>> Now, banking stocks have been getting hammered again in week from anxiety we haven't seen since the 2008 global financial crisis.
Confidence crumbling since two regional U.S. Banks collapsed, putting greater scrutiny on financial system and last-minute emergency measures being taken to stop credit suisse from failing.
The U.S. federal reserve called the impact of the crisis uncertain as it nudged interest rates higher on Wednesday.
We asked if the fed was doing enough.
>> Thank you, Michael.
Welcome to the show.
>> Great to be here, thank you.
>> So the filled just raised another quarter of a point.
They have to worry about fighting inflation but now they have this banking crisis.
Do you think they got the Goldilocks soup right?
It's just the right temperature?
>> I think on this latest rounds of fed rate increases they got it just right because if they had not raised rates, it would have signaled to the market that this national crisis, this banking crisis is worse than it probably is at the moment.
If they had just kept rates flat they would have been giving in to those who are concerned that perhaps this thing is spiraling out of control.
And if they'd raced it 50 basis points, they would have, in effect, ignored this "banking crisis."
So 25 basis points is perfect.
Goldilocks is right.
>> And you say it's because in banking crisis is not spiraling out of your -- control in your opinion and in general Powell's opinion.
Why not?
>> I think in each case, in each bank that has failed in the last few weeks, has a -- generous aspect to it.
Silicon valley bank was a unique ecosystem catering to venture capitalists, providing them with all sorts of special deals on various pieces of financing and then many of those, depositories there had more than $250,000 so they were a vastly uninsuranced group of depository.
They started talking to each other, telling each other to take their money out.
No bank can survive that signature bank in New York was also different.
I'm not sure we know exactly why that bank was declared to have failed and to be shut down.
Something to do with crypto-related loan portfolio.
Something to do with the management team that's not exactly clear.
I find it fascinating that Barney frank, the author of the Todd-frank law was on the board of signature bank.
That's still a bit of a mystery but not connected to the main banking system.
And of course, credit sw -- suisse, a sad end to that institution.
But they had been failing for years.
>> Silicon valley bank.
You and the banking industry have a technical term for it which begins with a.
Explain to me what that theory is.
>> The "a" theory, shall we call it, is frankly, again, getting bark to who the climate of this bank were.
OK?
This bank was at the center of the silicon valley ecosystem, hence the name silicon valley bank.
It had about 25 branches.
Most of which were in California.
A few on the East Coast because they had bought a private bank there but this was a bank that catered to extremely wealthy venture capitalists and their portfolio companies and I think this was also a bank that was usedded to catering to these individuals by Viving them sweetheart deals and their portfolio companies.
Pre-revenue, pre-profitability and still managed to get very favorable loans.
That just became a portfolio that isn't all that attractive.
>> You mean it was sort of a fear of missing out crowd out there that made people want to cater to them?
>> Exactly and if your name is silicon valley bank then you better be catering to the silicon vale crowd or else somebody else will.
>> What was the underlying problem?
That people invest in the bank didn't realize that rates were rising and got caught short?
>> I think it was a combination of factors.
On the one side you had this whisper campaign by the bank's clients.
The bank is in trouble.
We have to get our money out and fast.
No bank can survive a run on bank like that.
>> Was that sort of happening on social media as well?
Do you think twitter contributed to this?
>> Absolutely.
I borrow -- my second book was "house of cards" about the collapse of bears-Stearns.
In this March of 2008.
Bears Stearns collapsed in about a week and that was considered lightning fast.
This happened in about 24 hours, make 3 and I think the effect of social media on the situation was exacerbating and ultimately devastating.
People would have had time to get their mind around what was happening but now it's too fast.
>> Congress passed a de-reg act in 2018.
To what extent did that deregulation restrict to this problem?
>> Incrementally because silicon valley bank was one of the Banks that got effectily exempted from careful and detailed oversight but the fed as a result of that change in 2018, which raised the testing on these Banks from 50 billion of deposits to 250 billion of deposits.
Silicon valley bank at the end had about 215 billion of deposits so had the level for higher scrutiny remained at 350 billion then there's a great -- 30 million, then there's a great degree of possibility that the failings of silicon valley bank -- the clientele concentration.
Its portfolio concentration.
Its buying bonds at the top of the market.
That would have been picked up by the feds testing and stress testing and I think we probably would have avoided this, quite frankly but that's a hypothetical you'll never know.
Signature bank also was exempted they had about 100 million in deposits.
Had the limit been kept at 50 million, they would have all been caught up in the stress testing and they didn't want that because it's too vigorous and probably very annoying but it would have revealed to the regulators the riskings inherent.
They should have seen it anyway.
I don't know why they didn't.
Obviously, hindsight is 20/20, it's obviously -- obvious the mistakes they were making.
>> Don't we have to put these regulations back on?
>> I would say, Walter, that, because of the deposit limit, the no limit on insured deposits that in effect we've nationalized the Banks, or federalized the Banks.
I'm not even sure why we necessarily need to pay C.E.O.
's and C.F.O.
's and risk managers at Banks to do their job because they essentially are being backstopped by the federal government now.
Now, it's only for a year so hopefully it will remain temporary unless we are in effect -- Banks like Mitterrand did in the 1980's.
>> Should we be doing that?
What do you think?
>> That's not our system.
That's never been our system.
We've never had -- well, we probable have had in history -- history, very -- various central Banks but now we have the fed.
The fed is our federal bank.
We have private Banks.
A capital system that is the envy of the world.
Even post the 2008 financial crisis, our big Banks are the envy of the world.
They were intellectual leaders, they are capital leaders.
For better or worse, maybe for worst, the best and brightest minds in this country often want to work either at the Banks or private industry or hedge funds.
It has really created a capital market system that is the edge have I of the world.
And if the Banks are owned by government or run by the government and there's no reward for taking risks properly or incentives for creative financing or to be innovative then I think our Banks are wither on the vine and we will lose what is essentially a national champion and the envy of the world.
We could do that and we maybe have inched closer towards doing that in the last couple of weeks and I'm not sure that's a good thing but if we're going to do that, we need to have a discussion about it.
Right now we haven't had that discussion, it was just decreed and I think we want our Banks to still be the envy of the world.
>> For 17 years, you were a banker yourself.
I think you were at will discard and J.P. Morgan, Merrill lynch.
>> Yes.
>> How have things changed?
>> When I was at lazard Walter, who was founded in New Orleans, you'd probably be glad to know.
In 1848.
It was a private partnership and the kinds of risks that we saw at silicon valley bank, they weren't taking.
We were slowly in the business of providing M.M.A.
advice to important clients, as we like to say.
And so the kinds of risks that bankers take today were not the kinds of risks that we were taking back at lazard in the old days and I think m and a bankers, generally, people who give advice to C.E.O.
's about buying and selling companies, they don't take those risks but traders take those kinds of risks and a lot of Banks, of course, that's a big part of their business.
But the question is, you know, obviously 15 years ago we had a major financial crisis because -- even much worse than this, knife.
Because the Banks then, at the center of that crisis, bear Stearns, leemon brothers, Merrill lynch, were literally in the left ventricle of capitalism, responsible for providing the capital that we basically take for granted and use all around the world every day.
Again, silicon valley bank was catering to a very special clientele and not at the center of our financial system.
But I think banking has always been a very dangerous place, Walter.
And I'm afraid that the well-compensated management teams at these Banks forget just how dangerous banking can be.
The business of borrowing short and lending long is a formula for financial disaster every hill?
Time.
We forget that but we just saw it again.
We could not have had a better example of that danger than we had in the last few weeks between sill Connell vail bank, signature bank and credit suisse.
>> Calvin, the great humorist said that when he went to Yale, the -- were the ones who went into banking and it made it a much better system.
Have we allocated too many I.Q.
's to Wall Street and they're all trying to outdo each other?
>> I've always said that the moment the M.B.A.'s started going to Wall Street, that's the moment it became even more risky than it is.
Creating products that people don't understand.
Whether they're credit defaults.
Mortgage backed securities.
All of that has made what is already a very complicated and dangerous environment even more so.
I'd been a journalist for many years before I went and got my M.B.A. and the next thing after I got my M.B.A.
I was doing leverage buyouts and financing them.
How I went from a guy at public schools in wake county, North Carolina, to leveraging buyouts is the alchemy of what was going on in 1 80's Wall Street when they needed bodies and something like an M.B.A. gave you a credential that you didn't, really, frankly deserve.
You didn't know what you were doing but ahead to do it anyway.
I learned and hopefully did a good job but if you don't understand the risks you're at risk of having the whole thing blow up on your watch.
>> Ever since S.V.B.
started melting down, a lot of normal consumers have started moving to the bigger Banks.
People putting Department of sits in bank of America, Citibank and chase.
Do you think we're entering an era again of some really big Banks that are too big to fail dominating?
>> I think we've been in an era of systematically important financial institutions post 2008 financial crisis.
We've been in that era now for 15 years and it's OK.
This crisis did not start with those Banks and there's a reason for that.
And I think Todd-frank is the reason.
And the tighter regulation of these Banks.
Now they come up up the -- under the purview of the fed.
The truth is, these big Banks -- J.P. Morgan chase does not want these deposits.
You know how we know that?
Because you look at what they're paying people who deposit there, including me.
They pay me one basis point or two basis points.
People who want your deposits pay awe lot more than that I don't think we're inny danger of those Banks becoming even more systematically important.
We have a lot of Banks in this country.
I don't know the number.
7,000, 8,000.
We could do with some more bank consolidation, frankly.
The fed has not allowed any of the Banks to do any consolidation since the financial crisis and that's for a reason.
They've don't want from to be too much concentration among these Banks.
That's why you don't see J.P. Morgan chase buying silicon valley.
Maybe they would but they'd have to get a special waiver from the fed.
The fed hasn't given any waivers since 2008 and I think that's OK.
I think our central banking system is probably as safe now as it's ever been.
I'm not just saying that because I don't want people to panic.
I think that is the real truth.
There are isolated case was special eco systems and rather poor choices made by management teams that've made them vulnerable to a run on the bank that caused these bank failures.
Knock wood, Walt every but I think our banking system is in pretty good shape despite the events of recent weeks.
Walter: William, thank you so much for joining us.
Appreciate it.
>> Thank you, Walter.
Appreciate it.
