Kevin O’Leary weighs in on Silicon Valley Bank fallout, mitigating risks, Fed policy, startups, wine

O’Leary Ventures Chairman Kevin O’Leary joins Yahoo Finance Live to discuss the collapse of Silicon Valley Bank and what it means for investors and the Fed.

Video Transcript

DAVID BRIGGS: ABC's hit show "Shark Tank" describes itself as having reinvigorated entrepreneurship in America. Might the collapse of Silicon Valley Bank have the exact opposite effect, stifling innovation and tech startups at the same time? Kevin O'Leary, Mr. Wonderful, O'Leary Ventures Chairman joining us now to weigh in.

Good to see you, sir. People always look to you for that no BS explanation of things out in the business world. How do you tell your neighbor, the guy at the bar what went wrong, what happened with SVB?

KEVIN O'LEARY: Very simple. Let me explain what happened last week. This is a combination, a powerful one, of idiot management with a board above them that was incompetent, or at least asleep at the wheel, because what happened here was just plain bad management. To make the bets they made means they know nothing about banking. I hate to be so blunt, but that's a horrible combination.

They blew themselves up the old-fashioned way. Idiots. That's the bottom line. And at the end of the day, they caused chaos in the banking system. And the outcomes now with new policy in place are not good because if you think about what's occurred here is we let one bank-- and let's talk about the other option of letting that bank fail, OK?

They blew themselves up. Let them fail. What would happen? 95% of those assets, including the accounts that were not insured by the FDIC, that had more than $250,000, which was 90% of the accounts, were held by sophisticated investors such as hedge funds and venture capital firms.

They're big boys. They understand risk mitigation. And either they were or they weren't doing their jobs. They would have got back $0.95 on the dollar. And then for everybody that had $250,000 or less, they would have got all their money back.

Now the big discussion was, OK, has this breached confidence in the entire US banking system? And I would have argued it would have been volatile for a few days, but this was not a 2008 Lehman Brother situation. These are just idiot bankers with an incompetent board. It's that simple.

Now, we should have let that wave go right through onto the beach and come back in. That would have been fine. But instead, we're sitting in a horrible moral place today, where every single account in every single bank, regardless of who's running it, is guaranteed by the taxpayer. I'm not happy with the outcome.

SEANA SMITH: So, Kevin, what do you think this then means for the banking sector going forward? Do you think we will see more risk from other banks given the fact that regulators were so quick to step in and were so quick to guarantee all of those deposits?

KEVIN O'LEARY: Well, let's think about what's going to happen. I'm a banker. My primary compensation is equity in my bank. Now I've just been told that my deposits that I get to do anything I want with, which was what was going on at the Silicon Valley Bank, really stupid investments, but basically, they took 90% of the depositors' money and bet it long on 10-year treasuries right when the Fed was raising rates. Yes, only an idiot banker would do that. But that's what they did, massive risk.

But now I can be running a bank and just spend all of my day worrying about the stock price because I don't have to worry about the deposits anymore. You and me, the taxpayer, basically, I have that risk now. There's no-- I can do anything I want as a bank manager. I can swing for the fences. I have to stay within the rules of banking, but I can take inordinate risk to move that stock price and never worry about what I do with the depositors' money. Does that sound like a good idea to you?

DAVID BRIGGS: Not my favorite. Your fellow shark, Mark Cuban, he had between $8 and $10 million invested in businesses there with SVB. And he tweeted this, quote, "The Fed should immediately buy all the securities and debt the bank owns at near par. The Fed knew this was a risk. They should own it." What do you think of his thoughts on the situation? Does he have it wrong?

KEVIN O'LEARY: Well, I think what-- which Fed owns it? I think the San Francisco Fed owns it for not being an overseer to this board of directors who is obviously negligent. And we'll see that will be tested in court, there's no question about it. I'm not sure if Fed policy is to blame for what happened at SVB.

I think it's just idiot management. And that's why it's OK to let a bank fail if it's run by idiots. I'm OK with that. And frankly, at the end of the day, I had all kinds of companies with money in there, including Circle that had over $3 billion in there. But we would have got back $0.95 on the dollar anyways if the Fed hadn't rescued it.

Now, this did cause some damage for USDC as a crypto. It broke $1 over the weekend. It went to $0.95. And that's brain damage for the long term. But at the end of the day, we changed policy for the entire banking system without thinking about the unintended consequences. And it's really, really ugly.

Now that's changed policy for me as an operator with multiple platform companies. Here's our new mandate. Here's what we've decided to do given what's going on here.

We've told our CEOs do not put more than 20% of our liquid assets in any one institution. I don't care who you know or how big they are, there's always the next black swan idiot manager in big and small banks. So we don't know who they are. So I only want 20% in any one institution.

Secondly, very few people know this, but the Fed has already allocated $250 billion-plus to small businesses that did not take advantage of it in what's called the Employee Retention Credit Program instituted in 2020 and 2021. Every single one of my companies now applied for that. That is up to $26,000 per employee towards payroll.

This whole narrative started last week around payroll, around the companies inside the Silicon Valley Bank not being able to pay payroll. And yet practically none of them had already got the relief the government offered them with the ERC program.

And so I've made it a mission now to tell every small business that's sitting around wondering, can I make payroll now that money's gotten really tight in the venture community, well, yes, you can by tapping into what's already been given to you in the ERC. And you can go get it. You just have to find out if you qualify. You need at least five employees, and then you can. But these are things that no one knew about.

And now the government coming bailing out this small bank that blew itself up, no one ever heard of Silicon Valley Bank in the general population. Now they own it. Now the taxpayers have the liability of every single account. I think this is really, really difficult policy, and it's going to have major political implications. You can see this being divided by party line pretty soon.

SEANA SMITH: Kevin, when we talk about the impact that this is going to have on the startup community, clearly they have been in freefall over the last couple of days trying to figure out exactly what comes next-- what comes next, how big of a chilling effect do you see this having overall on the startup community? And I guess how big of a disadvantage maybe Silicon Valley will be positioned here against some of the competitors, specifically what we're seeing in terms of innovation overseas?

KEVIN O'LEARY: I think it is going to be very challenging. But remember, there was a time when we had rates of 6% or 7%, and the venture community did very, very well. I think what happens now is there's going to be curation of the quality of deals. So the speculative, really risky stuff that maybe you would have taken a flier in the portfolio, you're not going to do now. You're going to go and be more concerned about the pathway to profitability than ever before.

We're grooming our portfolio and deciding which we're going to support and which we're not because already the capital started to dry up for them. Factoring, that's when you have to factor your receivables, last-- four months ago was 9%. Today, it's anywhere from 17 and 1/2% money and have a company recently that borrowed at 35% just to get cash.

So things have gotten really, really tight. That's a combination of the Fed raising rates faster than they have in decades, but also the fact that this is a new environment where we saw what occurred with the loans that were sitting in Silicon Valley Bank that were basically, many of them, were garbage. Up to 9% of them wouldn't qualify today for any bank loan. And so they were very, very loose.

And they also had predatory marketing practices, which I think are going to be questioned by the regulator. For example, you raise $25 million with VCs. SVB said to you, you put that $25 million in here and you keep all of it here, and we'll give you a very loose loan. But then you've got to take that loan money, also keep it in the bank. And by the way, do you need a mortgage for your CFO, your CIO, and your CEO? We'll give you that too.

I think all of that's going to be scrutinized as predatory marketing practices because no company should keep all of their liquid assets in one financial institution. I think we've proven that over the weekend. That's a really stupid idea because you don't know where the next black swan is swimming. It's in the lake somewhere. There's idiot managers everywhere.

And lastly, what we've really said to ourselves as an economy-- there's 11 sectors in the S&P 500. One of them, called financial services, is the only one that services all other 10 sectors. I think we just nationalized it. And so if you're going to become a shareholder in a bank, you should think twice.

Also, you should think about whether you ever want to own bank bonds because I think the profitability of this sector is going to be under tremendous pressure as the regulators make the margins much more liquid-- that's less profitable for banks-- and the cost of compliance much higher, which squeezes margins. I think the best days of banking, from an equity point of view, are behind us.

DAVID BRIGGS: Well, hopefully, the regulators ask some of the very questions that you just proposed. Finally, a lot of unintended consequences, needless to say here, many of which you've mentioned. One we didn't see coming was the wine industry. Apparently, SVB had lent down more than $4 billion to the wine industry over the last 30 years. You know a thing or two about wine. What do you expect the impact to be here?

KEVIN O'LEARY: Well, basically, all the accounts have been guaranteed. So the panic that occurred in the wine industry on Friday, Saturday, and Sunday has been allieved. But those loans that were provided for buying or renting acreage, they're gone. And so what the wine industry has to do is try and figure out what the varietal is that people want, and they've got to go get that juice at least two quarters ahead of time.

Sometimes, they buy land. Sometimes, they buy winery. Sometimes, they lease land. All of that has to happen with debt. And so that was one of the banks that provided a lot of it. That's not going to be the case going forward. The wine industry is unique. It's been very, very, very successful in California.

Some of the varietals we make, we're all proud of. But clearly, our cost of capital-- and I say this as a participant-- is probably going to go up 30%, no question about it. It's going to make the larger operators probably more protected around a moat, and the smaller ones are going to be acquired by the larger ones.

It's going to force consolidation in the wine industry. And I remind everybody that the wine industry, 97% of wine is sold for under $15 a bottle. So it's a very thin margin in the first place. You need major scale and logistics. And that lends itself to the larger players.

DAVID BRIGGS: Wow. That's enormous impact. All right, next time, come in studio. We'll have a glass. We'll cheers to all of that. Kevin O'Leary, Mr. Wonderful, good to see you, sir. Appreciate that.