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Interest rate hikes, tech stock declines made for ‘perfect storm’ for SVB collapse: Former FDIC CIO

Sultan Meghji, Former FDIC CIO, Duke Professor and Venture Capitalist, joins Yahoo Finance Live to discuss what led to the fall of Silicon Valley Bank.

Video Transcript

DAVE BRIGGS: We're joined now by the former chief innovation officer of the FDIC, Sultan McGee, a founder of multiple tech startups and a professor now at Duke University. Good to see you, sir. How have you been impacted by this bank failure? And was this really just a perfect recipe for financial disaster?

SULTAN MEGHJI: Well, fortunately, because of my experience in the banking sector, I knew about the $250,000 limit-- depository limit. And so personally, I just didn't have more than that amount in any one bank account because beyond that, you're kind of lucky. And frankly, the Herculean efforts of the various agencies yesterday really, I think, gave everybody a big deep breath. And we're happily seeing sort of nominal impacts in the market.

From an investor or startup perspective, there was such a concentration in Silicon Valley Bank, Signature Bank, and Silvergate as well in certain categories of tech that it's not surprising to me at all that this perfect storm of interest rate hikes coupled with decrease in value of tech companies and biotech companies led to this kind of perfect balance sheet mismatch. It's rather kind of not surprising, I think, to most of us who pay attention to that kind of thing.

DAVE BRIGGS: Yeah, and you just said you only had 250. You were the smart one, but 85%. That's staggering-- 85% of their deposits were uninsured. What do you make of that? Shouldn't regulators have known something was going to break in that situation?

SULTAN MEGHJI: Well, it's interesting. The call reports and the other processes that the regulators have to pay attention to this kind of thing usually are pretty good about catching this. I am kind of curious as to where the majority of the blame lies. Certainly, bank management was not paying attention, not managing their books the right way, and kind of protecting their overall business.

But then you also have to wonder about the regulators. This didn't happen two weeks ago. This has been going on for a few weeks, a few months. There are a lot of stories, even in early to mid February, that talk about some of the issues with Silicon Valley Bank in particular. On the regulatory side, I'm really surprised that more proactive engagement with Silicon Valley Bank in particular hasn't been happening for a little while.

SEANA SMITH: Sultan, you've laid out lots of reasons about what went wrong. So what happens next? When we talk about reforms, what's necessary inside Capitol Hill down in DC, what do you think should be on the top of that agenda?

SULTAN MEGHJI: Well, isn't that the 50,000 Bitcoin question, right? Getting Congress to act on something like this is a real challenge. And the vast majority of the banking regulations here in the United States previous to Dodd-Frank go back to the mid 20th century, where fax machines were considered fancy new technology. So we're in a moment where we really need Congress to get involved and get more direct on this and really give the regulatory agencies much clearer direction over what they're doing so that we can stop things like this from happening.

The simplest way to think about it is if we're going to have a real-time banking system where you can move money at any moment of any day across the American financial system, the regulatory bodies have to be able to navigate that, have the right tools, the right people, the right processes, and the right authorities to be able to keep up with this kind of thing because currently, they do not.

DAVE BRIGGS: You wrote when you left the FDIC that a more flexible regulatory framework is needed to protect Americans' financial security. Did the FDIC or did the Fed have a role in what happened?

SULTAN MEGHJI: Well, it's hard not to draw a direct link from the interest rate hikes into some of these issues. It is almost impossible to decouple those two. And so the short answer is yes. On top of that, because there's so little structural and procedural transparency into how banks are actually examined, one bank gets one examiner. They operate one way. One bank gets another examiner. They operate in a slightly different way. It's very easy for different banks to have different regulatory regimes. And in a space where that's just the norm, of course, you're going to have situations where things fall through the gaps.

SEANA SMITH: When we talk about systemic risks, some of the risk out there to banks, a number of the regionals under tremendous amount of pressure today, how worried should we be?

SULTAN MEGHJI: I wouldn't be worried at all. I think the Federal Reserve, the Treasury Department, the FDIC, your government did all the right things. They're doing it in a way that's reasonable. It's straightforward. They acted for government agencies fairly quickly. And if I'm holding money in an American bank of any size, I'm not worried at all. I'm going to sleep like a baby tonight. The bigger issue for me is medium and longer term, are we setting up the banking system and the innovation economy of the United States for success?

And I do worry about a knee jerk coming out of Congress, coming out of the White House, that makes that harder because we're already been on our back foot in that regard. And I don't want us to be farther back,

DAVE BRIGGS: Yeah, yeah, what is, to you, the biggest impact on the startup community today and the one that's coming behind it? Where are they going to go for a bank loan?

SULTAN MEGHJI: Yeah, it's a real challenge, right? Equity has always been the backbone of the venture system. You go to a venture capital firm, you raise money. I've done it a number of times in my life. It's exhausting. But that's how you do it phenomenally. And then downstream of that, you can do things like get venture debt. You can have a variety of other facilities. I think what we're going to see is significant more pressure on venture equity and far less accessibility of venture debt.

And I worry about it from an equality and diversity perspective especially. I think we're going to see a lot of more brown, more female startups struggle to fundraise over the next few years. Frankly, this is one of the best times to start a company. These kinds of economic compressions are perfect. This is where the Ubers of the world came from. This is where a lot of the great tech of the '90s came from similar moments. And I worry that we're disincentivizing that behavior, or worse yet, we're pushing it outside of the United States.

SEANA SMITH: Sultan, how is it going to affect you, how you're looking at potential startups, how you're looking into different types of VC deals? Does it affect it at all?

SULTAN MEGHJI: Not really. My basic view of the world is invest in good technology. You invest in good teams. You invest in good markets. And there's not really a huge change from a year ago to now. The view of those markets is different. Certainly, I look at banking technology in a slightly different way post my time in the government. I look at artificial intelligence in a much more bearish kind of way. I think there's a lot of great AI coming. I think there's a lot of great opportunity there.

DAVE BRIGGS: But first, what's right in front of us, Sultan, is March Madness. I'm headed down to host a show called March Madness Live. A Duke fan to a Duke professor, what do you make of the Blue Devils' chances, having won 9 in a row under their first year head coach?

SULTAN MEGHJI: I'd go all the way, man. I am so excited to watch them go. It's going to be fantastic.

DAVE BRIGGS: Yeah, they look like they are a title contender. John Scheyer has that team playing well. Sultan Meghji, great to have you. Really interesting insights. Thank you.