to use it. You unplug it. And I think that's what needs to happen this weekend. That's what should I have Jason Calacanis (01:18:55): to unplug David Friedberg (01:18:55): it. Today, is they, number 1, need to go get Silicon Valley Bank handed over to a big balance sheet and guarantee that balance sheet that they're gonna make money by taking this thing on. number David Sacks (01:19:04): 2, David Friedberg (01:19:04): they gotta make a statement. We got another 500 Billy for you. Where's the president? Where's Yellen? Jason Calacanis (01:19:09): Well, they'll make a profit on it too. So, I mean They David Friedberg (01:19:11): they don't need to use any money to do it. Right. David Sacks (01:19:13): The thing that's missing in our system is that there's no FDIC for $25,000,000 accounts. What like, 250 is is not an effective amount -- Jason Calacanis (01:19:21): That's a personal account. David Sacks (01:19:23): -- it's for a personal account. But businesses need confidence in our economy and our banking system or the whole thing starts to unspool. So what the quip pro quo should be is you can get a 25,000,000 FDIC business banking account, and the bank is highly restricted in what it can do with that money. You can't put that money in the Gauzy venture debt. You can't put that money in laddered 10 year bonds that don't get mark to market. It's only highly liquid secure mark to market assets. And the the downside of that for the bank is they'll make less money and pass on less interest to the the business the the depositor. Chamath Palihapitiya (01:19:57): The shareholders. David Sacks (01:19:58): But the yeah. So what? That's the way it should work. Jason Calacanis (01:20:00): How are stablecoins looking like a better option right now? mean, the crypto guys right now are like, what did you listen? David Sacks (01:20:06): They're not, Jake. Jason Calacanis (01:20:06): They're not. David Friedberg (01:20:07): They're not joke. It was a joke. Chamath Palihapitiya (01:20:08): Nothing can revive the crypto market as we're seeing today. even in a run on the bank, which is exactly what everybody was afraid of in a Bitcoin world, that thing is down 10%. So Speaker 6 (01:20:18): so what I just wanna recap whenever whenever David Sacks (01:20:20): liquidity whenever the the reason for that, Jamal, is just that what we've seen is that liquidity is all correlated. So when people are panicking about the state of their finances, and worried about getting access to their cache, the first thing they dump is crypto because it is very liquid. So -- Yep. -- everyone is trying to free up cash right now. Jason Calacanis (01:20:38): just wanna be clear at the end of the show here. We were dancing around, is this gonna be a contagion? And I think what we know and what we're seeing is the next dominoes are already falling. And so It cannot David Friedberg (01:20:51): be a contagion. It cannot be a contagion. We have to stop it That's the point. Jason Calacanis (01:20:56): That's your feeling. Yeah. And I agree with you, but I just want to make sure people understand. We started this. We didn't wanna go there. you know, I think with some reticent reticence to to going there. Chamath Palihapitiya (01:21:07): Let's let's put it this way. If you, if anybody, if you, have initiated a wire in the last twenty 4 hours, you are worried about contagion. David Friedberg (01:21:16): Yes. If you're in DC and you have any ability David Sacks (01:21:19): -- Chamath Palihapitiya (01:21:19): Management matters. And if you have any ability David Friedberg (01:21:21): to influence what's gonna happen this weekend, we strongly advise -- Unplug it. David Sacks (01:21:27): -- David Friedberg (01:21:27): someone comes in and bear hugs the market this weekend and says, we will not let Contagion happen with a very big slug of capital to support it that will likely not even be needed. to support it. Because once you say that, the contagion will stop. You gotta comment again. David Sacks (01:21:43): Yeah. Free Freightberg, we're gonna know on Monday whether these regulators and the administration know what they're doing at all. David Friedberg (01:21:49): The other black swan problem is that this weekend, we will find out what some of the unintended second and third order consequences are gonna be of SVB being in receivership this weekend. We talked a little bit about the pipes problem. but there may be several other businesses and other other institutions and companies that we don't know about that may trigger -- -- unknowns. David Sacks (01:22:09): -- David Friedberg (01:22:09): another set of cascading effects that are unrelated to a banking problem but could drive some more significant business and economic problems that we're gonna kind of probably end up talking about next week. So, you know, this weekend, I Jason Calacanis (01:22:20): think -- -- obsessed with payroll, but there are other things that this money goes towards. You know, mortgages or rents, So the cascading effect of this, if people stop paying their rents, if people stop paying mortgages, I mean David Sacks (01:22:32): -- David Friedberg (01:22:33): Real estate. Yeah. I mean -- Real estate. David Sacks (01:22:34): -- Biden visited Kyve instead of East Palestine. Yellen visited Kyiv instead of Silicon Valley. Do these people know what's going on here? Chamath Palihapitiya (01:22:43): Come home. David Sacks (01:22:44): They promise more financial assistance for Ukraine, and they're saying they're monitoring the situation here. We're in the process of what could be Speaker 6 (01:22:53): a run of maybe failure. Jason Calacanis (01:22:54): Yeah. David Sacks (01:22:55): What's a Jason Calacanis (01:22:56): bill for Ukraine? The the bill for Ukraine this month versus this bailout is, you know, probably the same. So I think we have to really think this through folks. Yeah. You're gonna get We'll David Sacks (01:23:06): know on Monday whether these people have a clue or not. Jason Calacanis (01:23:09): No. They have to be on TV tonight or tomorrow. This this has to be a presser on Sunday. Chamath Palihapitiya (01:23:14): Hold on. I think I think a lot of these guys do know what they're doing. So let me just say it to them in language they understand. Folks, when you look at the equity tier of these regional banks, people are liquidating the equity tier because they know that that is the 1st domino to fall if banks go into receivership. Please act accordingly. You can see it in the ETFs. You can see it in the trade flows. This is not a Silicon Valley problem anymore. It is a regional bank problem, and it will get worse unless you do something to make it better. David Sacks (01:23:48): Right. And and I and Jake, I just use the word bail. I don't like that word. because -- Jason Calacanis (01:23:51): No. Not a bailout. Backstop. Yeah. David Sacks (01:23:53): There were big, you know, too big to fail banks in 2008 in the financial crisis who did get bailed out. Those people should have lost the value if they're stopped. Okay? That was wrong. That's not what we're talking about here. The FCB has wiped out already. What we're talking about is protecting depositors. These are people who trusted that when they put their money in a top 20 bank that our regulatory system is compliant, that they will not lose their money. When it says on their computer screen, that my money is in a BlackRock or a Morgan Stanley Mutual fund or money market fund rather, the safest instrument there is. that that money is where it's supposed to be. And if regulators allow that bank to put their money in stupid assets that are not mark to market, and that's why they shut down, that is not a good reason for depositors to not get their money. 100%. We're taking care of depositors here and not bailing out stockholders. Jason Calacanis (01:24:43): This is not for the executives at the banks. It's for the depositors who did nothing wrong and nor did their employees and their customers. and the innovation that they're working on. Alright. This has been a great all in podcast. Sorry we didn't have time to talk about the Chamath, QAnan Shaman. I know that's a passion project for Hugh Sacks, but you can announce your kickstarter for him and your go fund me for Chamath Palihapitiya (01:25:05): the QAnan. David Sacks (01:25:06): For for you, Chamath. Speaker 5 (01:25:07): for you to shop Jason Calacanis (01:25:08): and but where's the bulldog there? Give me that bulldog one more time, man. Chamath Palihapitiya (01:25:11): The shaman the shaman the shaman is an Intersection of David Sacks (01:25:14): 3 Chamath Palihapitiya (01:25:15): of a very interesting Venn diagram. He is very athletically fit, incredibly hairy, and oddly attitude. That's a that's a trifecta that you rarely see you rarely see that in you know? Jason Calacanis (01:25:29): Also cultural appropriation. So, yeah, we have to keep that in mind. And conspiracy serious. I mean, this guy's got it all. Are we gonna play poker this weekend and just like, as the as the David Sacks (01:25:38): meteor is coming -- It's kinda -- towards Jason Calacanis (01:25:40): Silicon Valley. David Sacks (01:25:40): He's kinda he's kind of an odd that that seriously, the the Chamath what's his name is? Jake -- Jason Calacanis (01:25:46): He doesn't seem like he's all there. David Sacks (01:25:47): Yeah. No. He's he's a guy who has diagnosed mental illness, but he's completely non violent. He's completely non violent. He actually believes in the philosophy of Mahatma Gandhi of no violence towards any creatures. Jason Calacanis (01:25:59): He's a bit Sharon. David Sacks (01:26:01): Yeah. He you know, he's a bit of an odd duck. And -- He's Jason Calacanis (01:26:03): a Friedberg of Cunon. David Sacks (01:26:05): And he didn't assault anyone. He did what just wandered through the capital apparently getting a tour from police officers or just guiding him through it. Jason Calacanis (01:26:13): He's the January 6th grade. David Sacks (01:26:15): Hold on a second. He got 4 years in jail for that because he became the face of an insurrection because He just looks so weird with the viking horns and the face pain or whatever. Jason Calacanis (01:26:24): He also made some threats to the politicians too, but, yeah, I mean, it does seem like it might not be the appropriate sense He wrote a note saying we're coming for you, I think, on you have to look into the case, but he was sentenced by a Republican judge from Texas. and he had made threats, written threats, and put them on the desks of folks. And he was one of the first people into the building. So I think they got him for that, but I agree with you. they're they're Listen. David Friedberg (01:26:45): And he's talking about David Sacks (01:26:46): it's the building. If he didn't break a door down or didn't smash a window, if he if he Chamath property, that's one thing he assaulted someone that's one thing. But if he just wandered through the capital, I think 4 years is kind of excessive. And I think the reason why the guy got 4 years is because of his mental illness, he's not able to defend himself the way that he should be. This is just a fundamental liberties issue. If you have any compassion at all, you shouldn't let a guy like that gets scapegoated. Jason Calacanis (01:27:10): There's 400 people who of the thousands of people who broke in, who were violent, and who got sentences of some degree. They were all settled like plea bargained, including his. They didn't go to trial. And if you know, I think we could all agree, the violence that occurred that day is you know, should be punished, and the non violence stuff should be a speeding ticket. You know? We don't need to -- I David Sacks (01:27:33): think 3 categories, Jason. I think violence, the assault on cops or and so forth -- David Friedberg (01:27:37): Yeah. David Sacks (01:27:38): -- punished -- Jason Calacanis (01:27:38): Folics and murder. David Sacks (01:27:40): Yeah. -- then damage a property. And then but the people -- -- the law. Yeah. People who just trespassed or wandered through who may not even have known they were trespassing. Jason Calacanis (01:27:47): Probation. David Sacks (01:27:48): That that that's not that's not jail time. That's not a felony. Jason Calacanis (01:27:50): Yeah. I mean, we want to promote peaceful protest. If they had come with guitars and sang Kumbaya and we shall overcome, we'd be having a different discussion here. Instead, they beat cops, you know, and you can't beat cops up. Sorry. David Sacks (01:28:02): Those ones go to jail. Jason Calacanis (01:28:03): Yeah. Perry, full stop. We're in agreement. Okay, everybody. It's been another amazing all in podcast. Sorry we couldn't get to all the news. but we felt that this required a big unpacking for the Sultan of Science, the dictator, and the rain man, I am the undisputed world's greatest moderator. We'll see you next time when you're all in podcast. Chamath Palihapitiya (01:28:23): Not this week. Speaker 6 (01:28:24): Not this week. Speaker 5 (01:28:28): We'll let your winners ride. Jason Calacanis (01:28:31): Rainman, David Sacker. Speaker 6 (01:28:36): We open sources to the fans, David Sacks (01:28:38): and they've just gone crazy with it. what airliners were. Speaker 5 (01:28:48): Besty's our car. David Friedberg (01:28:49): I don't want 13. That Speaker 6 (01:28:51): is plenty of dogs. Like, you know, driveway checks. Oh, Speaker 5 (01:28:56): man. I might have Jason Calacanis (01:28:57): the casual media outlets. We should all just get a room and just have it think you, George, because they're all just useless. It's, like, this, like, sexual tension, and they just need to release her mouth and mouth. What? David Friedberg (01:29:07): You're the b p What? You're a thief. What? What? Jason Calacanis (01:29:12): Where did you get Murkeys are now?