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Quest Means Business
Bank Stocks Fall As Investors Fear Wider Effects; Tech CEO: Worst Hours Of My Life In Aftermath Of Collapse; US, UK, Australian Leaders Discuss Nuclear Submarine Deal; HSBC Buys SVB U.K., Saving British Tech Firms From Calamity; Toy Store Turned Customers When Cash Was Frozen In Collapse; Investors Rip Up Forecasts For Future U.S. Rate Hikes. Aired 4-5p ET
Aired March 13, 2023 - 16:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ELENI GIOKOS, CNN INTERNATIONAL HOST: The closing bell is ringing on Wall Street and the Dow and S&P 500 just barely closing in the red in what was
an extremely volatile day. As you can see, the Dow Jones down around three- tenths of a percent, much better than what he was doing earlier when it was losing almost 300 points.
Those are the markets and these are the main events.
The ongoing fallout from the collapse of Silicon Valley Bank, despite government efforts to restore confidence, shares in some regional US banks
Israel's top VC says plenty of banks are stepping up to service tech startups.
And expectations soften for the next Fed meeting.
Live from Dubai, it is Monday, March 13th. I'm Eleni Giokos and this is QUEST MEANS BUSINESS.
And a very good evening. Great to have you with us.
Tonight, bank stocks closed down heavily as the US President assures Americans their deposits are safe.
Joe Biden said his administration will do what it takes to prevent contagion after the collapse of Silicon Valley Bank. Still, shares in small
and regional banks have been battered. First Republic falling 60 percent despite securing additional funding on Sunday. Western Alliance was down 46
percent. And PacWest fell 19 percent.
Trading and the stocks was halted several times due to volatility. It comes after officials took emergency measures on Sunday to guarantee all deposits
at Silicon Valley, as well as Signature Bank. The two collapsed after a bank run. The measures were meant to shore up confidence and prevent
And Richard Quest is in Jerusalem for us. Richard, welcome. Great to have you on your show.
Look, you're in Jerusalem, there is a vibrant tech startup space. And look, it is an exciting industry, but so many of these companies had deposits at
SVB. What are you hearing? I mean, are they concerned about contagion? Do they have the liquidity that they need?
RICHARD QUEST, CNN INTERNATIONAL HOST, "QUEST MEANS BUSINESS": Good evening from Israel. This evening, we are here and indeed, QUEST MEANS
BUSINESS will come from here tomorrow evening.
There are two very clear and very distinct issues here. The first relates to banking and the second relates to tech. On the banking question, it
really is an issue of whether other banks could fall the same fate or face the same fate of the two that we've been talking about, and the reason why
these banks failed was because their asset base declined.
They were stuffed to the gills with government and corporate bonds. Bond prices went down as interest yields went up, and that left the institutions
classically, classically with a poor risk management portfolio.
There is nothing magic about this. There is nothing different. There is nothing unusual. There is nothing weird. It is straightforward bad risk
management at a time of rising bond yields. That's half of it.
Now the tech side is arguably more interesting because so many techs were involved as you say, will they be hit by the fact that these lenders have
I spoke to Shlomo Dovrat, he is the head of Viola Group, which is the one of the largest venture capital here in Israel. They basically fund many of
the world's greatest startups. He told me, he did not see a systemic risk from what was happening at SVB.
SHLOMO DOVRAT, COFOUNDER AND GENERAL PARTNER, VIOLA GROUP: No, I'm not worried. I do believe it's an isolated -- it's a very sad incident. SVB has
been a phenomenal partner to the tech industry for many decades. I know that people very well. We work with them extensively. I think they were an
amazing partner to the growth of the tech industry.
I think they had some mismanagement on their balance sheet, and because of the concentration and because of how fast this world is moving, which, by
the way, talking about Israeli reform, it's a very interesting reminder of how quickly things can happen if rating changes, if people get panicked.
Run on the bank in a world of internet, in a world where everything is digital is very quick, but I do believe it's an isolated, you know,
specific event, I don't think it will have huge impact. This is not 2008.
QUEST: No, it's not 2008, but what I find interesting about SVB is it is the marriage of traditional banking with all the rules, regulations,
compliance that goes with it, and a high-tech fast moving industry like technology. And when you put the two together, arguably, there's an
accident waiting to happen.
DOVRAT: There is -- there are risks that need to be managed, and when you manage a bank, even if you cater to the very vibrant tech industry, you
better act with your risk management and rigorous as a real regular bank. Obviously, something went wrong in the way they managed their risk.
QUEST: But not systemic in your view.
DOVRAT: Absolutely not. I think this is a -- you know, obviously they're an important part, but they are a tiny part of the banking -- of the world
banking economy. I think there is no vacuum left.
I can tell you, I'm getting hundreds of calls from all the banks in the world that want to bank with us now. This vacuum will be replaced by other
banks, whether SVB, itself Silicon Valley Bank, will be back or other banks will step in.
This is not systemic. It is a very sad, isolated incident.
QUEST: So we look at this in different ways. From the tech sector, there will be others that will pick up the slack from SVB. But on the banking
front, it's very likely that there will be other banks that will suffer the shortfall, because the bonds that they've got have gone down in value.
Eleni, there is nothing magic about this. This is classic. It's what happens in the same way that when there is a run on the bank -- I remember
back in 2008, I use the phrase, a good old fashioned run on the bank. Once it happens, there is very little you can do other than to take the
institution into public management or public ownership.
So I certainly wouldn't be surprised to see more banks that have to be bailed out, taken over. The question, of course, Eleni, whether all
depositors should be made whole? That's another issue for another day.
GIOKOS: That's another issue, but it does play on sentiment, right? And I'm glad you're delineating between the impact on tech companies, which we
know, I've even heard from asset managers here that many vultures were circling over the weekend wanting to pay 60 to 80 cents on the dollar to
shore up liquidity for some companies.
But here's the thing, Richard, and we've seen this playing out before. Sentiment is everything, and a lot of this had to do with the way that
people felt, just a little bit bad news, snowball effects, and then we saw big trouble coming to the fore.
And I know that you don't believe that this could create further systemic issues, but I wonder if there's a worst case scenario we are not exploring.
QUEST: Well, that's the same way of asking the same in a different way, Eleni, is the calamity around the corner? Could it happen? In this
fragility, the fragility of the current situation and the worries over what's likely to happen? Yes, there could be a nasty accident. Absolutely,
particularly when we know rates are going higher. And the higher the rates go, the lower the bond prices that are in portfolios.
And we certainly saw it, again with the pension funds during the whole Liz Truss debacle. Out of nowhere, you suddenly get these crises with asset
It's possible. Absolutely.
But I think the difference here is unlike 2008, the banks are much, much, much better capitalized, number one. Number two, policymakers are not going
to take any truck with this. They will move in very fast to ring fence and shore up even if there is an issue of moral hazard.
GIOKOS: Richard Quest, great to have you on the show. Thank you so much. And as you said, QUEST MEANS BUSINESS live from Jerusalem tomorrow evening.
All right, well, President Biden said his administration acted swiftly this weekend to shore up the banking sector. He said that taxpayers will not be
on the hook for any losses as the management of the collapsed banks will be fired.
His remarks were part of a broader effort to maintain trust in the US banking system and prevent further failures.
Phil Mattingly has more on the story for us.
JOE BIDEN, PRESIDENT OF THE UNITED STATES: The bottom line is this, Americans can rest assured that our banking system is safe.
PHIL MATTINGLY, CNN SENIOR WHITE HOUSE CORRESPONDENT (voice over): President Biden is seeking to reassure a nation on edge.
BIDEN: During the Obama-Biden administration, we put in place tough requirements on banks like Silicon Valley Bank and Signature Bank.
MATTINGLY (voice over): He also placed blame on his predecessor for contributing to this moment.
BIDEN: Unfortunately, the last administration rolled back some of these requirements.
MATTINGLY (voice over): Biden pointing to a 2018 law that eased some of the strictest post financial crisis restrictions on midsized lenders,
lenders like Silicon Valley Bank.
BIDEN: 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
MATTINGLY (voice over): Biden's new regulatory push framing a new crisis moment.
BIDEN: Treasury Secretary Yellen and a team of banking regulators have taken action.
MATTINGLY (voice over): Just hours after the administration's top finance officials triggered a dramatic show of dual-pronged government force.
The action designed to halt financial contagion that threatened to rip through the banking system after the failure of Silicon Valley Bank. The
bank's failure on Friday risking a cascade of events that threaten financial stability with a second bank failure Sunday and several more
institutions on the brink, officials said.
BIDEN: When we learned of the problems of the banks and the impact that could have on jobs, on small businesses and banking system overall, I
instructed my team to act quickly to protect these interests.
MATTINGLY (voice over): Ninety-three percent of Silicon Valley Bank deposits set above the $250,000.00 deposit insurance limit.
JANET YELLEN, US TREASURY SECRETARY: I've been working all weekend with our banking regulators to design appropriate policies to address this
MATTINGLY (voice over): Leaving thousands of small businesses and individuals at risk.
BIDEN: I instructed my team to act quickly to protect these interests. They've done that.
MATTINGLY (voice over): But the speed of the crisis and the potential systemic effects marking a jarring turn for an industry viewed as stable
BIDEN: 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.
MATTINGLY (voice over): And setting the stage for an equally unpredictable political fallout in the days ahead, as officials move
quickly to try and separate their actions from the politically toxic bailouts of the 2008 financial crisis.
BIDEN: No losses, and this is an important point -- no losses will be borne by the taxpayers.
GIOKOS: Well, Ashley Tyrner experienced the worst hours of her life after Silicon Valley Bank collapsed. She is the CEO of health company FarmboxRX,
which had more than $10 million deposited with the bank.
She was unable to access her account on Friday and described the aftermath of the bank's failure as pure and utter panic.
Ashley Tyrner joins me now from Orlando, Florida.
Ashley, thanks so much for joining us.
As you've explained, the last few days, extremely painful, extremely difficult. Did you get any kind of warning on Thursday that this was going
to play out? Because I've heard from some asset managers that on Slack channels and WhatsApp groups, there were concerning comments that perhaps
are pointing to this playing out.
ASHLEY TYRNER, CEO, FARMBOXRX: Thank you so much for having me.
No, on Thursday, we didn't have any advance notice. We found out when the media started reporting on it late in the afternoon.
GIOKOS: Are you able to access your deposits now? Today? What is different today?
TYRNER: Yes, we do -- yes, we were able to log in to SVB about an hour ago. We've been trying all morning and we weren't able until, you know, an
hour, an hour-and-a-half ago and we have initiated a few wires to different banks that we're diversifying ourselves into.
GIOKOS: Are you trying to exit completely out of SVB? And did you have a cap of $250,000.00? I mean, the messaging is that all deposits will now be
backed? Is that your experience?
TYRNER: Yes. So you know, we had quite a bit of money in SVB, but it was a small amount of cash, you know, considering all of our assets. We are now
diversifying to several, you know, in our mind too big to fail banks.
We do bank with First Republic as well, but we've decided to diversify our capital across to Chase, B of A, and Wells Fargo.
GIOKOS: Yes. So you want to end your relationship with SVB. You find it far too risky at this stage to continue despite the Federal government's
assurances that they will be stepping in.
TYRNER: Yes. I mean, you know, what our plan is now with our Board and our advisors is we need to just put all capital into a few of the big
banks. Again, you know, there are other smaller regional banks, but we're going to diversify out of there as well after what's happened with SVB.
GIOKOS: I want to talk about potential contagion here. How this is affecting startups, the tech space. What your peers are telling you, what
you're discussing, and what the long-term impact in your mind will be?
TYRNER: Yes, I mean look, we were really fortunate that we had already diversified capital into a few other banks before this happened with SVB. A
lot of my founder friends had not. They had all of their capital in SVB, and so, you know, they were concerned, are they going to be able to make
payroll? You know, what do we do?
So now, you know, there is this fear going forward of, you've seen that some of the other Signature Bank and First Republic. First Republic was
down by like 70 percent this morning. And so a lot of founders are really unsure, like, what do we do next? How do we diversify? And what is our plan
if this happened to another bank?
GIOKOS: Yes, Ashley, I want you to take me back to sort of the darkest moments that you experienced over the weekend. We also know that there were
a lot of banks and other companies circling potential, you know, buy out opportunities and offering a much lower value than companies actually have.
And some out of desperation went for it, because they just didn't know what just sort of laid ahead in the next few days. It took the Federal
government about 48 hours to make the decision to back deposits.
TYRNER: Yes. I mean, the last four days have been really stressful in the startup community. You know, I've spent the last four days mentoring a lot
of founder friends that were not as fortunate as we were, and had not diversified.
You know, so really, with SVB going down, that was the heart of, you know, the ecosystem for technology and people didn't know, right? They didn't
know what was going to happen.
I was pretty sure that the government would come forward, and, you know, make sure that depositors were made whole and that's just what I kept
telling, you know, the startup community through LinkedIn, and some of my founder groups, because there were people that were offering, you know,
we'll give you 60 to 70 cents for your deposit.
And, you know, there are people that have taken that approach. We did not. This wasn't going to affect our business, day-to-day, if we had access to
this capital anytime soon. So we were just waiting because we figured the government would come forward.
GIOKOS: Ashley Tyrner, thank you very much for your time. Good to have you on the show and best of luck.
All right, well after the break, as tensions with China escalates, the US plans to provide Australia with nuclear powered submarines. That's coming
up after the break.
GIOKOS: Well, a couple of hours ago, Joe Biden arrived in San Diego to meet with British Prime Minister Rishi Sunak and Australian Prime Minister
Anthony Albanese. The three are set to talk more about supplying Australia with nuclear submarines.
The AUKUS deal is moved to counter China's ambitions in the Pacific ahead of today's meeting. Sunak said the UK will boost defense spending by $6
Jeremy Diamond is in San Diego with the latest for us.
It is an interesting show of force. I want you to give me a sense of what is being discussed, and I guess, this is a really big message to China and
JEREMY DIAMOND, CNN WHITE HOUSE CORRESPONDENT: Yes. Listen, this is certainly a move that the Biden administration is taking intended to
counter China's growing military presence in the Indo-Pacific. And today, President Biden alongside the Prime Ministers of the United Kingdom and
Australia set to announce an accelerated timeline for the delivery of those first nuclear-powered submarines.
Initially, experts had said that it was likely going to be in the 2040s when this partnership was first announced, but now, we are learning that at
least three nuclear-powered submarines will be delivered in the early 2030s.
And in between then and now crucially, both US and British submarines are set to rotate through Australian ports in an effort to counter China's
naval presence in the region.
But what's important to keep in mind here is that the President has really been pursuing a multi-pronged strategy with China. On the one hand, trying
to counter China's military moves in the Indo-Pacific and also taking steps to address US companies' investments in China, for example.
But at the same time, also seeking to try and normalize diplomatic relations, which have really taken a hit in recent months, particularly in
the wake of the downing of that Chinese spy balloon over US waters.
I spoke with a senior administration official who told me that rather than improving those military-to-military communications, which the US has been
seeking to try and avoid some kind of a miscalculation that instead, this official said quite to the contrary, China has been resistant to
establishing those dialogues.
Now the question is going forward, especially now that the Chinese President Xi Jinping has completed his unprecedented consolidation of power
with this third term, what will the Chinese posture be going forward? US officials are certainly hoping that there will be more dialogue, that China
will be willing to reengage now that they have gotten past that People's Congress and that consolidation of power.
But that is certainly a looming question, and keep in mind, here in the United States, there really is this growing bipartisan consensus about the
risks that China poses to global stability, and that certainly is buttressing President Biden's position here today.
GIOKOS: Jeremy Diamond, great to see you. Thank you so much.
Well, in Britain, ALDI is the latest supermarket to lift purchase limits in the produce aisle. Britain imports a lot of its fruits and vegetables from
Spain. Poor harvests there led to shortages. Some say Brexit has played a role in the shortages.
Spain's Agriculture Minister Luis Planas says bad weather is mostly to blame. The Minister joins me now from Madrid.
Minister, great to have you on. Thank you so much for your time.
I think we were all shocked to see rationing of fresh produce in Britain, and I think that there has been a big conversation about how much this has
to do with Britain's Brexit, and then importantly, you've also been very vocal about the bad weather impacting yields.
To what extent would you say your reality on the agricultural front played an impact on what we're seeing in Britain?
LUIS PLANAS, SPANISH AGRICULTURE, FISHERIES AND FOOD MINISTER: Well, in fact, what we are facing now is not only the consequence of the war in
Ukraine, but also the consequence of climate change, and in the case of fruits and vegetables, it is very clear.
It was a case in the British supermarkets some days ago when the production coming from Spain, alternate products coming from Spain were reduced
drastically because of the of the situation. We had warm water from summer until December, and suddenly, we had a very cold weather in January and
that affected the production of alternate products like broccoli, artichoke, lettuce and others so that has provoked the situation.
But I think this situation is an anomaly that will be clearly solved in the days to come and we start today.
GIOKOS: Let's talk some numbers here. I'm really fascinated by the increase in input costs like you say, inflation, and then importantly the
drop in yields and then if we can compare that to what your export figures have been to Britain versus what you've experienced in the past, and just
what kind of drops we're talking about here.
PLANAS: Well, in fact, what we are seeing is that there is on the supply side, a decrease of the production, because of this consequence. We had
seeding drop last year, less rain and very hot temperatures, so that has produced a reduction in the production. And so the consequence has been,
can we say that with high demand, clearly an increase of the prices around Europe and particularly in Spain, and in fact, that has created also a
deviation from the exports that are coming to the UK to other European countries.
In fact, UK is a fifth Spanish destination, 4.6 billion euros, of which 2.2 billion euros are fruits and vegetables, so it is very important for us.
GIOKOS: Yes, absolutely vital commodities that we're talking about here.
Look, we're heading into spring. What are your expectations on yields going forward for the summer season? And what are farmers telling you right now?
Are the inflationary pressures putting so much of pressure on farmers, where they're thinking very differently about the crops that they will be
planting and de facto, that will have an increase in prices down the line?
PLANAS: Sure, we are facing a situation that is not a normal one. We are facing a rise in inflation elevated from the increase of the cost of the
war in Ukraine, particularly, I am talking about cereals, about oat seeds, about fertilizers, and that has created an estimate that is going up. I
think that we have more or less, I hope, come to the end of that. Now is just 12 months after the beginning of the war in Ukraine and we think we
have next week a meeting of the Agriculture Ministers in Brussels and our common thinking is that, I think that the prices of the food will stabilize
and decrease in the coming weeks and the coming months.
But we have both factors. We have the one as the consequence of --
GIOKOS: Minister, do you expect --
PLANAS: And also the private sales.
GIOKOS: Yes, absolutely. Let's talk about shortages. Are you expecting a recovery in what you're producing in the next few months? And as you
mentioned, climate change is that externality which you cannot control. So we don't really know what lies in the months ahead, but I assume you're
thinking about mitigation factors.
PLANAS: Sure, we are facing uncertainty and the scenario is not very clear, in the sense but our intention is there and I think Spain produces
30 percent of the European fruits and vegetable. The market is provided by us. The second country is The Netherlands with 24 percent.
And our position is there and we have a competitive advantage just because of the sun, of the good weather and the good condition, but also we have
problems related to water and the scarcity of water.
So they use for example of nonconventional water is another factor, that will I think that help to solve the situation. We expect we have a very
good, hopefully an advantage. We are the fourth spot of the EU, the seventh in the world in food production, and we expect to be there to provide to
our customers, to provide to other countries.
GIOKOS: Yes. Minister, you have great fresh produce and also a beautiful country. I wish you all the best. Thank you so very much, Minister, for
joining us today. Much appreciated for your time.
PLANAS: Thank you.
GIOKOS: All right, we're returning to our top story after the break, the collapse of Silicon Valley Bank. Its demise has rattled global markets and
prompted calls for the US Federal Reserve to hit the brakes on its fight against inflation.
GIOKOS: Europe's biggest bank HSBC has bought the U.K. arm of Silicon Valley Bank for just one pound. Had not found a buyer, SVB U.K. would have
been placed into insolvency. The deal secures the deposits of thousands of British tech firms. Still, the sale wasn't enough to boy HSBC shares today.
Indeed, most major U.K. banks were down over concerns about SVP's demise.
Anna Stewart is in London for us breaking it all down. I'm looking at this rate across the board, HSBC down two percent. Lloyds, I think down around
five percent. It's read across the board. And here's the big issue. There's a delineation between what this means for tech startups and what this
actually means for the banking sector as well. And we've got those numbers up again. It is not looking good for the banking sector.
This is speaking to the contagion concerns, Anna. What are you hearing after HSBC bought SVP U.K. for one whole pound?
ANNA STEWART, CNN REPORTER: The princely sum of one pound but I have to say, SVP U.K. has tangible equity expected to come around 1.4 billion
pounds. So, possibly not a bad deal. That said, this rescue Eleni took about an 11th-hour deal. I was hearing about it around 11:00 p.m. last
night Friday, this was a whole weekend of the Bank of England and the U.K. government struggling to think of a solution before Monday morning when the
markets open to try and ensure that deposits were safe with SVB U.K.
And actually, the chancellor clearly relieved once this deal was signed, as you said, they could have seen some of the most important companies and
most strategic companies in the U.K. wiped out. So, this is how serious the situation was. The rescue came and as bank has said, HSBC has said they can
confirm that all depositors' money with this bank is safe. It is secure as a result of this transaction.
So, you would expect with that sort of incredible backstop, great safe and with all the noises in the U.S. as well that that might be it. This might
be over. But you're right to point out the share price action we've seen. Both in the U.K., but also in Europe. I was just looking at some of the
closing prices. Commerce Bank in Germany down 12 percent. Credit Suisse down over nine percent. And also, we have you know all those U.K. banks are
looking pretty miserable too.
Investors are clearly jittery. Now, this morning I was wondering whether they were catching up with some of the market moves in the United States
that we saw late Friday, because the markets were closed here. But as the day has worn on, I just question whether investors are still feeling pretty
jittery, perhaps more so in Europe, given SVP didn't maybe sort of impacted directly. But as a result of that, there hasn't been any one saying that
additional liquidity will be provided by a central bank or a government to facilitate any bank runs in Europe.
And I think this goes to the point that given the backdrop we were in with interest rates on the rise and it had been for some time have we had a good
look at the balance sheets of some of the smaller banks around the continent? And I think that's possibly why investors are jittery. I don't
know where this has got a second day of run in it. I think it's anyone's guess at this stage.
GIOKOS: Yes. When you look under the hood to see what's going on, all will come to light, I'm sure. And I've been watching you on T.V. all day. I hope
you're going home to get some sleep. Thank you so much for staying up for us.
STEWART: Thanks, Eleni. Bye.
GIOKOS: Great to have you on the show. All right. When Silicon Valley Bank collapsed on Friday, it sent venture-backed companies that rely on its
scrambling. A New York based toy company turned to its customers for help. Camp slashed its prices, urging buyers to use the promo code bank run to
save on its merchandise. The company's deposits are now assured but its CEO told CNN is Poppy Harlow they plan to use the sales to try to avoid
collapse. Listen in.
(BEGIN VIDEO CLIP)
BEN KAUFMAN, CEO AND FOUNDER, CAMP: Yes. About 85 percent of our company's cash assets were at SVB.
POPPY HARLOW, CNN ANCHOR: Eighty-five percent.
HARLOW: Millions of dollars.
KAUFMAN: Millions of dollars.
HARLOW: OK. So, what happened to you Friday?
KAUFMAN: So, on Friday, when we got the alert that the FDIC was taking control of the bank, we had no idea what would be the next step. We did not
know how long it was going to take for us to get our cash out. And to be honest, we still kind of don't. They say today we'll see -- we'll see what
HAROW: You don't know if you can get your money.
KAUFMAN: We hope -- we hope we can. And we're so grateful that the Fed stepped in and the way they did. But we did what startups do, which is we
kind of took matters into our own hands and we kind of had that fight for survival. It's a similar fight for survival we felt when COVID happened and
we ran an experiential toy store. And so, we turn to our most loyal group of customers and said, hey, we need -- we need inflows of cash right now.
We set up a new account and kind of pushed our weekend sales to a new account.
HARLOW: At J.P. Morgan Chase.
KAUFMAN: At J.P. Morgan Chase. And we said we need your help and the outpouring of support was absolutely incredible.
(END VIDEO CLIP)
GIOKOS: Gives you a sense of the dash for liquidity. Now a top banking regulator during the global financial crisis says the Federal Reserve needs
to stop raising interest rates now. Sheila Bair says SVB stunning implosion demands the Fed pause its fight against inflation and assess the impact of
its rapid rate hikes.
Aaron Klein is a senior fellow at the Brookings Institute and also a former deputy assistant secretary for Economic Policy at the Treasury Department.
He joins me now from Washington. As we're getting more information, speaking to people that have been affected, it is really mind boggling to
see how this is playing out. Are you part of the group that feel the Fed needs to stop hiking rates?
AARON KLEIN, SENIOR FELLOW, BROOKINGS INSTITUTE: So, the consequence of monetary policy of the Fed failure to supervise and properly regulate
Silicon Valley Bank is really stunning. You know, last week, Fed Chairman Jay Powell was going across Congress testifying, preparing the markets for
a larger interest rate. Hike of about 50 basis points. And now he's got a full on, you know, bank -- the start of a possible bank panic or contagion
on his hands.
And he's worried about the consequences of that. And the Feds now, you know, monetary policy has been too much of the focus of the Fed. I wish
they'd been focused more on regulating what was going on Silicon Valley Bank. I've long question whether the Feds interest rate hikes are really
what's necessary to tackle the inflation issues in America. And so, the Fed is caught in a tough situation because if they pause their interest rate
hikes, or they're going to be perceived, as we saw on inflation, which is in their messaging,
GIOKOS: Surely there must have been some kind of scenario planning to see what this was going to do to banks that had exposure like this. That's the
first thing. The second thing, we've seen -- we've learned our lessons. We saw what happened during the 2008 financial crisis. The Dodd-Frank bill
came into effect. That was watered down slightly because of quite a bit of lobbying in 2018.
When -- I mean, it's a confluence of issues that are now coming to bite us.
KLEIN: Well, no. I mean, a couple of things, right? One is, I wouldn't assume there were was planning on this. I don't know why you would. The
regulators were looking at the stock price and other indicators, you know, the stock price was $200 a share, 275 A week ago.
It was a -- it was a highly-rated institution. I think through Wednesday, surely if the Federal Reserve would have noticed this entity that it
regulated quadrupling and assets over four years, with huge exposure in unhedged interest rate situations and treasuries and mortgage-backed
securities. So, you on the one hand, you have the Fed not supervising this entity, which was raising red flags all over the place, and then seeing the
dominoes and contagions that go on.
So, a lot of Dodd-Frank assumed folks on top of things, you can't regulate people doing their job. And clearly there was a stunning failure here to
supervise this entity by the Federal Reserve who regulated Silicon Valley Bank head to toe.
GIOKOS: Yes. I want to -- I mean, even Richard Quest earlier said, you know, delineating between what this means for the banking sector, what this
means for startups. So, let's talk about the two different scenarios that are playing out. Do you believe that there is contagion and systemic issues
that still need to be worked through the system? And what would that look like?
KLEIN: Yes. So, look, their -- Silicon Valley Bank was a super outlier. 97 percent of its -- of its business was uninsured deposits. You know, banks
of its size, usually about 1000 branches. It had 16. So, this thing was a total outlier. Now, are there other banks that have similar models that
rely heavily on hot money? Yes. So, it wasn't alone. It wasn't the only one with exposure to crypto and Silicon Valley startups, et cetera.
But there aren't as many other banks like that. It -- this doesn't really pretend on Main Street banks who by and large are far more safe, far more
sound. So, in that way, I don't think so. There isn't. But, you know, contagions are tricky things. Panics are tricky things. They don't behave
rationally. So, I can explain to you that one set of banks over here were outliers, and almost all the rest were really in much better shape.
But you have to trust that. And it's hard to have trust when the Federal Reserve was regulating a bank right under its nose that just imploded like
GIOKOS: Such a good point. It is about trust. It is about sentiments. And, you know, that still is a big part of the calculus here on time. Thank you
very much. Great to see you. I appreciate your insights.
All right. Before we say goodbye, I want to check in on how the markets fared today. The Dow and the S&P 500 just barely closing in the red. It was
a very volatile day. As you can see, Dow Jones down three-tenths of a percent. And I'm Eleni Giokos in Dubai. Thank you so very much for watching
Quest Means Business. We have African Avant-Garde up next. Stay with CNN.