39:00 mins

The Problem Podcast

Making Cents of SVB's Collapse With Mark Cuban and Sheila Bair

Could the Silicon Valley Bank collapse have been avoided? On this week’s podcast, we chat about how SVB’s risky investments lead to its eventual failure. We are joined by Sheila Bair, former chair of the FDIC, and Mark Cuban, entrepreneurial multihyphenate, to discuss where the regulation was for these banks, why we don’t bail out citizens like we do businesses, and what’s next for banks with similar investment strategies to SVB.


Making Cents of SVB’s Collapse With Mark Cuban and Sheila Bair

Ep. 230 Final Transcript

Mark: [announcement in background] Can we wait a little bit before we take off?

Unknown: Absolutely. Just let us know. [garbled audio]

Jon: Oh —

Mark: Oh no, I’m good, sorry.

Producer: So, Jon, just a heads up, Mark is calling in from an airplane. 

Jon: Oh, dig it.

Producer: And he may be in and out.

Jon: Hey, listen, Mark, don’t worry about it. We’re all good.

Mark : I’ll deliver. I’ll come through. I got you.


Jon: Alright, everybody. Welcome to the podcast. It’s “The Problem” with me, Jon Stewart, the actual problem. The show is currently on AppleTV+ for season two. And, this week’s episode, oddly enough, it’s about the Fed and inflation. And, former treasury secretary, Larry Summers, shows up for an interview and it goes great. Because he and I get along really well. I don’t know if you guys have heard Silicon Valley Bank, which caters to, I believe it’s Silicon Valley in the way that the Bank of America caters to America and Citibank of course caters to cities. Well, it has failed and, it has collapsed billions and billions of dollars. And, as you know, the Fed has come in and backstopped all the depositors, and we’re hoping that the contagion doesn’t spread because, we can only talk about things as they relate to pandemics, I guess, from here on out, whether it’s, a virus or, a lack of liquidity. But, we’re very excited today. We’ve got two great guests. We’re talking to former chair of the FDIC and author of the Children’s Book series, “Money Tales,” providing financial literacy lessons to children. Sheila Bair. Thank you for joining us.

Sheila: Yeah, my pleasure. Thanks for the invitation.

Jon: And of course, entrepreneur and co-founder of Cost Plus Drugs, Mark Cuban. He is, and this may or may not be a metaphor for the entire situation. [MARK LAUGHS] He is flying above us as we speak in a plane. So I’m gonna, Sheila I’m gonna start with you. The FDIC is something that was put in place during the great depression to stop bank runs. It still is in existence today. The federal government has stepped in and said it will actually backstop all of the deposits. So the question is this, what is the FDIC if the government just says like, “Hey man, all the money that’s in the banks, we will back up” then —

Sheila: Yeah.

Jon: — what is the FDIC?

Sheila: Yeah. Well, they haven’t said that. They said at least for those two banks, they’re gonna cover all the uninsured deposits, but you’re right. I mean, if there’s really a problem with deposit runs, just helping two isn’t gonna take care of the broader system problems and, and if anything it could make it worse for the others if you need to get two backstop, but others are out there that not helped.

Jon: But I assume if you backstop, if you backstop these two —

Sheila: Uh-huh

Jon: It’s, you’re gonna be hard pressed to then not backstop regional banks and, and everything else.

Sheila: Well, that’s true. We did that and they may need to do that. I kind of sense that there’s a bit of an overreaction here. I think the banking system is basically OK. I think regional banks, community banks basically are OK. There are a few more out there that have some problems they have a lot of uninsured deposits, so, you know, we, as you said, we ensure deposits up to $250,000 you know, the FDIC’s got a perfect record on protecting insured, so, nobody worries about that, and they shouldn’t worry about that.

Jon: Mm-hmm.

Sheila: But if you rely heavily on uninsured, depending on, you know, how loyal those customers are that the money could run. So if, you know, if we get in a situation where fear starts driving behavior by uninsured deposits, not necessarily fundamentals about how good the bank is, but fear —

Jon: Right.

Sheila: — then they are gonna have what’s called liquidity failures. If you take all your money out of a bank, they can’t make raise cash enough to make the withdrawal request, then you’re gonna close the bank. It’s somewhat self-destructive behavior, but I think that’s really the, that could be the problem right now.

Jon: Right

Sheila: But you’re right. 

Jon: Uh, the Silicon Valley Bank had, I think 90% of its deposits were uninsured, which is–

Sheila: Yeah.

Jon: — an enormously high number comparatively.

Jon: That’s right. 

Jon: Normally it’s I guess to 40-50% and risk offset.

Sheila: That’s right. The big regional banks had the traditional ones out. This is also a rapid growth company. So it was new, it was tech oriented. It had a volatile —

Jon: That’s right.

Sheila: You know, so the traditional regional banks out there, they have a lot of insured deposits. The uninsured they have are institutions that have done business with them for a long time. They, you know —

Jon: Mm-hmm.

Sheila: They do credit lines. They do all sorts of different things for them. So, they’re not gonna run. And so I do think, people need to keep their heads on this, —

Jon: Right.

Sheila: — but if it starts getting outta hand. I do, the government needs to backstop at all. It can’t just backstop a couple and think this is gonna take care of itself. If anything that that could make it worse.

Jon: Mark Cuban. You’re very familiar with this tech culture, this Silicon Valley culture. You’re a tech bro. From what I’ve understood from reading your — [MARK LAUGHS]

Mark: I’m not a tech bro.

Jon: Your Wikipedia page.

Mark: Not a tech bro.


Jon: Mark Cuban, you had money at this bank. I don’t know if you pulled it all out, but you did — you know, I want to ask you about this. This feels like a failure of the government to hold our banking system to account. We put into place, measures after 2008 that set liquidity goals for banks, that had different kinds of stress tests for any bank up to $250 billion, and the banks and the politicians rallied to strip those to banks that had $50 billion. Silicon Valley Bank was between the $50 and $250 billion so there was no real regulatory stress test and oversight like you would for some of these larger banks. Why is what feels like normal regulation so difficult for banks between $50 billion and $250 billion to undertake?

Mark: So. One, I’m not a tech bro, so let’s get that clear. I’m not a fan of Silicon Valley. 

Jon: Ok.

Mark: Two, I agree with you that rollback in 2018 was a mistake and you know the entire economy of the United States of America is built on trust in our institutions, in our legal institutions, and in our banks.

Jon: Mm-hmm.

Mark: The minute insured or uninsured people feel, and companies feel, they can’t trust our banks, we lose our place as the reserve currency. We lose our place as the destination for commerce. But three, and here’s kind of the linchpin of the whole thing. In every business, big bank, little bank, podcast companies, you name it every CEO makes decisions, right? Those decisions are based on probability. Where they’ll say, you know, the chances of this happening are big or small and I think what happened for the CEO at Silicon Valley Bank was, I think they probably thought to themselves along with their board, you know, we do have a risk with all these uninsured accounts, but it’s only really a risk if there’s a run on the bank. And there’s only really a risk if it’s a really big run and the chances of $42 billion being withdrawn in six hours are so infinitesimal, you know, and the banking regulations allow us to hold these things to maturity anyways, it’s probably, you know, such an infinitesimal risk we can take that risk. The problem was that one in a billion thing happened —

Jon: Mm-hmm.

Mark: — and when there was a bank run and it was $42 billion in six hours, that just collapsed everything and that created the problem we saw.

Jon: Mark, let me ask you a question because the call was coming from inside the house. You know, Silicon Valley Bank you know, caters to tech startups and VC companies, and they’re all in it together. And, it’s a notoriously tenuous and fluctuating business. And, this bank had provided liquidity and money for these startups for years. As these startups were going through all the ups and downs that you generally find with tech and what did that community do to this bank at first blush of trouble when, and I listen, this is not, I’m not making a statement on the, profound nature of their investing strategy, which sounds asinine to me when they go into all long-term securities at low yields during the year and a half that the government is raising interest rates, which is obviously undercutting their business model. But the point being, when Peter Thiel and all the other VC libertarian fellas, go in there and decide this bank that has back stopped all of our adventures is struggling a little bit, and they just pull the rug out from underneath it. That struck me as that was the issue here. Is a community, a cutthroat Libertarian valued community that decided that the foundation of all of their adventures was struggling, so let’s yank everything and then run to the government and beg for a bailout. So we all pay the price. It’s reprehensible.

Mark: Yeah I mean, some of that I agree with and some I don’t.

Jon: No, you agree with all of it Cuban. Cuban, you agree with all of it. [MARK LAUGHS]

Mark: Y’know, there’s no question that when things started to go south, the stock price started to crater. So that created a red flag so people knew something was up. And when that happened, there’s no question that every tech company that banked with Silicon Valley Bank and had a lot of money there and recognized what was going on, they, you know, they made room underneath their mattresses next to their copy of “Atlas Shrugged” for all the cash they were going to need to take out, [JON LAUGHS] because you need to save your business first.

Jon: Right, right. As did you, you asked for your money back, for God’s sakes. You, that’s just, that’s three Shark Tank investments. [SHEILA LAUGHS]

Mark: Well, first of all, it wasn’t my personal, it was indirectly my company, my Cost Plus Drugs had money there, right?

Jon: Yeah.

Mark: And we weren’t paying attention to the stock price. We’re paying attention to running our company.

Jon: Right.

Mark: So what I asked for, what I said was on a bigger picture issue you have to backstop those deposits because let me just tell you, Jon, probably 75% of American employees and I’m guessing are dependent on uninsured deposits to get their paycheck. And you can’t expect that everybody is going to check to see, you know, where is my paycheck coming? Is it an uninsured account and what are the capital ratios for that bank? That holds by my employers um payroll money. You can’t do that.

Jon: Right, right. But that’s the point of these Dodd-Frank. The point of Dodd-Frank was to make sure that banks were capitalized enough and that there was enough liquidity in the system so that they could run their payrolls.

Mark: Yeah, of course. Hey — I still, I was not happy when they got rid of Glass Steagall right. [JON LAUGHS] You know, I thought there were a lot of needed protections that were there as well.

Jon: That’s a throwback for those who don’t know Glass Steagall was the line that made sure that banks could not gamble with the money that was being deposited by regular people. And one thing we have to make clear, Silicon Valley Bank has an unusual amount of deposits coming from large investors, a lot of these other banks, their deposits are much more diversified they’re coming from small businesses, they’re coming from individuals. It’s not the same as that.

Sheila: That’s right.

Jon: And Sheila, let me get back to you. You know, first of all, Silicon Valley Bank was insolvent in September. Everybody knew that Silicon Valley Bank was insolvent in September, and yet all of the sudden when they make a move to shore up their capital reserves by selling some of their long-term securities that had low yields, that’s when everybody flips out.

Sheila: Right.

Jon: Why is that?

Sheila: Well, you know, I don’t know. It’s pretty amazing to me they didn’t manage their interest rate risk, cuz that’s pretty basic. [SHEILA LAUGHS] First of all, they invested in long term government bonds and MBS.

Jon: Mm-hmm.

Sheila: At just the wrong time then didn’t hedge the interest rate risk. So I think there was some serious mismanagement here. And as you note, there’s some unusual things about their deposit base, which was not loyal.

Jon: Mm-hmm.

Sheila: Which I find kind of astonishing and I agree with you then they come run for a bailout when you helped create the problem. And Mark, I would have to disagree with you a little bit. I mean, I think we have $250,000, caps on deposit insurance. Everybody knows that, you know, kids know that it’s at the teller window when they go into the bank with their parents. And we do that because we want some market discipline for uninsured. We want you looking at your bank. We want you to be monitoring it and seeing how safe it is. Now, maybe you think that’s, you know, that’s unrealistic and people don’t wanna do that. But if that’s the case, then let’s have a program for uninsured and let’s charge for it. You know, charge banks fees. 

Mark: Yeah, yeah of course charge for it.

Sheila: Well we don’t have it right now. So, now you come in and say we’re gonna guarantee all these uninsured —

Jon: Now there are companies that you can go to gain extra insurance.

Sheila: You can get private insurance, you can.

Jon: You can get private insurance on this liquidity, but the government is not going to backstop it.

Mark: Well, what happens though is there’s this thing called cash lead programs, ICS programs that just game the system, right?

Jon: Mm-hmm.

Mark: So, they do these deals where they’ll say, “Hey, you can insure up to a billion dollars, but we’re gonna take your $250,000, and put it in, you know, hundreds of banks,” and they’ll do deposit swaps. It’s just the kluging of the system —

Jon: Right.

Mark: Rather than just dealing with the obvious that $250,000, is not enough. And I disagree with Sheila because if you are a small entrepreneur and you have inventory and you have payables and you have payroll, your account is going to go up over $250,000, even if you’re tiny. And then there’s downstream risks where you might work with a payroll processor, like happened with Silicon Valley Bank, where there’s one payroll processing company that might deal with thousands, thousands of smaller companies, or Etsy sellers, as an example.

Jon: Mm-hmm.

Mark: And their accounts are always gonna be over $250,000, and someone selling Etsy jewelry, they’re not gonna know where their money’s being held.

Sheila: I don’t disagree with you at least in terms of volatility. The FDIC should have the authority to provide unlimited — at least for transaction accounts, that’s really what we’re talking about there. You know we did that, I pushed for that.

Jon: Right, we’re talking about liquidity for payrolls. We’re not really talking about deposit accounts or investment accounts.

Sheila: That’s right. We’re not talking about, you know, three and a half billion dollars of you know, somebody’s money. You know, so we did do that. And I think the FDIC should do it again. Unfortunately, I’ll tell you what happened. I pushed for that, we got a program in place it’s called the Transaction Account Guarantee. It was very successful on keeping uninsured money at banks. We were having a particular problem with community banks losing deposits of course, to JP Morgan Chase and Citigroup and all the too big to fail banks.

Jon: Mm-hmm.

Sheila: Then per lobbying by the money market fund industry, Congress took the FDIC’s authority away to institute that kind of program without that express approval from them. So I do think the regulators need to go back, there’s a streamlined process to get approval for that kind of program, but they do have to go back to Congress. But that, at least that authority should be restored to the FDIC so they provide this emergency basis and maybe, you know, some countries do provide unlimited insurance for transaction accounts and I don’t think it would be a bad idea at all. 

Jon: I think it’s a great idea, and it gets us to something that I’d like to maybe macro out on. Let’s zoom out on this. And it’s very clear to me that the only people that bear risk in our system are small depositors, small businesses, people that rely on payroll. If you are large and you have billions of dollars and you can lobby the government, there is no risk to your shenanigans. The only risk to your shenanigans is that you can catastrophize our entire economy and then Urkel it, “Did I do that?” And immediately the government steps in, and bails you out. So Mark, let me ask you this.

Mark: Uh-huh

Jon: You know, the whole ethos of Silicon Valley is risk. “We take risks because we are bold innovators, entrepreneurs that are bringing the, we’re going to Mars for f***’s sake. We’re doing everything we can do.” There is no risk if the government will back everything that you do as a — you can disrupt other industries, but nobody can disrupt you. If all the laws of thermodynamics and gravity and nature that apply to every individual that is late on their mortgage payments or is gonna lose their house or have their pension funds crap out, but none of that applies to 100% of the money that investors throw around in Silicon Valley — what kind of system is that?

Mark: So here’s what I would tell you, Jon.

Jon: Yes sir.

Mark: If rather than Peter Thiel and all the tech bros were saying, “Pull your money from Silicon Valley Bank.” If it was Occupy Wall Street who came out and said, “We convinced everybody to pull their money from Silicon Valley Bank,” they would be getting credit for the Ultimate Eat the Rich event, right. This literally was the ultimate eat the rich event. Be, and I’ll explain to you why.

Jon: OK.

Mark: Every single penny of equity in Silicon Valley Bank and Signature Bank and 60-70% of stock valuations and a 100% of bonds in Silicon Valley Bank is gone. I mean, $100 billion dollars is probably a low estimate for — the amount of money that was lost by shareholders and bondholders in this bank run.

Jon: Mm-hmm.

Mark: As a result of this bank run. And what happened at Silicon Valley Bank. So it wasn’t like —

Jon: Lost in what way, Mark, but lost in what way?

Mark: So, if you owned a share of stock in Silicon Valley Bank where you owned, at one point it had a $60-$70 billion market cap, plus their debt, billions of debt owned any of that debt or any of those shares of stock, that money’s gone never to be seen again. Literally, if somebody owns 5% of Silicon Valley Bank, billion dollars worth it for, to make the numbers easy, they are no longer a billionaire, right.

Jon: Even if another bank comes in —

Mark: Correct.

Jon: And buys their assets, which by the way, I would assume their assets are still quite viable — that their assets are probably close to what they’re —

Sheila: They got good assets, that’s right.

Jon: Right.

Sheila: Yeah.

Mark: But in the UK, I think HSBC bought the UK Silicon Valley business for one Euro. So that tells you what it’s worth.

Jon: Right. That’s right.

Sheila: They did, that’s right.

Mark: So literally over a hundred billion dollars in net worth was lost in this event.

Jon: By the way, that was a Jim Kramer recommendation. He said that’s a buy. [LAUGHTER]

Sheila: I just wanna clarify too, that they bought up for one Euro, but they’re backing all the liabilities. You’re standing behind all the deposits which involves risk. 

Jon: That’s right.

Sheila: So the one euro, I think it’s a little misleading that it was a valuable, it is a valuable franchise.

Mark: No, it’s not though. It’s not misleading because the shareholders got nothing. So HSBC took on debt and took on obligation and it could benefit the HBSC shareholders, but if you owned the value to the equity valuation is gone.

Jon: Mm-hmm.

Mark: It is gone. There’s no value. You can’t even buy a share of Silicon Valley stock.

Sheila: No, I agree with that. I agree with that. Yes. I just wanted to make sure that they were putting money up in terms of backing the deposits. So that wasn’t just the only financial exposure there.

Mark: Their commitment was bigger —

Jon: Right. 

Mark: Their commitment was bigger than it all. 

Jon: No, no, I understand that the shareholders have taken a haircut, a loss and that they’re last in line. 

Mark: Yeah, but that haircut is —

Jon: Yeah. 

Mark: Yeah. So it’s not little, they’re not even in line, right? [SHEILA LAUGHS] So it’s not like there was this big saving, or, you know, we bailed out the shareholders and all the tech bros came out OK. They got crushed. 

Jon: Well, that’s, I think that’s a little misleading because this is not, these are not average depositors. So the people that are gonna be getting their money back, because it’s now fully guaranteed by the United States. There are people there that had hundreds of millions of dollars. I mean, you’ve got Roku that had, I don’t know, 500 million dollars in there. These are mom and pop investors and mom and pop depositors that put in a little bit of money, saving it for a rainy day. Like, there are a ton of people, this is like, when you read about those PPP loans that people would get that would say, “I have a billion dollar business and I got a, you know, $300 million PPP bailout.” Like, I’m not as concerned about all the shareholders there.

Mark: Yeah but it’s bigger than that. Yeah, the share — OK — The shareholders are different, but the depositors, right.

Jon: Yeah. 

Mark: Our entire banking system —

Jon: There are giant depositors —

Sheila: But they were giant — like, this wasn’t a bunch of mom & pops trying to get money for their payroll. 

Jon: Yeah. Yeah, that’s what I’m trying to get at. 

Sheila: Yeah exactly. 

Mark: Yeah but that’s not the point, right? The point is that the entire banking system of the world —

Jon: Oh did we lose him?

Sheila: Yeah.

Jon: Son of a b**** He just said, “The entire banking system of the world.” [SHEILA LAUGHS] And then we lost him. Holy s***. Now what do we do? Mark Cuban just created a bank run. The entire banking system of the world.

Sheila: I was sure he was gonna say it was perfectly safe and sound. [SHEILA LAUGHS]

Jon: And then, and then all we heard was ding. [SHEILA LAUGHS] “This is your captain speaking Mark Cuban has just said something about the World Banking system.” Let me ask you, Sheila, this was not this bank, you know, when he’s talking about the entire banking system of the world, this was not a systemic risk to the banking. This was an unusual situation that was in some ways an industry outlier. It was a —

Sheila: Right.

Jon: VC bank that was funding all these, VCs. The truth is it wasn’t even in that terrible a shape —

Sheila: It wasn’t.

Jon: As far as it was a s***ty investment strategy that they employed.

Sheila: Right.

Jon: Apparently nobody in their risk management department, and again, I don’t work for a giant bank and I don’t understand exactly the hierarchy of their org chart. But I would assume there’s somebody in the meetings who said, “Hey, man, did you guys see in the paper today the Fed raised the interest rates again, I think 75 basis points. [SHEILA LAUGHS] Did anybody? Hey, what are, where’s all our s***? Where’s all our stuff in? What are we getting now 1%”

Sheila: That’s true. Somebody should have asked. That’s right.

Jon: I don’t understand it. The CEO of the company was at the San Francisco Fed. I mean that none of this snuck up on them. This was a, they keep saying, “Oh my god, six hours, $ 42 billion disappeared.” For a year and a half. These guys knew what was happening to their investment strategy. It wasn’t diversified, it was long-term assets, it was a very low interest gain. And they just pivoted poorly.

Sheila: No, that’s true. It is pretty astonishing. But I think your point about this being an unusual situation is good because I think people are just starting to think more broadly there’s this huge problem in the system. There’s not, I don’t see that at all. You know, the communications around this and in a way the regulator is saying this was systemic. Such small banks. It was unsettling to people. OK, you know, what else is going on? So, I do think they may end up having to do broader guarantees. They probably will, just because I think the fear factor is kicking in. But this is an unusual bank and an unusual failure and not one that’s reflective of, most, mid-size regional banks at all.

Jon: But I think you, said something that struck me, which is, “Well, this isn’t a systemic failure,” but in some ways it’s not a systemic failure of the system that has been set up by the Fed to and by the Congress to service the financial industry. It’s not a failure of that system, but it is a failure of our system, which doesn’t backstop foreclosures, it doesn’t backstop, you know, why in God’s name, you know, there used to be a thing called moral hazard. And in the 2008 financial crisis, Tim Geithner, you know, he and I were talking about the bailouts and I said, “I don’t understand why the federal government didn’t bail out the mortgages that were underwater.”

Sheila: Yeah.

Jon: Because if you did that, it would’ve been a lot cheaper.

Sheila: Yep.

Jon: And you wouldn’t have had, you know, AIG being made whole and you wouldn’t have had all the bailouts happening at the geometric level that had happened. You could have, if it was all mortgage derivatives, if you just bring some of those mortgages above water, suddenly the derivatives are cured and they’re no longer toxic. So why didn’t they do that? And he said to me, “moral hazard.”

Sheila: Oh, brother. [SHEILA LAUGHS]

Jon: I swear to f***ing God. He said moral hazard.

Sheila: For the little people, that’s right.

Jon: “We could not reward homeowners for making bad decisions on loans.” And I said, “You bailed out an entire industry that made bad decisions on mortgage derivatives.” and I said, “Why? Why wasn’t that moral hazard?” He said, “Well, we had to land the plane.”

Mark: Guys, I’m back.

Jon: Oh!

Mark: If you guys still got me. I’m back. I’m back.

Jon: Was that turbulence Mark? Was that or were they bringing out the food service? You’re in coach, right? You’re in — what are you on, Southwest? Is this a Jet Blue?

Mark: I’m in the last row facing the wrong direction. [JON LAUGHS]

Jon: Mark, you missed.

Sheil: Yeah, you missed it. It was good.

Jon: You missed a whole moral hazard rant for God’s sakes.

Mark: I actually heard it.

Jon: Yeah! Alright.

Makr: I actually heard it. I actually heard it. Yeah.

Jon: Good. So, so —

Mark: Lemme just add my cents please.

Jon: Please.

Mark: I would tell you that the Fed is very much Fed and regulations are very much responsible because one, the Fed talks, you know, Fed speak is so much mumbo jumbo that one day the market is up 500 the next day it’s down trying to interpret the Fed.

Jon: Mm-hmm.

Mark: And so banks have that same problem trying to determine how and where they make their deposits or earn their income. And two, there’s regulations. 

Jon: Oh, for God’s sakes. We lost him. We lost him again. Alright, so we’ll get on that regulation situation.

Sheila: OK.

Jon: He said, you know, it’s a failure of the Fed and it’s a failure of regulations. I would also say it’s a failure of Congress and the lobbyists, because actually all the pressure that’s on these banks in terms of regulations is eased. All they do is spend their time and money getting regulators off their back.

Sheila: Yeah, no, that’s right. We would criticize regulators, but there’s relentless lobbying against them all the time to ease up —

Jon: Relentless.

Sheila: Yeah, it’s nonstop. And then when they do bailouts, they’re celebrated. You know, all these rich guys in Silicon Valley, “Oh, we got a bailout aren’t regulators wonderful.” But they’re not — you know, they’re not rewarded when they have to, when they try to crack down that’s a big, big part of the problem. Jon, I’m sorry I had a hard stop —

Jon: Oh alright.

Sheila: This has been great. I wish I could stay a little while longer.

Jon: No, Sheila, I very much appreciate it. Is there any other, final words you’d like to deliver on the FDIC’s role, the regulator’s role on the SVB situation and where it’s going?

Sheila: Right, so I think it’s just for people, you know, the FDIC if you’ve got insured deposits, don’t worry. The FDIC’s got a perfect record and most banks are completely safe and sound. If you’re dealing with a bank you’ve dealt with for a long time who’s been around a long time, you know, you’re fine. So, don’t anybody panic.

Jon: Or in the words of Fox’s Ainsley Earhart, “Everybody run to your bank right now and take all your money out.” [SHEILA LAUGHS] “Because the world is on fire.” Sheila, thank you so much, Sheila Blair. 

Sheila: Thank you very much Jon, it was great.

Jon: From the FDIC. and now here it is, folks. Jon Stewart had two, I think, unbelievable guests. Lost, maybe somewhere riding a Chinese spy balloon to wherever it is that he’s going. Do we have Mark anymore or is he gone still?

Mark: Yeah, I’m still here. I’m back.

Jon: Mark! Did you hear any of what we were talking about in terms of, she said, “This isn’t a systemic failure.” And I said, “Oh, it’s a systemic failure in that the system is designed through regulators and lobbying and all that to bail out these, these larger banks and ignores the smaller investor and the small creditor, and the small business owner and the homeowner.” That is my point.

Mark: Yeah. I don’t disagree. Yeah, I don’t disagree. You know, there, you know, I heard the part about the moral hazard and that’s always a fine line to work, right? And again, with this specific situation with Silicon Valley Bank, I think there was moral hazard. There were people who, you know, the CEO and management potentially lost tens of millions of dollars bond holder shareholders. So I think there was a moral hazard.

Jon: Mm-hmm. 

Mark: But I think they were trying to game the system in a lot of respects and it backfired on them. And you know, when I mentioned, if you heard me, the mark, the hold to market versus hold to maturity versus mark to market.

Jon: Yes.

Mark: That was a fundamental problem on what they did. Right? Because the system allows to say, even though the value of the bonds I purchased for income have declined five, 10, 20%

Jon: Mm-hmm.

Mark: I can pretend that as long as I hold to maturity, I’ll get all my money back. And so the system allowed them to do that. And because of that, they were the system in fact in essence, was encouraging them to take more long-term risk.

Jon: Right.

Mark: Because they’re saying you can buy a 2 year bond instead of a two-month bond because you know, you may be able to earn more interest and we’ll allow that to happen. And we won’t make you update your equity valuation. Even though you effectively became insolvent like you said. 

Jon: Doesn’t bailing them out for their terrible investment strategy, though. Now, say to this system — let’s say the old system encouraged some risk, right? To chase yields, especially for a VC community that’s always chasing yields. You know, all they want is, you know, the unicorn companies and all that, and they’re gonna throw all their money. 

Mark: Right. 

Jon: Well, now the system is saying, take all the risks you want. There is no limit to the shenanigans that you can pull because the federal government will always commit. I mean, they said that this is not a systemic risk to the banking system. Well, if it’s not, then why do they need an emergency Fed relief program?

Mark: Well, it is a systemic risk. That’s where I disagree with you, because again, the ultimate product for the US banking system is trust, right? If any single person makes, you know — you save your life savings is a million dollars, right? You’re 70 years old. You’ve worked your entire life. 

Jon: Right. 

Mark: You’ve got a million dollars for your retirement. You just pulled out your IRA. You don’t know banking mishegoss at all, right? You put in and you have to —

Jon: But that’s not this bank, Mark. 

Mark: Silicon Valley Bank Bridge.

Jon: Silicon Valley Bank is not that bank.

Mark:. No I’m not saying it’s 90, a hundred percent of their customers —

Jon: Right. 

Mark: But all it takes is 1, 2, 5, 10 and you’re that person who lived next door to the Silicon Valley Bank branch, and you put your life savings in there.

Jon: Right. 

Mark: If the banking, if people can’t trust that their bank deposits are going to always be there, we’ve got real systemic problems. And so the response isn’t — 

Jon: No question. 

Mark: The response is, Congress has gotta change the laws. If a bank does A, B, and C, which makes it incredibly conservative, we will protect all your deposits, right? If you don’t follow let’s just say Glass–Steagall equivalent laws we’re not going to. 

Jon: Right, but you know how this is gonna go. You’ve been around the block enough to know that Congress is lobbied not by the grandmother with her pension fund. Yes. And the person that’s gonna get bailed out, they’re lobbied. The billionaire investors, the millionaire investors, the people that go in there and get them to relax those rules and to give them the breaks. If what you’re suggesting to me is, “We need confidence in a banking system that teachers, and policemen and firemen, that their pensions are gonna be protected.” I’m all for it, but the Fed doesn’t step in and protect those people. It doesn’t step in and protect individuals that have lost their houses due to the incompetence and bad investment strategies of the muckety mucks. It steps in and protects the muckety mucks. 

Mark: You’re exactly right in terms of lobbying. That’s just all horse s***, right? The fact that our politicians will sell out everyday people so that my peers can make more money is ridiculous. It’s ridiculous at every single level, right? 

Jon: So if you want trust in a system, if that’s the currency, then you’ve gotta fix that part before you can gain any trust in the fact that, you know, a Silicon Valley bank that had incompetent investment strategies, needs to be, needs to be bailed out with, with taxpayer backed money.

Mark: Oh yeah. OK. Yes, but it’s not a bailout, right? It’s a bail — it’s back stopping the depositors. I can’t say it enough. One day the CEO of Silicon Valley Bank walked in thinking, you know what? I got f*** you money. 

Jon: Right? 

Mark: I got, you know, X amount of dollars in Silicon Valley Bank stock or bonds, and I’m set for life. And then a week later, he he didn’t have f*** you money anymore.

Jon: Mark, he had pretty close to f*** you money because he sold his own stock for almost $ 4 million before this thing went south. 

Mark: 2 weeks before, yeah.

Jon: Right. And so these guys knew what was coming, but these guys knew what was coming.

Mark: Yeah, that’ll get clawed back. No question about it.

Jon: Wow.

Mark: And so, and they should, right. And that’s part of the moral hazard for the muckety mucks, right? 

Jon: Right, but there’s no real moral hazard though, for them. And they’re the ones that, you know, we have to figure out a way to do the system. And if the currency of the system is trust, it should also be competence. 

Mark 100%

Jon: And there should be some level of pain that is felt by those that have performed incompetently?

Mark: I agree. I agree a hundred percent. You know, my guess is the SEC is gonna go after him cause they just literally changed the rules for the automatic sell programs that he used to sell his stock. So I would not be shocked if the SEC went after him. I would not be shocked if there was a claw back. And both of those build moral hazard, which is really important for this — for the banking industry. But it also, we also need to hold the Fed accountable as well because the whole talk around talk in circles, Fed speak, creates a lot of these problems, right? Because they were trying to interpret what they thought the Fed was going to do in terms of interest rates and the rate of acceleration when they were making their decisions 

Jon: Right, but they weren’t riding a fine line though, Mark. I mean they had, I don’t know, 90 some percent uninsured and they had all their money in long term — they basically were loaning money to the Fed to get their treasuries to just make one or 2%. And as interest rates went up over a year and a half, I mean, that’s a train coming down the track that you can see for miles.

Mark: I wasn’t though. No, it wasn’t though because if there was no bank run, we wouldn’t be looking at Silicon Valley Bank and saying, “Oh my God, such bad decisions. They’ve lost all their money, they’re going out of business.”

Jon: But we should be, my point is we should be. That there should be regulators that are watching that for systemic risk to the bank. Not to the system, but to that bank —

Mark: Yes.

Jon: But they loosened the regulations — 

Mark: Yes

Jon: So that they were not being stress tested in that way. 

Mark: No, we agree there a hundred percent.

Jon: I see. 

Mark: We agree there a hundred percent. Yeah, we see. I’m just saying that if there was no bank run, none of this would’ve come to light and this problem would still continue.

Jon: Oh, I’m sure. And listen, you’re seeing it now in a ton of these other banks. Suddenly everybody’s looking at Credit Suisse like, —

Mark: Yes. 

Jon: “Hey man, you, you’ve got a lot of long-term mortgage backed securities too. what’s going on with that?”

Mark: Well, that’s a whole nother question too.

Jon: Yes, and that’s my whole problem with the Fed. They make these big banks liquid, they have them have no risk, and yet individuals are s*** out a lot. And that was my biggest problem — 

Mark: Yeah. 

Jon: With the situation, is that they made people whole, that tanked the whole system and they allowed people to lose their homes for no reason. They just allowed it to happen and it never should have happened.

Mark: I can’t argue with you at all.

Jon: There you go. That’s a good thing, now I’m gonna let you go then, now that, now that we’re at the no argument —

MarkYeah, no argument there. 

Jon: Privatizing, profit, socializing losses, that’s how we do this.

Mark: No, no, no, no. Because you know, there’s no way shareholders should have gotten anything back in 2008. Shareholders understand the risk better than anybody, right? They are the ultimate risk takers, and so they should have gotten blown out just like the Silicon Valley and Signature Bank shareholders did.

Jon: Right.

Mark: And so there is moral hazard going forward for all the banking CEOs and boards. Because they know they’re gonna lose the value of all their equity. And so you’ll see a rush to conservatism right now as they try to fix this. And, but the Fed and the FDIC is gonna have to help. And the idea that 250K is enough insurance is insane because the idea that we’re asking—

Jon: Yeah, they’ve gotta raise that, they’ve gotta raise that limit.

Mark: Yeah or offer insurance to big accounts. So if Roku with 458 million wants insurance, here’s what it costs you from the FDIC.

Jon: That’s right.

Mark: Here’s the premium. They’ll pay it. 

Jon: And they have to make them carry that insurance. They have to make them carry that insurance.

Mark: Yes. 

Jon: And they have to raise that limit for individuals, not for companies. Not for the large investors —

Mark: Yes. 

Jon: But for the individual, they should not be holding that limit. Everybody has been backstoped in any bank failure except IndyMac. And Lord knows, I don’t know what the problem with that one was, but Mark Cuban, thank you for spending the time. I hope you’re off on a spring break jaunt with the kids.

Mark: Yep. 

Jon: And you’re gonna enjoy yourself. I look forward to seeing you, the next time, the Mavs are in town for my Knicks and we’ll talk to you soon.

Mark: Hope so, Jon. Thanks for having me on. It’s always a blast.

Jon: Thank you so much for spending the time with us and Sheila Bair from the FDIC former chair. Thanks so much to her. That is our podcast, for “The Problem.” The show is on Apple TV+, join us this week. It’s about inflation, and we’ve got an interview with Larry Summers that I really, truly believe, I would like you to watch. So take it easy everybody. Bye-bye.


Jon: “The Problem with Jon Stewart Podcast” is an Apple TV+ podcast and a joint Busboy Production.