PoliticsAside: Silicon Valley Bank Collapse

On the most recent episode of PoliticsAside, Congressman Porter was joined by Hugh Anderson, Managing Director of Hightower Las Vegas. Mr. Anderson, who has more than 42 years of experience in the financial services industry, answered many of the questions that have been top of mind since the news regarding Silicon Valley Bank first broke. 

Transcript

Welcome to a special edition of Politics Society.

0:02

You know, politics aside, was created an opportunity for me to introduce friends of mine, national leaders and international leaders on topics that are timely such as what is happening now with the Silicon Valley Bank.

0:16

What's happening in the banking industry?

0:19

I've invited one of my good friends for many, many years to speak today.

0:23

Hugh Anderson is the managing director Hightower Las Vegas, 42 years of experience and financial services and a New York native.

0:33

His motto is finding creative perspectives against conventional wisdom.

0:38

And I wanted to do a quick hat tip to Desert Research Institute where I am Mobile today at the Desert Research Institute and the National Atomic Testing Museum.

0:48

I want to thank them for allowing me to set up shop here, mobili.

0:51

So having said all that dramatic happening since last week, we have SVB Bank a few weeks ago there, the darling of the banking industry.

1:05

A few weeks ago, they were set as an example of what other banks ought to be doing and one of the largest banks in the world.

1:13

Now, what does it mean when that bank?

1:15

Collapsed.

1:16

You what happens next, what's going on?

1:19

But what you missed also, John is next week I believe they were going to be over in London accepting award for one of the best run banks in the world.

1:26

But that's, that's that's inside the the challenge that Silicon Valley Bank has is that it had number one, a concentrated clientele.

1:36

So part of their working model was that as these companies in Silicon Valley went public, that Silicon Valley Bank helped them go public.

1:48

The expectation was that the proceeds from those offerings would be deposited with Silicon Valley Bank.

1:54

And it became a very nice flywheel approach to things over the course of the many years of repressed interest rates, it became appropriate for banks to do what they could to get whatever rate of return they could on those deposits when they weren't actually lending them out.

2:13

Because as you know, most banks, all banks have to have a certain amount of money on deposit from a regulatory standpoint to be able to show stability as well as be available for depositors to make withdrawals.

2:26

Well, starting in 2022, when the Federal Reserve started raising interest rates, many banks that had reached for yield, meaning that they bought bonds that were longer duration.

2:39

Those bonds started becoming less valuable in on their portfolio.

2:44

But if they, if the bank wasn't intending to sell them, they didn't have to recognize those losses.

2:48

But as banks, I mean, as depositors started withdrawing money to find higher yields elsewhere that the banks weren't offering, then the banks had to start selling those bonds at massive losses.

3:03

And that's what happened last week with Silicon Valley Bank, they had to sell a bunch of their bonds that were deeply underwater because of rising interest rates and the fact that their customers, many of their customers are non profitable tech companies that have only just gone public in the last several years and there's essentially startups.

3:21

So they're seeing challenges in their fundamental operating businesses.

3:26

So not, not only do you have the fundamentals of banking, but you now have your customers are becoming more precarious in their, in their situation.

3:35

So the average consumer is, you know, certainly worried about what's going on in China.

3:41

What's what's happening in Ukraine always what's happening in Washington DC.

3:47

And now there is this sense of urgency and panic starting to happen.

3:51

People are wondering about their own savings and visions of 2008, but people are really nervous and we wake up this morning and now it looks like the other banks are gonna be impacted.

4:02

So what really made this bank different than everybody else?

4:08

It's because technology has become the centerpiece of our economic and our economic universe, take the advances in technology are what we expect to see society move forward with all the new innovations that Silicon Valley has rightly so been proud to bring forth for the whole world to adopt and adapt to.

4:29

And the fact that that linchpin of our economic growth over these many decades is now coming into question.

4:37

Has people gives people pause for concern.

4:41

Plus we also have to remember John, any financial transaction is a transaction based on confidence you and I put our money in a bank fully expecting to get that money back on demand.

4:53

And people forget the fact that you're, when we make a deposit, that money is then lent out.

4:59

And ideally the bank, if they're prudent and thoughtful in how they lend that money out, the vast majority of their loans get paid back and they make their interest and we get paid our interest and the system works fine until it doesn't.

5:14

And when you have a situation like we've had over the last several days, there's a crisis of confidence going on and it's a good old fashioned traditional bank run and people are asked, are shooting first and asking questions later, give me my money back and then I'll decide what to do later.

5:30

I may put it back or I may not.

5:32

But I want my money now.

5:33

And whether whether the banking question is in jeopardy or not, doesn't matter those people there, those customers want their money back.

5:42

So in this particular case, and I don't have the latest stats because again, it's coming out by the minute and you are probably far more in tune than I am, but it seems like 93% of the funds that were within the bank were above the $250,000 limit from FDIC.

6:01

Yes.

6:02

The again, as I, as I mentioned a few minutes ago, part of the expectation for Silicon Valley Bank's services were the expectation that if we help you technology company, a we expect all proceeds of business transactions to be done through and with us regardless of the amount of money.

6:22

So John, if you and I started a tech company and we raised $500 million They expected that $500 million dollars to be put on deposit with them.

6:31

And you know, payroll would be met and you know, expenses would be meant, but it's sitting on my balance sheet.

6:39

And now as the bank, we go and invest that money and that's really where the trouble began.

6:42

And if you remember back in the Drexel Burnham days during the so called junk bond era, part of that issue was many, many companies that went to Drexel Burnham were encouraged to borrow more than they actually needed.

7:01

And the part of the excess was intended to buy other bonds that came to market and it was the whole flywheel effect again.

7:09

And then you get this concentration of risk on the part of a select few players and then things fall apart.

7:16

Sometimes.

7:18

So I think, you know, having said that, you know, we're focused now on this nameless faceless institution that we no longer trust.

7:26

But what it really means is there's a large tech organizations that may have hundreds of millions of dollars but also that this waterfall or domino effect of a smaller investor that's still, you know, questioning trust, but maybe above the 250.

7:44

But in essence, this puts jobs, families education payroll, of course, is that part of that domino effect?

7:53

So how is the consumer, how do you know what bank to go to mean?

7:59

You assumed all these things, right?

8:01

We assume Washington is gonna protect us, right?

8:03

We assume there's rules in place to take care of all this.

8:08

And then it appears to be a management issue and you know, we look at leadership in the bank.

8:13

So what are we, what is the average business owner or, or family supposed to do to find trust in the banking industry?

8:22

Well, first off, they need to recognize the limits of F D I C coverage.

8:27

Now, the fact that the treasury is back stopping all the depositors in Silicon Valley Bank according to the latest news reports, what do I want to talk more about that in a minute?

8:39

But thank you for bringing that up.

8:40

Please continue.

8:42

And I think that's purely a function of the fact that all of those companies, that were you know, that 93% of their deposits uninsured would basically bring to a screeching halt, a major major segment of our economy where they would know not be able to meet payroll, they would not be able to pay their bills and layoffs and shutdowns with cascade as the term you just used would start occurring.

9:07

So I think that's in essence why the treasury decided to do what they're doing.

9:12

But there again, you know, John Q public says, why do I have to play by the rules?

9:18

And these other folks don't.

9:19

And that's, and so for most people, I think they should recognize the F D I C limits, know the rules.

9:25

If you're, if you're stay below the limit, you, you are insured and you should never have any issue with the bank that goes bad.

9:33

Number two, you should pay attention to what your bank is, what your, what type of bank you're doing business with.

9:39

This is a local bank that's largely involved in the construction business.

9:44

Well, then the cycles of construction will be important to that bank.

9:49

The same thing with, you know, technology or what.

9:52

So understanding where who you're trusting your money to is is very important.

9:57

And then of course, the, the knowing what your money is in because if you're investing in a, if you're saving in a bank, then that that bank is using your money.

10:07

And so your money is now has become an investment not necessarily your investment, but it's, you should know that your deposit now went to a construction loan or it went to a high tech company that went to a manufacturing company.

10:21

And if that bank is broadly diversified and very well run and prudently managed, then you should, you should have confidence, but you can also get the information at the F D I C.

10:32

But most people, of course, don't, don't do that.

10:34

They don't delve into the background on exactly how the bank is operate and what their reserves are and so forth.

10:40

So it's really a function of if the government has these rules in place of F D I C coverage, stay below those coverages and then, you know, spread out your ranks.

10:49

And this is a classic case of don't keep all your eggs in one basket if, if insurance coverage is important to you.

10:55

So as you note, Congress and Senate have been meeting throughout the weekend, you know, having committee meetings and conversations, meeting with the fed, talking with F D I C and, and bless the world of public servants.

11:13

I sense now we're going to see another pendulum swing from a regulation standpoint because again, we as public servants were always looking for solutions to problems.

11:26

So I expect we're gonna see a lot of that like starting any minute now in, in D C.

11:32

But also the fact that there has been a commitment to create a new, the Reserve and Treasury plan to create a new emergency liquidity facility.

11:45

There is a dramatic announcement from Treasury and Federal Reserve F D I C that, that all these investors will be fully protected.

11:53

How does that work?

11:55

I mean, does that mean that whatever, whomever or whatever bank I'm involved with?

11:59

I can now just count on the feds coming in and bailing it out.

12:03

What does this mean?

12:04

Well, I think that's exactly the question, John, where does it stop?

12:08

Where do we draw the line?

12:11

Because there are financial institutions throughout history, financial intermediaries that were not well run were not well managed.

12:18

We're not thoughtful and they didn't necessarily intentionally blow themselves up but they did.

12:25

And should they be, should they be bailed out?

12:29

The reality is, is that, you know, the Federal Reserve and you know, we can talk about this and we have talked about this for many, for many years, the Federal Reserve Acts as both pyromaniac and firefighter, they start the problem and then coming to rescue the problem and artificially suppressing interest rates for so many years caused too many individuals and institutions to play fast and loose with sound economic thinking and in many cases were forced to because there was that old issue, there were no other alternatives when interest rates were actually negative and you do you lose, you lose sight of prudent risk taking and prudent risk taking means that I will back John Porter in his endeavor because he's got character, he's got integrity.

13:17

He's got a good business model.

13:18

He's got a history of practical success and his widget is something that looks like it could do well in the, in the investment world.

13:27

Well, that, that, that's no assurance of absolute success, but it's a, it's a sound business risk.

13:34

Well, if the fed continue, if the, if the federal government keeps running in to bail out every, miscalculation on the part of the business community and the financial markets, then nobody's ever going to play by the rules.

13:47

So if you can run down the halls with scissors without ever getting hurt, then you're gonna keep running down the halls with the scissors.

13:55

And by the way, I'm happy for the individuals, especially those that their life savings, is on the line and businesses and I do appreciate it, but I also can think of the domino effect.

14:09

Now, again, with the Feds step stepping in saying everything's gonna be okay, but I don't really know what everything's gonna be okay means I've been around Washington way too many years.

14:20

I don't know what that really means.

14:23

but I do sense now, not only within, you know, the business community, but also the banking industry.

14:30

So what, what's happening would you guess today within the community, banking and the smaller banks and even the credit unions for that matter?

14:39

What, what are they saying at their board meeting this morning, what are they talking about?

14:44

I'm pretty sure that they're talking about the, the sheer concern and borderline hysteria on the part of their depositors who are coming in and very concerned about the safety of their assets in that bank.

14:58

Whether that bank has any risk whatsoever of contagion from these other issues.

15:05

We have to remember that Silicon Valley Bank was a very unique niche bank just like some of the others, many traditional community banks are not niche banks.

15:17

Their, their fundamental dependence is on the general health of the economy in their local community.

15:24

So if you think about the Washington D C economy, which is relatively stable because of the nature of government as a business and all the leasing and construction goes on their Las Vegas with its cycles and so forth.

15:38

So any banks that cater to a particular community, you just have to look at the overall health of that business, that economic ecosystem.

15:46

And that will tell you about the general health of that bank.

15:49

But when there's a crisis of confidence, then it just becomes a matter of helping people relax and, and postpone any you know, urgent decisions that might might not be in their best interest.

16:04

And then again, the question becomes, where do they go a really good question or go to SVB now because you know that's safe, right?

16:14

So let's invest more into a failed system.

16:18

Now, I was in office, of course, during the crisis, the mortgage crisis, banking crisis, auto crises.

16:26

And you saw a number of steps taken by Congress if nothing else to show stability and to provide confidence back in those years, 678, it was to show confidence today with, you know, multimedia, social media and, and stories.

16:46

and, and today, you know, as we analyze what happened with SVB, there's a question of leadership, I was end of the day.

16:54

It's about who's running the organization and it appears that maybe they didn't learn from a few years ago.

17:01

But well, this one end of the day again without pointing fingers in the day, this is gonna be about that there wasn't proper investigations or, or checks and balances or is this going to be about from the federal government or is this about peer leadership in their decision making on investments?

17:19

What do you think the end of the day?

17:20

This is gonna be, how is this gonna be categorized?

17:23

Well, at the risk of running down the rabbit hole, you have to keep in mind John that there are in, there's a whole demographic of people who have never lived in a higher inflationary environment, nor in an interest rate environment where interest rates were above a fraction.

17:40

We're talking about the better part of the last 15 years.

17:43

So think about when you were in Congress and young people graduating that year, they're now in their mid thirties and many of them in their careers are, have achieved a certain level of managerial responsibility and so forth.

17:57

They don't know anything else.

17:58

And now suddenly as they, you know, things are coming home to roost and the reality is that the, the grayer hair should have remembered and should always remember.

18:10

And as long as the fed and the government continues to intervene in preventing mistakes, it's just like as parents, if you never let your child make a mistake, they never learn from that mistake.

18:23

And we continue to spackle over problems and those problems continue to fester underneath the veneer of, well, it's all repaired.

18:32

Everything's fine.

18:33

Let's move on.

18:35

And so when people will keep reaching because, well, I can take more and more risk because I'm not going to get burned because the government's going to bail it out.

18:44

And so, you know, at what point if you think about what happened during the Great Depression, where many people lost their life savings when the banks failed completely and so forth, They spent the rest of their lives never being in debt and never using the financial system.

19:01

And of course, the never being in debt part may or may not be appropriate depending upon their circumstances because good debt has a place in an economic system and a business decision, but never, never trust in the financial system again, the proverbial mattress was not a good place to be.

19:19

So there's a, there's a fine line between preventing a cataclysmic economic meltdown and seizure and letting the chips fall where they may when imprudent business decisions and manage management decisions have been made.

19:35

Well, you know, as I mentioned earlier, this is a very special edition of Politics Society and, you know, I appreciate you hopping online with about five minutes notice.

19:46

and I do value you take your time and I know you have a lot happening today, but if I could just kind of close with a couple of questions, you mentioned that you touched upon it early, were possibly on the eve of another increase in interest, correct?

20:03

We're still looking at going into our second year in Ukraine and the cost of of the establishment operations business that you have built their, their lines of credit and families on a different model that's starting to change.

20:21

What happens if they raise at another point?

20:24

0.5.3 parts of point?

20:25

What does that, what does that do to the dominoes?

20:28

What happens?

20:29

Would you guess the fed is looking for a certain level of equilibrium between financial market, valuations, stock market valuations and interest rate equilibrium and to get inflation down to a certain level, there's still two widest disparity between those metrics.

20:49

And so the arguably we're already in a recession, many people don't see it or feel it just yet except people have already been laid off.

20:57

But the CEO of fedex back in October said we're in a global recession.

21:01

And if you think about all the years we've heard about, the fedex and ups and the post office not being able to, deliver packages on time during the holiday season this past year, fedex and ups had planes parked because due to lack of demand for their services, delivery services So that arguably we've already been in a recession to one degree or another.

21:24

And now it's getting progressively worth because The Fed started raising rates back in early 2022.

21:31

And there is a healthy, roughly a year give or take lag between raising rates and when they actually start biting.

21:39

So it's all, it's like when you put your foot on the brake in a rainstorm.

21:45

When you first put the foot on the brake, the car is not slowing down enough because it's the road slick and the waters under the tires.

21:50

But eventually the more you push, the car will finally stop.

21:54

And now we're getting to that phase and you know, there's an old adage that the Fed keeps raising rates until something breaks.

22:01

Well, what happened over the weekend?

22:02

Something broke now, will they stop?

22:04

They've already telegraphed that they're going to raise rates at the next meeting.

22:08

Inflation is still very high.

22:10

It is causing massive income inequality among our population.

22:15

Those of us with assets have benefited from a rise in inflation because some of our assets have increased in value.

22:20

But the person who doesn't have assets, but just a paycheck is losing purchasing power dramatically.

22:26

And that's a problem that the fed has to cure, which they caused by the way.

22:31

So the last, probably the easiest question to you today, it's about the debt ceiling and you know, that is looming as well.

22:41

You know, the federal government has overcharged its credit card.

22:46

Now the bills do and we exceed what's happened over the weekend as the politics aligned.

22:55

Now, this is politics aside, we're not, we are not picking sides.

22:59

We're talking about politics.

23:01

You have the conservative members of the Republican Party and the more progressive members of the Democratic Party.

23:09

And then you have the more I think more in reason members of Congress, the president's new budget has come out some of the highest taxes according to the media.

23:20

So as we get into this debate of, we're getting closer to coming to a conclusion with the debt ceiling sometime earlier this summer.

23:31

How does that fit into the confidence level of the industry of the investor, of the family of, you know, small business moms and dads.

23:39

How does all this fit into the lack of comfort and security?

23:43

Well, you, you talked about it a few minutes ago about leadership and management.

23:48

People are looking for sound thoughtful and strong leadership among our elected as well as managers and everything else.

23:56

And I think the longer the our political leadership plays chicken with this discussion and if the economy is beginning to continue to weaken because of the Fed's intend to slow it down, so we can get inflation back under control.

24:14

That will create a lot of discomfort which would create volatility in the financial markets.

24:19

And the reality is John, you know, raising taxes, increasing regulation, you and I both know that's not the, that's not the answer to improving our our debt issue, our debt situation.

24:32

The best way for us to fix the debt problem is to grow, Unleash the animal spirits create productivity enhancing policies that will allow this country to do what it does best and that's grow.

24:43

And if we grew the way we are capable of growing, the debt would not be an issue.

24:47

But we have hamstrung the economy in so many respects.

24:50

And we really haven't had a major innovation, productivity innovation in this country since the late 90s when the in internet really went mainstream.

24:58

You know, you can only have so many iterations of new cell phone and that's not, that's not innovation, that's just product enhancement.

25:05

We need to unleash the animal spirits and it would not be a problem.

25:08

But right now it's a problem because we do not have that productivity growth and we do have a slowing economy and both sides are going to play politics with this.

25:18

And if they take it too far in terms of what the public perceives as a lack of leadership, it could create some real volatility in the markets.

25:25

Well, now Hugh Anderson, managing Director of Hightower Las Vegas, I appreciate you sharing your experience for 40 some years being on this last minute call.

25:38

I do think it provides value of insights from your perspective.

25:43

Thank you for today.

25:45

Of course, your friendship and our thanks to the National Atomic Testing Museum for letting me set up shop here in about five minutes in the desert Research Institute.

25:54

And we appreciate everyone joining us and said that's politics aside and hopefully you could put politics aside and sit back and enjoy and learn from some of the best in the world.

26:04

So you Anderson.

26:05

Thank you.

26:05

Appreciate it.

26:06

We'll hope to see you soon.

26:07

Thank you, John.

26:09

Enjoy the conversation.

26:10

Take care.