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First Move with Julia Chatterley
Biden: I will ask Congress to Strengthen Rules on Banks; U.S. Banking Authorities Scramble to Prevent Crisis; HSBC Buys SVB's UK Business for just over $1; Meghji: Analytic Models should have Predicted Issues; Kalb: This is a Banking Problem, not a Tech Problem; U.S. Government Vows to Rescue Depositors after Two Banks Fail. Aired 9-10a ET
Aired March 13, 2023 - 09:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[09:00:00]
(COMMERCIAL BREAK)
JULIA CHATTERLEY, CNN HOST, FIRST MOVE: A warm welcome to "First Move", great to have you with us this manic Monday, day where financial news is
truly coming in everything everywhere all at once. Maybe Oscar worthy coverage and analysis of the global efforts to protect depositors shore up
competence and prevent runs on other banks across the United States.
All happening this weekend, following the collapse of Silicon Valley Bank of sinks second largest banking failure in fact in U.S. history now
President Biden is set to provide what I'd call a verbal reassurance any moment now and we will bring that to you live.
Rahel Solomon joins us now. Rahel, I call it verbal reassurance, but also, I think, some explanation of why they moved so swiftly in the measures that
they took? What should we expect from the President?
RAHEL SOLOMON, CNN CORRESPONDENT: Well, you know, Julia.
CHATTERLEY: I'm going to interrupt you Rahel, President Biden speaking, let's listen in.
JOE BIDEN, PRESIDENT OF UNITED STATES OF AMERICA: --Silicon Valley Bank and Signature Bank. Today, thanks to the quick action to my administration over
the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them. Small businesses
across the country, the deposit accounts that these banks can breathe easier knowing they'll be able to pay their workers and pay their bills.
And our hard working employees can breathe easier as well. Last week, when we learned the problems of the banks, and the impact they could have on
jobs of small businesses and banking system overall, I instructed my team to act quickly to protect these interests. They've done that.
On Friday, the government regulator in charge, the FDIC took control of Silicon Valley Bank's assets. And over the weekend, it took control of
Signature Bank's assets. Treasury Secretary Yellen and a team of banking regulators have taken action, immediate action and here are the highlights.
First, all customers who had deposits in these banks can rest assured they'll be protected. And they'll have access to their money as of today
that includes small businesses across the country, that bank there and need to make payroll, pay their bills and stay open for business. No losses will
be and I made this an important point, no losses will be borne by the taxpayers.
I'm going to repeat that no losses will be borne by the taxpayers. Instead, the money will come from the fees at banks pay into the Deposit Insurance
Fund, because of the actions of that, because of the actions that are regulars already taken. Every American should feel confident that their
deposits will be there, if and when they need them.
Second, the management of these banks will be fired. If the bank is taken over by FDIC, the people running the bank should not work there anymore.
Third, investors in the banks will not be protected, they knowingly took a risk. And when the risk didn't pay off, investors lose their money.
That's how capitalism works and fourth, there are important questions of how these banks got into the circumstance in the first place. We must get
the full accounting of what happened and why those responsible can be held accountable. And my administration, no one in mind that no one is above the
law.
And finally, I must reduce the risk of this happening again. During the Obama-Biden administration, we put in place tough requirements on banks,
like Silicon Valley Bank and Signature Bank. Including the Dodd-Frank law to make sure that a crisis we saw in 2008 would not happen again.
Unfortunately, the last administration rollback some of these requirements, I'm going to ask Congress and the banking regulators to strengthen the
rules for banks to make it less likely this kind of bank failure would happen again, and to protect American jobs and small businesses.
Look, the bottom line is this. Americans can rest assured that our banking system is safe, your deposits are safe. Let me also assure you, we will not
stop at this we'll do whatever is needed. On top of all that, let's also take a look a moment to put the situation in a broader context.
We've made strong economic progress in the past two years. We've created more than 12 million new jobs, more jobs in two years than any President
has ever created in a single four-year term. Unemployment is below 4 percent for 14 straight months. Take home pay for workers is going up
especially for lower and middle income workers.
And we've seen record numbers of people apply to start new businesses, more than 10 million of them, more than 10 million applications over the net
last two years starting businesses.
[09:05:00]
Now we need to keep the program this progress going. That's what swift action that my administration over the past few years is all about
protecting depositors, protecting the banking system, protecting the economic gains we've made together for the American people. Thank you. God
bless you, and may God protect our troops in California.
UNIDENTIFIED MALE: Mr. President, what do you know right now about why this happened?
CHATTERLEY: President Biden speaking there to address the measures taken over the weekend to shore up confidence in the banking sector and as we
were expecting him, the first thing, the first line out of his mouth was deposits will be there when you need them to try and reassure customers,
clients of banks across the United States that their deposits are protected.
But also emphasizing that this isn't a bailout that no taxpayer money will be used to backstop some of these banks that are and remain a concern,
Rahel Solomon is back with us. Rahel, I rudely interrupted you before. Before you could even suggest I knew exactly you're going to predict
exactly what President Biden said there. What do you make of those comments? I think expected.
SOLOMON: Expected but perhaps critically needed, right? I mean, the first comments out of his mouth, as you alluded to there; Julia was that
confidence, right instilling confidence for Americans saying that Americans can have confidence that their deposits will be safe that payrolls will be
safe.
And Julia, as you know, part of the story about why SVB failed in spectacular fashion as the way it did in the way that it did was because of
a lack of competence, right? When SVB communicated, some would argue poorly, that it needed to raise cash in order to become more liquid.
Well, that really sent off a panic between investors between Founders, and we saw a traditional bank run. So we saw the federal regulators really step
up in dramatic fashion and very quick fashion over the weekend to try to prevent the contagion right? Try to prevent that panic from spreading.
And Julia, really quickly, I just want to provide a bit of --. I just spoke to a Founder who had her money tied up at SVB for the last five years or so
she said they had actually been a really great banking partner. She didn't find it shocking in terms of what we're learning about their risk
management.
But she said that from Wednesday to Friday, it was sheer panic within the Founder community within the tech community, as our Founders were hearing
from their investors, some saying take your money out other saying everything is OK. She said, as of Saturday, some of her business accounts
were bouncing that the money was not there from her SVB line of credit.
And so in the sheer confusion about what would happened to SVB, she started to move some of her expenses to her personal credit card. It really just
gives you a sense, Julia, of just the range of emotions that Founders and employees, of course of the startups must have been going through this
weekend.
And why we saw such quick action from the federal government and why President Biden again, trying to stress that this was a limited situation,
but that the government will do everything, do whatever is needed to try to prevent any contagion to try to prevent any additional fragility beyond
what is already evident?
CHATTERLEY: Yes, rest assured that the banking system is safe. But I have to say I have great sympathy for some of these startups that were wondering
- they were going to do, quite frankly, because they're not bank equity analysts. They're not economists to be able to understand that and perhaps
the deposits aren't safe.
We're going to be debating this later on in the show. Rahel, great to have you with us! For now, let's just take a step back and understand what just
happened in the past 24 hours. The Federal Reserve, the U.S. Treasury, and the U.S. bank regulator the FDIC announced customers of Silicon Valley Bank
will be able to access frozen cash today and you heard President Biden reiterate that just now.
So this includes all uninsured deposits, so amounts over $250,000, because they were protected. We are talking billions of dollars in deposits in the
case of firms like Roku, and Circle, and this is crucial for a couple of reasons. One, it protects the tech firms who suddenly face collapse, as
Rahel was just saying.
Some unable to even meet wage costs this week we'll meet one on the show later. And two implicitly, not explicitly but implicitly protects
depositors in other banks were similar, different, but similar balance sheet concerns exist. Now for those banks too they're in our access to
loans.
They can use some of the government bonds or assets like them on their balance sheet as collateral with the Federal Reserve. So they can get money
from the Federal Reserve without being punished for the fact that those bonds have lost value due to the Federal Reserve raising interest rates.
So it means they don't have to sell them at a loss and this is crucial. Remember, it was the huge bond losses at Silicon Valley Bank that began
this panic in the first place. Now authorities didn't stop there stick with me. They also took ownership of crypto industry lender Signature Bank after
a run on deposits there.
Now these emergency actions are also global to some degree in scope the U.K. orchestrating the fail of Silicon Valley Banks U.K. on to HSBC for
just over one pound. Now the one thing I would argue got missed perhaps in all of this and we'll discuss is perhaps a ban on short selling on some of
the regional U.S. bank stocks.
[09:10:00]
Now again implicitly depositors are safe but the balance sheets of some of these banks remain a concern and that's clearly been reflected in some of
the stock prices today, you can see those in front of you. Lots of these banks will probably need to raise money. And where is U.S. as a depositor
would you rather have your cash in a big bank like JP Morgan or Bank of America, or one of these small ones, and that's the concern.
Take a look at Wall Street. And we'll give you a sense of the price action. U.S. futures volatile, as you would expect a flight underway to relative
safe havens she says, like government bonds. Europe sharply lower with banks, they're pacing losses, I think we have to expect turbulence, but
authorities have acted, depositors are safe.
And now we ask how to prevent this in future like President Biden said, and what it all means, of course, for the Federal Reserve's inflation fight. My
next guest says the actions taken by U.S. authorities have greatly reduced the contagion risk for other economies around the world.
Gerard Cassidy is Managing Director and Head of U.S. Bank Equity Strategy at RBC Capital Markets and joins us now. Wow, that was a lot of me, Gerard,
quick, take it over. What do you make of the moves this weekend --?
GERARD CASSIDY, HEAD OF U.S. BANK EQUITY STRATEGY AT RBC CAPITAL MARKETS: Julia, you summed it up very well, I think it is sufficient. I think what
they came out with yesterday, is an incredibly strong program to support depositors as you have identified, it's not just for the banks that
actually failed.
It's also an implicit guarantee for large deposits over 250,000, for all banks, is going to be very disruptive over the next 48 hours, this is not
going to be a smooth transition. But I think we will get through it and I think with the strength of these programs that will help us get through
this turbulent time.
CHATTERLEY: What do you expect the divergence that we're seeing between some of the larger banks and I mentioned them JP Morgan, Bank of America
just use a couple of examples and some of the smaller regional banks, because despite the implicit, as we've discussed, guarantee on bigger
deposits for some of these banks.
The fact that these banks have the ability to use some of their government bond holdings or similar assets and get money if I were a depositor, I'd
still be looking at my bank account and going, everybody's saying it's safe, but I'm a little bit concerned.
CASSIDY: And I think time will help with that concern. I can understand what you're saying. But we have to remember that all the deposits, and many
of these institutions, whether they're under the legal deposit insurance of 250,000, or above it, are going to be backed by the FDIC.
But it's understandable why people would be concerned, particularly with some of the smaller banks whose stock prices have fallen dramatically in
the last 4 to 5 trading days. But I think as we'll see with time, things will smooth out as people understand the program, and really get their arms
around.
So the program obviously, the President addressed it a short while ago, I think you'll see more treasury, Federal Reserve and FDIC Officials out
telling everyone what the program is about reassuring the public that their deposits are safe.
CHATTERLEY: Yes, you mentioned something that I think it's critically important to understand about Silicon Valley Bank. And that is there were
two things going on here. There was a high concentration of deposits from the tech sector.
And we know there have been a huge revaluation and the need for liquidity to get cash from many of these tech startups, and also the bank itself
exposure to government bonds that have lost value, at least on paper as interest rates rise. And this is virtually unique to this bank, the
combination of these two stresses at this moment in time.
CASSIDY: You're absolutely right, and I would point out that this bank, though, was highly successful in previous years, unfortunately with the
change in interest rates, it was becoming upside down as we call it in their bond portfolio. And when they took those losses last Wednesday, many
of their large depositors who had millions, if not billions of dollars in deposits, quickly fled the bank, which caused the run on the bank.
Now, what's interesting is as this crisis is unfolding here, bond rates have declined, meaning bond prices in these portfolios are increasing. So
these unrealized losses are shrinking as the 10-year government bond yield comes down. And so I think what you'll find is to your point, Silicon
Valley was very unique and had about 90 percent of its deposits were greater than 250,000. That's not your normal bank.
[09:15:00]
Normal banks have deposits Less than 250,000 anywhere from 30 to 55 percent of total deposits much more stable deposits. And now with this program
announced all the deposits should start to stabilize as the week unfolds.
CHATTERLEY: And the vital point you make there is the diversification that for many of these banks, they have people who aren't lucky enough to have
more than $250,000 in their bank accounts, and that makes a difference too. This was a blind spot, though, whether for regulators, for our
understanding of the vulnerabilities as interest rates rise.
Are you concerned about and can regulators do better? Clearly, they can do better, but quickly do better at assessing these risks early on. So that we
don't have a sort of catalyst event over the course of a week, like we just had?
CASSIDY: It's a really good question, because last week at the RBC Financial Institutions Conference in New York, one of the questions I was
asking Senior Managements of coverings like Citigroup, and others, you know, interest rates have moved up so dramatically and in years past cycles
past like 1994, 95.
When we hit those kinds of rate moves, we had the bottles, Orange County, California filed for bankruptcy, and Mexico had the peso crisis. So I was
asking these management teams, why haven't we seen the barcode? Now, unfortunately, we have 24 hours later. And I think you bring up a good
point, because the - tragedy, the financial crisis, was a credit led problems.
This has nothing to do with credit, this all has to do with interest rates, and a mismatch between the lengths of time that the bonds mature, versus
the funds they're using to support those bonds. You have to go back to 1979 and 1980, when the first Pennsylvania Bank went under with this problem.
That's how long ago, and I think what the regulator's will obviously do is now take a look at interest rate risk, as well as credit risk in assessing
the bank's health.
CHATTERLEY: Which to your point, arguably, they should have been doing before. But what was the management saying to you when you were asking this
question?
CASSIDY: They were surprised as well. No one was obviously predicting, of course, what happened 24 hours after I was asking those questions, and
everybody was surprised that something had not broken as well, because rates had moved so much. Now, I don't want to point out, I don't want to
suggest regulators don't look at interest rate risk, they do.
But this upside down bond portfolio problem came, you know, out of - field because of the speed in which the information was moving, which is also
this is something very different that we've never seen before, to see a bank that was healthy at 3:59 pm on Wednesday. Go out of business by Friday
morning was absolutely breathtaking.
And so part of what needs to be addressed by the regulators is how quickly information moves and when it deals with confidence, we've got to be very
careful with that. So that's another issue that will have to be addressed. Once everything settles down is how do we handle the speed in which this
information can move around?
CHATTERLEY: Yes, that's actually a brilliant point. I couldn't agree more with you because we saw the panic, particularly on social media. And I
think in the past, you wouldn't have had such a swiftly bank run situation if information weren't flowing so far.
So efficiency and information can be really good in the financial sector except in this kind of situation. And very quickly, do you think there's
also a problem in communication between bank management and the regulator's? I'm just trying to imagine a bank management trying to explain
leveraged crypto to a regulated to ensure that they understand that what's going on and how things move with interest rates.
And I'm even struggling to explain it here myself. So I'm not criticizing, I'm just saying I can imagine that there is a challenge between bank
management and regulators and even understanding some of the products out there right now and the vulnerabilities.
CASSIDY: Yes, the regulators are very close in monitoring all banks, especially our biggest banks, and generally they've been doing a very good
job since the financial crisis and under the Dodd Frank stress test that all the big banks go through. And in the case of Silicon Valley, as you
pointed out, this was not a crypto situation.
Now Signature Bank did have some crypto accounts, but that really wasn't the cause of their problems. It was, again, the bond portfolio and the
deposit outflows, but you're right. When it comes to crypto, it is different, but the regulators they think, and the Federal Reserve in
particular, has been addressing these issues on crypto.
[09:20:00]
But the regulators in the banks generally have a very strong working relationship, especially as I mentioned, with this annual stress tests when
and those results come out every June. So we'll be seeing those for the biggest banks and that stress test is very rigorous and the banks in the
past have easily passed it in years past.
CHATTERLEY: Yes, I just think there's risk assessments need to be more dynamic than once a year or even reporting quarterly. Yes, it's an ongoing
conversation who don't we'll come back to it, Gerard Cassidy, great to have you with us sir thank you, the Head of U.S. Bank Equity Strategy at RBC
Capital Markets.
All right, coming up after this we'll look at the International fallout from Silicon Valley Banks downfalls. And later the CEO of One Tech Startup
discusses getting caught up in the crisis. Stay with us.
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CHATTERLEY: Welcome back to "First Move", the Silicon Valley Bank collapse spreading far beyond just the U.S. banking sector and efforts as you heard
from President Biden and beyond to shore up the financial system.
Over in the U.K. HSBC announcing it's buying the bank's U.K. arm for just one pound. Anna Stewart joins us now. Anna, I know you have more of the
details on this, but there were tremors through the U.K. tech sector to over fears of what this bank collapse would mean?
ANNA STEWART, CNN REPORTER: Big tremors I think it's been as busy a weekend for many in the U.K. as it has been in the U.S. And I think it's been
hugely concerning particularly for tech firms who banked with Silicon Valley Bank, U.K.
Also, of course, for the Bank of England, and for the government and for Chancellor Jeremy Hunt, who are just days away from his big first formal
U.K. budget? He's been particularly busy. He was hugely concerned. Here's what he had to say about the rescue today.
(BEGIN VIDEO CLIP)
JEREMY HUNT, BRITISH CHANCELLOR OF THE EXCHEQUER: We were faced with a situation where we could have seen some of our most important companies,
our most strategic companies wiped out and that would have been extremely dangerous.
We have built over the last decade, the third largest tech economy in the world, after only China and the United States. So it's very important to us
as a country, this sector thrives. And that's why the --, The Bank of England, we're all rolling our sleeves up over the weekend to make sure we
had a solution.
(END VIDEO CLIP)
STEWART: Incredible he said some of our most important companies could have been wiped out that was the impact that they were looking at and a deal was
by no means guaranteed. It was interesting today that the CEO of HSBC Noel Quinn said it makes excellent strategic sense for their business in the
U.K.
[09:25:00]
It strengthens their commercial banking franchise and so on and so forth it gets more involved in tech and life sciences I suppose. But look at this
look at the share prices. Clearly HSBC investors maybe not very happy, you should see a minus in front of those numbers, of course, they are all down.
But actually, that's in fitting with other U.K. banks and actually European Banks, which are dragging down the stock 600 generally. Is this just
catching up from the market moves we saw in the U.S. late on Friday, when markets are closed here?
Is this still concern over what this means potentially for other banks in a similar position against this backdrop of rising rates? Are there concerns
I think about balance sheets here in the U.K., at banks and also in Europe?
CHATTERLEY: Yes, it's posing all sorts of questions; I think it's also posing. Oh, my goodness, my speech today. It's also posing questions about
what Central Banks are going to be able to do over interest rates, and whether this is going to make them more nervous.
I think because behind the scenes, we've still got this inflation battle going on globally. So I can throw more questions at you Anna, but we're
going to look to China now because SVB bank, I did it, it is also part of a joint venture over in China too.
STEWART: Yes, I was dreading saying the acronym, which is SDP, SVB.
CHATTERLEY: --to you.
STEWART: That is extraordinary. There is a joint venture in China. So this actually further complicates the issue for us, because it's harder to
really know what's going on here. What does it mean, given there was a 50- 50 joint venture? What does it mean for SVB, Silicon Valley Banks joint ownership of the joint venture?
That bit is unclear, but we have had a statement from them, which says the joint venture that is that says the bank has a standardized corporate
governance structure and independent balance sheets, they say that operations are sound. Interestingly, over the weekend, we had at least a
dozen Founders and companies coming out saying very clearly that either they had no exposure to SVB, or very insignificant exposure.
It was a lot of reassurance going on a lot of nothing to see here. So far, that appears to be the case not seeing any huge market moves as a result of
that. But very interesting response, I think, and we don't fully know what it means for that joint venture at this stage, but we may know more in the
coming days.
CHATTERLEY: What was the joint venture called again?
STEWART: Don't make me do SDP, SVB.
CHATTERLEY: Sure, Anna Stewart thank you for that. OK, let's just take a look at what we're seeing for U.S. stock market futures at this moment.
We're approaching the market open, of course, down some three quarters of a percent for the DOW, down six tenths of a percent for the NASDAQ.
You'd expect it to be volatile, I think and that's what we're seeing. We'll keep an eye on those numbers. Also coming up after the break, we'll talk to
a tech startup impacted by the demise of Silicon Valley Bank and ask a Former Executive from the U.S. banking regulator. Why didn't we spot these
risks earlier? And how do we do better going forward? That's next.
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CHATTERLEY: Welcome back to "First Move"! And recapping our top story today the race to shore up confidence in the U.S. financial system, President
Biden addressed the nation a short time ago in a bid to bolster public confidence following the second largest bank failure in U.S. history.
In the past 24 hours, the Federal Reserve, the U.S. Treasury and the Bank Regulator, the FDIC, have said customers of Silicon Valley Bank, including
well known tech names, and startups will be able to access their cash today.
That includes all uninsured deposits. So just to remind you, that's amounts over $250,000. But now, the questions really begin over how regulators
failed to see this coming? Joining us now Sultan Meghji, he's Former Chief Innovation Officer at the U.S. regulator, the FDIC and now a Professor at
Duke University's Pratt Engineering School.
Great to have you on the show Sultan! I think what's become very clear, and we've already discussed this, on the show is concentration risk,
concentration of deposits being made from startups from the tech sector but also concentration risk on the balance sheet of a bank that was investing
in government bonds, mortgage backed securities that are very sensitive to interest rate rises, the combination, a perfect storm.
SULTAN MEGHJI, PROFESSOR, DUKE UNIVERSITY'S PRATT ENGINEERING SCHOOL: That's exactly right. And, you know, it's not just this bank, which really,
I think some of the concerns across the banking regulators, including my former agency. We have this across all of the regional banks right now to
one degree or another. And in the case of Silicon Valley Bank, it was absolutely a perfect storm of interest rate hikes coupled with balance
sheet value decreases that just let them right into this.
CHATTERLEY: And that's where you come in, because what I want to understand is, whether in your mind, given your experience and the role that you for a
short while played at the FDIC, you think there is a better way to assess some of the vulnerabilities.
Whether hindsight is always perfect sight, but there is a way to model in a more dynamic manner, the changes in risk dynamics, particularly in an
interest rate, rising interest rate environment, should we have seen this coming?
MEGHJI: I believe we should have, you know, for a long time now; we've had the ability with advanced analytics, and especially machine learning to be
able to see these kinds of impacts and what first and second order impacts can be far more quickly and far longer before they actually become an issue
you know.
Five years ago, I was having graduate students do this work using, you know, call report data, as well as open bank and market data. And we were
able to predict this kind of stuff, you know, 180 days in advance.
So, you know, when I was at the agency, we put a lot of effort at the time into trying to build these analytic models that were better than just
quarterly call reports. And I really wish that we did more of that kind of work to stop this kind of issue from happening again.
CHATTERLEY: Wait, wait, wait, and say that again. So basically, five years ago, you had university students pulling in easily accessible data to model
what would happen in adjusting interest rate environments and even five years ago, you think, actually, you would have had enough data?
I mean, the NASDAQ collapse that we saw at the back end of last year that would have flagged awarding the holdings of government bonds that would
have flagged a warning, is that what you're saying?
MEGHJI: Exactly right. You know, all of this data is generally available. It's one of the great things about living in an open democracy, you know,
you can download your bank performance data directly from the FDIC, if you choose to. This is an absolutely solvable problem.
And it's really just a matter of having access to the data and running, you know, fairly well, you know, understood analytics against it. And all of
these would have caused me sitting in an examiner seat or sitting at a seat inside of one of these agencies to say, hey, this category of banks or this
category of assets or something that we should be paying more attention to.
CHATTERLEY: You've done it now, because you did sit in one of those seats. You were the Chief Innovation Officer for a while at the FDIC. Are they
using this kind of modeling as far as you know today?
[09:35:00]
MEGHJI: You would have to ask them.
CHATTERLEY: I think I can read between the lines there. I asked the question earlier on the show, and I'd like to get your wisdom on this,
again, being careful what you say, obviously, I'm sure. How able to communicate do you think bank executives are to regulators about the
financial system today, and particularly where tech startups are concerned, perhaps the needs that they have the leverage that exists in the system
right now, particularly in newer sectors like crypto?
MEGHJI: It is a fantast fantastic question and one that I think we should be asking a lot more. You know, the reality of the global financial system
today is it's a 24/7 365 real time system, and that has created entire new categories of financial products and services, entire new technologies,
entire new classes of assets.
And in many ways, the regulatory system still looks like it did 10, 15, 20, 30 years ago. And the disconnect there is fundamentally one of
communication and engagement, you know, I really believe that the public sector and the private sector here could do a far better job of talking to
each other about what one is doing to be more innovative while still playing inside the regulatory environment?
And there's got to be a place for that communication to occur. But I think everybody could be doing a better job there.
CHATTERLEY: So in your mind, who's more at fault here, regulators are not spotting, again, hindsight, perfect sight clear vulnerabilities or bank
management, saying, we may have to be selling at some point $21 billion worth of what are perceived to be in the market is about the safest assets,
you can buy mortgage backed securities, U.S. government bonds, and then trying to raise capital against it. I'm sort of wondering where the blame
is apportioned here?
MEGHJI: Well, I think there's a lot of blame on both sides. And it's important to remember that the way the banking regulatory environment works
is it's not prescriptive, there isn't an official list of 187 questions that the bank examiners asked their banks.
This is a very nebulous area in some ways. And as just as I think it's going to be very easy for people to say, well, Bank X should have been
communicating more formally, more thoughtfully, more proactively with the regulatory community and that absolutely should have happened.
But also, you know, we're going to have to do a better job on the regulatory side of getting smarter about knowing what questions to ask,
especially as it relates to advanced technologies and especially as it relates to this real time activity where, you know, we hear about something
on a Thursday, the bank is closed on Friday. And now, you know, on Monday morning, you and I are talking about how we could have seen this comment.
CHATTERLEY: I know. Well, perhaps the FDIC or some officials are watching this interview and would be interested in seeing some of your dynamic
modeling and obviously, artificial intelligence. I know now playing into this as well. So - when would you go back to the FDIC if they asked you to
come and show what is available and the capabilities that it presents?
MEGHJI: Absolutely.
CHATTERLEY: You heard it here first. We'll ask them. Sultan Meghji, great to have you on! Thank you so much, great to chat. Sultan Meghji there the
Professor at Duke University's Pratt Engineering School, great to chat! OK, still to come on "First Move" relief to small businesses after Silicon
Valley's Bank sudden collapse. I speak to the CEO of one startup about what's next after this.
(COMMERCIAL BREAK)
[09:40:00]
CHATTERLEY: Welcome back to "First Move"! Let me get you up to speed on what's happening on this historic day for global markets. U.S. stocks
volatile as you would expect, as investors weigh the wide array of emergency measures pushed through by U.S. regulators in the past 24 hours
to help shore up confidence in the global banking system.
Regulators guaranteeing the uninsured deposits that collapsed Silicon Valley Bank that's just one of the emergency measures announced. We're
seeing truly extraordinary moves lower however, in U.S. bond yields 10 year yields, which had been approaching 4 percent in the United States not too
long ago, now below 3.5 percent.
What does this reflect? Well, the expectations that the U.S. Federal Reserve will have to reevaluate its rate hiking path in the wake of this
crisis. As Jared Cassidy at RBC Capital Markets told us earlier this will help ease some pressure on U.S. banks that are currently holding
treasuries, U.S. government bonds that will currently be sold at a loss if they had to raise money.
Now, a number of regional banks however, under intense pressure in early trade, as we've mentioned earlier lots of these banks will probably need to
raise money and where would you rather have your cash as a depositor today in a big bank, or in a small? Now as authorities raise to limit the fallout
from the collapse of Silicon Valley Bank, and many businesses spent the weekend worrying about how it would impact them?
Seattle based food management startup "Shelf Engine" uses artificial intelligence to help grocery stores reduce food waste, like many small
companies that banked with Silicon Valley Bank they found themselves without access to cash, and wondering even how they would pay wages.
The Biden Administration has promised the bank's customers they will have access to all their money from today. And joining us now is Stefan Kalb.
He's the Co-Founder and CEO of Shelf Engine. Stefan I am sure you've had an incredibly busy weekend week. So I appreciate your time all the more. Tell
me how you're feeling and what this past week has been like?
STEFAN KALB, THE CO FOUNDER AND CEO OF SHELF ENGINE: Yes, absolutely. First of all, good morning Julia thanks for having me on the show. Obviously, I'm
quite relieved. It was a very stressful weekend, and quite relieved with the news yesterday evening.
However, I do have to say that I'm quite frustrated over the weekend; there was a narrative around tech being the problem here. And that there needs to
be a bailout and I really, you know, think this is super important piece for the American public to understand that this is not because tech is
risky.
We are good stewards of our capital. We manage our company quite well. This is a banking problem. This is the fundamentals of banking. This is about
having two small reserves in the bank. And I understand, you know, this balance between the velocity of money and risks. But nonetheless, this is
really a banking problem.
CHATTERLEY: Yes, I mean, I think there'll be people watching this going hang on a second, there are parts of tech that are risky, and perhaps there
was some excessive risk taking, and there's going to be greater adherence perhaps in future too.
How we're going to make profits, which may be an unfortunate thing for companies trying to grow such as you. But I do think you raised an
important point about your view, which I was keeping cash in a bank, and that bank safe.
KALB: Yes, that's absolutely right. This is not something that's speculative, right? This is not something that we put some money in and
think, oh, we hope that this kind of big bet. This is a bank, just like anybody who's watching the show today puts money in their bank account, and
expects that to be in a safe place. That's the exact same thing that we were doing. We're keeping our money in a safe place.
CHATTERLEY: Yes, you're not an equity analyst. You're not supposed to necessarily need to analyze the health of your bank and what they're doing.
What would it have meant for your business if you didn't have access to cash beyond the $250,000 that was insured?
[09:45:00]
KALB: Yes, you know, we started looking at this late Thursday and early Friday morning, and what kind of contingency plans. Realistically we
understood that we were going to get access to the $250,000 fairly quickly and that is $250,000 that FDIC insurers.
However, a $250,000, for us is a relatively small amount of money, and would have only kept us alive for a handful of days. The other thing to
understand that's really important, given that I'm the Founder and the CEO, is that if I pay employees I should say, have they worked, and I can't pay
them. I am personally liable for that payroll.
Even on Friday, we had a withdrawal for our 401k that the employees had already deposited, that did not go through it bounced. I'm personally
liable for that. And that's a very high consideration. So $250,000 would have let us go for a handful of days. But I basically would have had to
shut down the company by the end of this week. There was no other contingency plan.
So over the weekend, of course, I was scrambling to find dead options and other cash options. Our investors started stepping up in a meaningful way
there. So we knew we started having some options, but nothing that was going to last that long. So the news on Sunday evenings was quite relief.
CHATTERLEY: And for your 40 employees too, - not only were you personally liable, but they arguably would have been out of a job within the week,
which is sort of devastating. I think that for all concerned. One of the questions I want to ask you, why did you have all of your money or that
much money with SVB? Was that about the terms of doing business in accessing loans from SVB?
KALB: It was. Yes, so it sounds irresponsible. Maybe asking yourself, for many people may be asking themselves, why did you have all your capital in
a single bank? There's two things, first of all, those who because of the terms. It was pretty standard practice for SVB, for debt to say, hey, if
we're going to give you debt, you need to put all your capital in our bank.
So that was that was piece number one. But piece number two and this is one thing that's really important to understand. We don't think so today
because of latest news but just you know we go Silicon Valley Bank was considered the gold standard.
Silicon Valley Bank was the bank for the hot tech startups, all the way to public companies. And when your startup and you raise money, like we have,
we've raised over $60 million a day; you have to have a few things, right? Have the right lawyer have the right accountant.
And you have to have the right banker. And these bankers, the Silicon Valley bankers, they have the relationships with the investors. They are
considered kind of top tier. And so you know, we didn't ever give second thought to having all of our capital in one bank.
CHATTERLEY: Yes. So you were better off going to investors and saying, look, we have the SVB stamp of approval than perhaps going to a different
middle tier bank and getting money from them or depositing with them.
KALB: Yes, indeed, in fact, it would have been kind of confusing. If we hadn't gone with one of the key banks for startups or for tech, it would
have been kind of odd.
CHATTERLEY: Where's your money going to be now?
KALB: So I think it's going to be highly diversified. That's one thing for sure. Learned our lesson on that front so on Thursday, once we heard the
news, my Co-Founder and I ran to a JPMorgan Chase, we found that to be probably the safest banks to go too opened up an account immediately.
We wired the money on Thursday. But we were just a little too late, unfortunately. So the money did not get out of our Silicon Valley Bank
account, and did not make it into our Chase account. Hopefully that happens today.
I've been obsessively checking my email, nothing from the FDIC yet. I've been checking the website and just say that there's a technical error, and
they apologize for the inconvenience. So hopefully the money will be able to be transferred shortly.
CHATTERLEY: We keep our fingers crossed. And Stefan, you have really interesting business. So you're going to come on and talk to us about that
in happier times. And keep us posted, please, how you and your team are doing? Stefan Kalb, CEO and Co-Founder of Shelf Engine, great to chat to
you sir, thank you!
OK coming up, more on the race of stabilized competence in the U.S. financial system. Our very own Richard Quest will join me to discuss after
this.
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[09:50:00]
CHATTERLEY: Welcome back to "First Move"! A volatile stock market picture on Wall Street stocks, though well off their lows. Take a look at that the
DOW now trading three tenths of a percent higher.
But many bank stocks tumbling to their lowest levels in over two years nervousness uncertainty despite the moves by regulators the Federal Reserve
and beyond to help shore up the banking system over the weekend following the Silicon Valley Bank collapse as well as the failure of the systemically
important Signature Bank too. Richard Quest joins us now. Richard, did the tech sector just get a bailout?
RICHARD QUEST, CNN ANCHOR, QUEST MEANS BUSINESS: Oh, yes, absolutely. I mean, you could dress it up any way you like. But the moment you went above
the $250,000 limit, then yes, --, but it was under sensible bailout as long as investors and shareholders ended up growing the costs
Julia I'm in Tel Aviv in Israel, where of course startup nation and the headquarters of tech globally in many ways. I've been talking to one of the
top tech investors globally - Viola, the VC Group. He said to me today, it's not systemic. He had accounts with SVB.
He said he's had his phone ringing off the hook with other banks offering to take the money. He thinks it is an example of banking going that got
their sums and their actuarial tables and their banking if you like risk management wrong, Julia. But he says it is not in his view systemic to
tech.
CHATTERLEY: So interesting, isn't it? Not systemic for tech? That's important. I think and I'm sure you'll give me your view on this. I think
it could have been without these moves from regulators over the weekend to shore up to protect implicitly protect other banks too, the uninsured
deposits, just to ensure that the uncertainty, the lack of knowledge that we have, and individuals have too. Let's be clear about--
QUEST: Julia.
CHATTERLEY: --didn't create something bigger.
QUEST: Julia moral hazard--
CHATTERLEY: Oh, Richard.
QUEST: Have you forgotten moral hazard? I mean, you know, so where do you stop this bailout? These are relatively small institutions relatively
systemically to the global banking system. They are I agree, depositors have been made hold, but you have to ask what purpose?
I heard your previous guest by the way, I heard your previous guest talking about the effects that would have happened if they had not been made whole
above 250K. But then he was the example of moral hazard, in a sense, because the moment you make everybody oh, you basically say there's no
risk.
CHATTERLEY: Well, shareholders didn't get a bailout. Bondholders didn't get a bailout. They got wiped out quite right.
QUEST: Quite right.
CHATTERLEY: Right.
QUEST: That's the nature of equities.
CHATTERLEY: I think that sort of underscores the bailout. I've been told of. Please come back tomorrow and we'll continue this conversation. I
didn't think the tech sector got bailed out but I'm been told I'll let you go. Richard, thank you for joining us! I get the last word it's my show
thank you for joining us.
[09:55:00]
OK finally, the most important Oscar goes to.
(BEGIN VIDEO CLIP)
GUNEET MONGA, PRODUCER, 'THE ELEPHANT WHISPERERS': It has been just incredible from strength to strength to strength. I mean, if I feel like
the elephants, God bless us and we do win it'll be historic.
(END VIDEO CLIP)
CHATTERLEY: And that was last week and the Elephant God certainly smiled upon India during Sunday's 95th Academy Awards. We're sending huge
congratulations to recent "First Move" guests and now Oscar winners, Guneet Monga and Kartiki Gonsalves and the entire team behind the short
documentary "The Elephant Whisperers".
The film tells the story of a South Indian couple as they care for an adorable orphaned baby elephant named Ragu and his sister too. The team
made history as the first ever Oscar wins for an Indian production huge congratulations once again to them. And that's it for the show. "Connect
the World" is up next I'll see you tomorrow.
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[10:00:00]
END
