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March 13, 2023 - The Charlie Kirk Show
34:16
The Truth Behind the Silicon Valley Bank Failure with Dave Bahnsen
Transcriber: nvidia/parakeet-tdt-0.6b-v2, sat-12l-sm, and large-v3-turbo
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Time Text
Bailout By Other Means 00:09:34
Hey everybody, today in the Charlie Kirk show the collapse of Silicon Valley Bank.
What is behind it?
Dave Bonson, who is an expert, helps explain exactly what is behind the collapse at Silicon Valley Bank.
Email us your thoughts, freedom at charliekirk.com and get involved with TurningPointUSA at tpusa.com.
That is tpusa.com.
Buckle up, everybody.
Here we go.
Charlie, what you've done is incredible here.
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Charlie Kirk's running the White House, folks.
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Silicon Valley Bank is no more, but it's not just Silicon Valley Bank.
There's fragility all across the banking industry right now.
Questions are, are we about to see a 21st century equivalent of a bank run?
Over the weekend, the federal government made a series of announcements.
Now, you can count on the federal government to work weekends if they're trying to cover up the origins of the COVID virus or if they're trying to prop up the neoliberal banking order.
I'm not even saying that in an accusatory way.
You probably should work over the weekend to make sure that the entire American banking system doesn't collapse.
Multiple stocks of banks are down double digits, 30, 40, 50, 60%.
In fact, MarketWatch says that trading has been halted completely for several of the biggest banking stocks, especially mid-level ones, Bank of Hawaii, Regions Bank, many others.
So what exactly happened with Silicon Valley Bank?
And by the way, it's not just Silicon Valley Bank that collapsed.
Over the weekend, we got news that there were others right on the verge of collapse, but federal regulators came in and also said that Signature Bank has also collapsed and that they have assumed control over Signature Bank.
Now, look, part of this is psychology.
If every single depositor demands their money, the bank doesn't have the money there.
This is banking 101.
They should teach you this in eighth grade finance class.
That just because you see your money in your balance does not mean the money is there.
Now, the federal government, the FDIC, is supposed to insure that up to a certain amount, up to $250,000, but they've already lent out that money.
That money is elsewhere.
Now, they have to have, because of a fractional banking system, they have to have some part of that actually in their available liquid accounts.
But if 10%, 20%, or 30% of the depositors say, I want my money now, it crushes the bank.
Now, why it happened and how it happened is going to be under great debate.
We have some amazing experts coming this hour that will explain it.
But instead, I want to talk about some of the political implications of this and also whether or not this contagion is going to continue and grow.
I first want to play Cut Five.
Woke grandma, Janet Yellen, says we're not going to do that again.
We're not going to bail out the banks.
Play Cut Five.
Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out.
And we're certainly not looking.
And the reforms that have been put in place means that we're not going to do that again, but we are concerned about depositors and are focused on trying to meet their needs.
So is this a bailout?
It probably is a bailout just by different terms.
And so Silicon Valley Bank goes under.
The federal government says it's not a bailout.
But here's the central debate or the controversy.
Claims that the decisions do not amount to a bailout.
However, they're likely to be challenged.
While the fund going to depositors is paid into by U.S. banks, it is ultimately backstopped by the Treasury Department and therefore U.S. taxpayers.
So it's the full faith and credit of the United States that is swooping in to make the depositors whole of Silicon Valley Bank.
And I'll be very honest with you.
I see this both ways.
I see it both ways because there's a lot of good people that were using Silicon Valley Bank.
There's a lot of bad people too, a lot of crummy people, a lot of insider dealing, deceitful, Silicon Valley, woke pagan religion types.
But there are also people that were running their small businesses.
Now, the federal government is supposed to insure it up to $250,000.
What the government is saying is, though, we're going to make every depositor whole.
We're going to make every single dollar of the people that have had money in one of our accounts whole.
Now, is that a bailout?
It probably is a bailout by other terms and other means.
And what happens now with Signature Bank?
What if another five, another six, another seven, another eight, another nine, another 10 banks crumble?
And not to overly defend the Biden administration, but they really had no choice this weekend than to do what they did.
Now, if you allow Silicon Valley Bank to fail and all you say is, look, we're up to $250,000 in deposits.
The question is, how fragile is our banking system really?
And that probably is why they moved as quickly as they moved.
Now, it's unconscionable in one way that the moral hazard gets completely and totally removed, but it's worthy of some reflection, isn't it?
It's worthy of some reflection because Janet Yellen and Joe Biden and the people in charge of our government, I think they know how fragile the American banking system actually is.
Because if just 10% of people decide that I want my money back, I'm going to withdraw my money, you then have talks of a bank run, the likes of which we have not seen for well over 80 to 90 years.
I want to play another piece of tape here.
Joe Biden saying that customers can access their money after regulators shut down the Silicon Valley Bank, play cut seven.
Treasury Secretary Yellen and a team of banking regulators have taken action.
All customers who had deposits in these banks can rest assured.
I'm going to have it.
Rest assured they'll be protected and they'll have access to their money as of today.
No losses will be, and this is an important point.
No losses will be borne by the taxpayers.
Instead, the money will come from the fees that banks pay into the deposit insurance fund.
And so what actually caused this meltdown?
It remains a mystery.
We do know that Silicon Valley Bank was more interested in woke DEI programs and even having a head of risk assessment.
It's all very complicated.
There are two major ways a bank can fail, insolvency or a liquidity crisis.
The collapse of Silicon Valley Bank seems to be more of a liquidity crisis.
What that means is there was a high amount of demand for cash for them right now.
And since Silicon Valley Bank didn't have a way to meet all that cash immediately, it collapsed and caused in a bank run.
Now, a lot of people had no comprehension of what Silicon Valley Bank is.
This is the bank for startup culture in Silicon Valley.
Because we had so much stimulus and low interest rates for so long, because we decided to lock down our country unnecessarily and print $6 trillion out of thin air, money flowed into startups and tech that caused a lot of money to flow into Silicon Valley Bank.
But Silicon Valley Bank couldn't find profitable ways to lend that money.
And so they simply bought a bunch of U.S. Treasury bonds at very, very low interest rates.
That is a great example of how you knew you had too many dollar bills in the system.
When a bank can't find people to lend money to, they can't find borrowers that have good ideas that are able to make a return, that shows that you created way too much money.
That's exactly why you see asset prices going up across the board.
Now, thanks to widespread inflation, the Federal Reserve had to raise interest rates sharply.
Silicon Valley Bank's treasury bonds are worth a lot less now, and their startup clients need to pull out their cash more than ever.
If Silicon Valley Bank had been a normal bank with lots of retail investors, they might have gotten away with this.
In fact, back in February, there are already financial experts and analysts noticing that Silicon Valley Bank was basically broke months ago.
But specifically because they had a risky strategy catering to startups, they were more exposed to this kind of collapse, both because they had more cash being taken out each month and because they had a lot of savvy depositors who could notice the bank was in danger and then start a big bank run.
And then that kind of contagion grows and people worry and then they take their money out and it collapses the banking system.
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Insiders Sell Shares Mysteriously 00:02:16
I think the consensus from you, the audience, is no more bailouts.
And they're saying it's not a bailout, but it's a bailout by other means.
And the question is: can the federal government keep this up if more and more banks start to collapse?
That's a serious question.
Here's what we do know: we know that the CEOs and the bosses of Silicon Valley Bank mysteriously sold a lot of their shares last month.
President Gregory Becker of Silicon Valley Bank sold over 12,000 shares for $3.5 million on February 26th, while the CFO sold over $575,000 in stock in a separate transaction on the same day.
Now, the question is: were they acting on material, non-private information?
Now, as insiders, they have to disclose these sales, and that's technically legal, unless they knew something that was materially non-public information, and they decided to benefit materially on that.
Continues by saying: while CEO President Becker sold about $3.5 million worth of shares and CFO sold $575,000 in stock in a separate transaction, Draper's shares were sold over several transactions in earlier months.
Did they know the balance sheet?
Did they see something that was coming?
Did they know the 185 to 1 leverage that the bank was tolerating?
And the answer is probably yes on that front.
The most recent dumpings of stock, I'm reading from CNBC, stock by Becker, who had not sold any shares in over a year, was done through the prearranged share sale of 10 B51 plans.
These plans allow company insiders and executives to arrange sell shares to certain predetermined tates in order to prevent illegal insider trading.
Certainly seems like an perfectly timed window to dump stock.
While the U.S. market regulator has responded by introducing a 90-day mandatory cooling off period, which would prevent executives from trading shares in the next three-month period, the new regulations are only going to affect April 1st.
The bank was once the 16th largest bank in the United States, serving HNI or high-net worth individuals and venture capitalists.
Implicit Guarantee Confusion 00:16:21
There's several questions here.
We also know that Silicon Valley Bank was deep in with the Chinese Communist Party and Chinese banks and Chinese companies.
Silicon Valley Bank was especially popular among Chinese biotech groups that operated between the United States and China, according to the Financial Times.
The Federal Reserve has announced that a new short-term loan program to assist banks that are having the same kind of problems that SVB did.
The goal is to provide cash liquidity for banks to stop a cascade of bank runs.
Three years ago, you go back in the archives of the Charlie Kirk show, three years ago.
And just with a very basic economic education, reading Henry Hazlitt, Milton Friedman, Von Mises, Rothbard, I agree with these guys on some things and disagree on others, especially Von Mises and Rothbard.
We made a very provocative and bold statement three years ago.
We said the lockdowns and the spending that will happen because the lockdowns will break the American economy as we know it.
We were mocked.
We were ridiculed.
We said that the first stimulus was unnecessary.
The second stimulus was unnecessary.
Reopen America.
Talk about treatments, ivermectin, hydroxychloroquine, intravenous therapy, vitamin D supplementation, not being fat, getting good exercise, proper hydration, understanding comorbidities and underlying risk factors.
But instead, we locked down the entire economy, put masks on kids, shut down our schools, and created trillions of dollars out of thin air.
And what you are seeing with Silicon Valley Bank today, what you are seeing with the fragility of the American banking system are byproducts of bad moral decisions that were made because of the lockdowns in 2020.
The excesses that came from creating $6 to $8 trillion out of thin air has a cost.
Amazon, Facebook, Google, they had record highs.
Never before had tech companies turned profits like this.
Everyone's staring at screens all day long.
Real estate boomed.
Low interest rates.
It was like the roaring 20s, but boy, did those of us that knew economics said this party is going to come to an end at some point.
Our deficit is a trillion dollars a year.
We spent our way out of 2008.
We tried to spend our way out of 2020.
Our debt to GDP ratio is well over 100% now.
So what do we do now if we get a real crisis?
Because I'm afraid that we're entering one.
The Fed can only swoop in so much and say, everything's fine here.
We're going to insure this.
Low interest loans.
At some point, that system is going to break.
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Joining us now is Dave Bonson, Chief Investment Officer of the Bonson Group and also editor of the DividendCafe.com.
Dave, welcome to the program.
Hey, Charlie, good to be with you.
So Dave, help us make sense of what is happening with the Silicon Valley bank, let's just say, mess.
You have a great article on your website about it, but how should we think about this?
Explain it to our audience.
Let's start with the fact that it is the total end of Dodd-Frank.
Dodd-Frank is a disaster.
What happened out of Dodd-Frank is clearly a failure, the inability of regulators to do the most basic of their job.
But really, you have now a double indictment on the Fed, Charlie.
The Fed built up this bubble in Silicon Valley with the 0% interest rates, all the quantitative easing that they facilitated that they just let go for far too long.
I understand extreme monetary policy right at the point of the COVID moment, but they kept it going for over two years and it built up this massive deposit base at Silicon Valley Bank, primarily depositing SPACs and IPOs of unprofitable companies and startup tech firms that were funded by venture capital.
And then the interest rates start rising and the value of the bonds that this bank is holding go down.
So they got into what we call a vicious cycle in finance where the depositors are pulling money out.
And then because they're doing that, they can't raise new capital.
They can't raise equity to keep their bank afloat.
And so it was a real failure of regulation.
And I don't want to beat this dead horse, but it is almost surreal how ironic it is that this firm was such a leader in the woke DEI hiring, their chief risk officer, bragging about her sexual orientation and gender status and identification.
And I don't care.
They can hire whoever they want.
But then they're placing these identity politics issues above the substance of the job of actually managing risk.
And so I'm not trying to get a political jab in there, but that's what this was.
Well, it's a fact.
And when you prioritize the things they were prioritizing, and we have the list here, it just takes your breath away.
Like they're like lesbian pride parades and all this nonsense.
You only have so much time and so much resources when you run a company.
And if that becomes a priority and not risk mitigation, you're going to have an issue.
So let me ask you, Dave, and you understand this stuff really well.
You're in the industry.
Is it technically correct to say the federal government is bailing out Silicon Valley Bank?
No, it is not.
The value of Silicon Valley Bank is zero.
The equity shareholders are going to get zero.
The owners of the business had a lot of value one week ago and it's gone and not coming back.
The unsecured bondholders are probably going to get zero.
If it's not zero, it's going to be just a little bit less by the time they sell off assets.
So it's not a bailout of Silicon Valley Bank, but it is a bailout of uninsured depositors that had over $250,000.
And very candidly, I think the prior administration would have done this same thing because it's a very tough message to Main Street to say, all you people who just put money in your bank account, you're not in the business of doing credit analysis of a bank.
And you assume that you put cash in, you're going to get cash out.
And they felt that it would have been a disaster to wake up this morning and have those depositors uncovered.
However, this is not mom and pop.
This is not grandpa and grandma.
If this were a farm bank in Kansas, would they be doing this?
I don't know.
But really, this is a bunch of startup hip tech companies.
Well, let me ask you, Dave, and I, again, this one happened to catch the headlines because of the volume of the assets.
But of the last decade, I have to imagine there's been other bank failures.
Did the federal government insure beyond $250,000 of every other bank failure of the last 10 years?
Or is this an exception?
No, this is an exception, but there hasn't been very many bank failures.
They've been very, very tiny and not systemic.
And the code that Congress passed allows an exception for systemic risk.
And this is the second largest that we've seen.
So it's understandable that they could refer to it as systemic.
The problem now, Charlie, is going forward, they have to make a decision.
Are they just going to have unlimited FDIC coverage or are they going to pretend the 250 still applies?
Because how could anybody really believe the 250 applies when they just made an exception for these two banks?
And so they either need to make it explicit or stop with this gray area because what it does is it really helps the big banks.
People say, look, I don't know what they're going to do with the smaller banks.
And so I'm just going to move my money to JP Morgan or Wells Fargo.
Congress is going to have to act here.
Yes.
So if somebody, for example, let's just say some tech company had $30 million in cash and they're because they were doing big payroll or the government's going to make them whole.
Is that essentially what they're saying?
And from a free market economic standpoint, Dave, which you're an expert on, is there a moral hazard?
Is there an issue here?
Do you have a problem with it?
I do have a huge problem with it, but it's more nuanced than calling it a bailout of the companies.
It is a bailout of the depositors.
The difference is, Charlie, that it's not being paid for by the taxpayers.
The banking system has to pay for it.
So there will be a higher cost to bank now because there's a higher insurance premium with FDIC.
Ultimately, it is backed by Treasury, and that is the taxpayers, but no taxpayer has ever lost a dollar on FDIC coverage.
I have a problem with it because of moral hazard.
I have a problem with forgiving student loans because of moral hazard.
I have a problem with anything where the government intervenes.
But again, the people who were going to hurt this morning were not the people who caused the problem.
Payroll, you know, employees at different companies.
It's a complicated issue.
I'm not trying to be simplistic, but fundamentally, they have to make a decision.
Did Dodd-Frank regulate banks well enough that we won't have these situations in the future or not?
Because clearly it didn't.
Yeah, this was supposed to never happen again, right?
That was the big promise.
So, Dave, help me understand if this number is significant or not, but it's floating around that they had 185 to 1 leverage.
What does that mean?
Is that applicable at all here?
Or is that just a separate number that is being misapplied to the narrative?
It is being misapplied, Charlie.
Banks can't have more than about eight, nine, or 10 to 1 leverage, meaning the monies that they bring in in deposits and what they lend out.
This company had less leverage than that because they weren't lending the monies out.
They were not a traditional bank that was taking deposits in and then going out and doing mortgages and things like that.
What this bank did is have a bunch of junk on their balance sheet.
They would lend to a Silicon Valley company and take warrants and equity and stock options.
So they were kind of running like, who's that guy from the bar stool?
Dave Portnoy, my hedge fund friend said it was like Dave Portnoy was running their balance sheet.
You know what I mean?
It was just all shiny objects: crypto, tech startups, all that stuff.
But they weren't over-levered.
What that is referenced to is the deposit base that they only had a few billion of capital and they had a hundred and something billion of deposits, but those deposits were on deposit with the bank.
So that leverage is being misunderstood a little bit.
So the general health of the American banking system, we saw Signature Bank collapse at all.
Do you think Signature Bank collapsed because of the Silicon Valley Bank?
Are they related?
I mean, it just seems the timing seems to be too much of a coincidence, meaning did depositors say that I want my money back?
Is that oh, yeah, that it's a run on the bank, and this is a risk we've had since the 1930s, so fractional reserve banking, but signature was much more crypto-related.
Got it.
There's just so much grift and corruption and fraud in this crypto world.
And the few banks that dared to try to offer traditional banking in the crypto space, signature last week, it was Silvergate Capital.
They're getting their faces ripped off.
And so it's not a coincidence.
It's connected, but there's just slightly different circumstances.
That makes sense.
And so, but the fear that the federal government is trying to prevent is a psychological run, right?
Which, again, in the era of digital banking, too, it can happen really quick because you don't actually have to run into like that old, you know, the old pictures of the 1930s, people running to actually the banks.
Now you can open up your app and say, I'm getting it out.
But you make an interesting point, Dave.
Is the federal government basically saying that it is not a $250,000 insured reserve requirement?
It's basically unlimited.
I mean, do you think the $250,000 is antiquated?
Should it just be any ceiling?
I'm curious your thoughts here.
Yeah, it's definitely antiquated right now because there's no one in the world who could believe that they will not insure whatever deposit level they have to.
If First Republic were to go down, which I don't think it's going to, but if it were, there's a 100% chance they would have to provide the same coverage to them as well, right after doing this for Silicon Valley depositors.
What they it's very similar, Charlie, to Fannie and Freddie back in before 2008.
There was an implicit guarantee that was actually in the statute, but it was never explicit.
Then, after the Treasury Department took over Fannie and Freddie in September of 2008, it became explicit.
They just need to decide: is this an implicit guarantee, which is going to lead to market confusion and distortion and moral hazard, or is it explicit?
And if it's explicit, who's going to pay for it?
Just to give you a small window into how financial panic psychology works, as I was texting with one of our wealthy donors at Turning Point USA this morning, and he said, Hey, Charlie, for whatever it's worth, I just told my money, my guys at my bank to go down to 250 on all of my accounts, and I'm going to go put it into either T-bills or something.
So basically, just imagine if 10,000 people do that, right?
That's going to have an effect because if you're moving the money out of the bank, the bank then has to basically make good on what you think is your balance when it's actually not all there.
And so that is a question, right?
If you want to stop the run on the banks, then the federal FDIC has to come out and say, actually, it's up to whatever you want it to be.
And the question is, then where does that money come from, right?
Because that $100 billion that I imagine would get exhausted pretty quickly, which the banks do pay in fees.
Dave, one of the things I love about you is you're so clear in understanding free market economics.
You teach free market economics.
We're actually partnering with you at some things at Turning Point Academy.
I'm a little surprised, though, just from your perspective, that you're comfortable with the federal government involving itself here.
So make the free market economic argument so that I can understand it from your perspective.
Yeah, Charlie, it's not that I'm comfortable with the federal government intervening.
It's that we have a system where this has become the expectation.
And so the federal government doesn't generally get to pick when they're going to jump out.
You think of that multi-trillion dollar CARES Act and the PPP legislation the Trump administration passed.
I wasn't really comfortable with all of it, but it's what the expectation now is that our society has in its relationship with the federal government.
Ideally, I don't have a problem with the existence of depositor insurance, but I want it to be a market transaction where there's federal depositor insurance to avoid a run on the bank like the Depression, but that there's a known limit and a known cost.
When they change the rules like this midstream, it undermines credibility.
And so you end up paying for that later.
There will be a higher cost to federal deposit insurance and it will be borne by bank depositors and other banks.
The big banks will subsidize the little banks, et cetera.
But again, the problem is not just what they did in the last 24 hours.
We turned to them after the financial crisis with Dodd-Frank and said, keep any of this from happening.
Hyper-Regulated Banking Mistake 00:03:28
And then, yeah, companies, even woke companies I don't like like Dropbox or Roku, if they choose to bank somewhere because the rules of the game told them it would be safe.
It's a tricky deal.
I also don't want to get too punitive just because they don't share my politics.
At the same time, I'm not going to offer unearned sympathy.
I'm just not because there are some awful people.
Let me ask you, Dave, do you think, and do you think that Peter Thiel started this?
Because some people are going after Peter Thiel harshly.
Is that a fair critique of him?
He didn't start it, but he was a player in it.
No question.
The company that started it was Silicon Valley Bank.
By having a god-awful balance sheet and a totally unsustainable business model of hot deposits from a bunch of real sketchy companies.
But Pete Deal definitely played into it by publicly asking his portfolio companies to withdraw their deposits.
And so he's a player in this.
Yes.
So moving forward, the repeal of Dodd-Frank is something I enthusiastically agree with because it actually strengthens some of the big banks.
But Dave, I have to just say, and this is just kind of a broader question that I'd love your take on.
We were told this would never happen again.
Banking is one of the most hyper-regulated industries.
Is that a fair thing to say?
The most hyper-regulated industry.
Then how the heck is this possible?
I mean, there's supposed to be safeguards and measures, right?
And especially with the bank of the size and the magnitude here, were the regulators not doing their job?
The regulators were not doing their job.
The principals and risk managers at the bank were not doing their job.
And the Fed was not doing its job.
It kept money too loose too long.
And now it is way too tight.
So the Fed hurt Silicon Valley on both sides.
Silicon Valley was incompetent.
And Charlie, you can't regulate away incompetence.
That's what people never learned out of the financial crisis.
You have to let people suffer pain.
That's the greatest regulator in the world.
All of us who are parents know that.
Then kids get, that's it.
Then, Dave, do we just say to the big depositors, tough luck?
Do we just say, look, we'll go up to 10 million?
I mean, final thing.
You talk a lot in your economics class, moral hazard.
Are we on that fine line here?
Yes, we are on the fine line.
There is a moral hazard for uninsured depositors, but depositors should not have to worry about the solvency of their bank.
So they're making a policy mistake.
But the reason why I'm putting that as secondary is because the primary thing is why they're making the policy mistake, which is their failure to let this happen to begin with.
I think that makes a lot of sense.
Dave, you very, very clear.
Our audience loved it.
This is an incredibly confusing topic.
I mean, I do politics and philosophy.
I don't do fractional banking.
But you explained it in a way that I think everyone could understand.
And I sure hope we do not have a run on the banks.
That would be really bad and would be tragic for a lot of people.
Dave, thank you so much.
Thanks, Charlie.
Thanks so much for listening, everybody.
Email us your thoughts as always, freedom at charliekirk.com.
Thanks so much for listening.
God bless.
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