Financial Expert on the Collapse of SVB and Credit Suisse

MICHAEL HOLMES, INTERNATIONAL ANCHOR: Now, Banking stocks have been getting hammered again this week from anxiety we haven’t seen since the 2008 global financial crisis. M Confidence crumbling since two regional U.S. banks collapsed, putting greater scrutiny on the financial system and last-minute emergency measures being taken to stop Credit Suisse from failing. The U.S. Federal Reserve called that the impact of the crisis “uncertain” as it nudged interest rates higher on Wednesday. Walter Isaacson asked financial journalist, William Cohan, if he thinks the Fed is doing enough to stem the losses.

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WALTER ISAACSON, HOST: Thank you, Michael. And William Cohan, welcome to the show.

WILLIAM D. COHAN, FOUNDER PARTNER AND FINANCIAL JOURNALIST, PUCK: Great to be here. Thank you.

ISAACSON: So, the Fed just raised another quarter of a point. You know, they’ve got to worry about fighting inflation, which is why they’d raise interest rates. But now, they have this banking crisis. Do you think they got the Goldilocks soup right, it’s just the right temperature?

COHAN: I think on this latest round of Fed interest rate increases, they got it just right, Walter, because if they had not raised rates then it would have signal to the market that the financial 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 were concerned that perhaps this thing is spiraling out of control. Now, if they had raised it 50 basis points, they would have, in effect, ignored this “banking crisis.” So, 25 percent — 25 basis points is perfect. Goldilocks is right.

ISAACSON: And you say it’s because this banking crisis is not spiraling out of control in your opinion and Chairman Powell’s opinion, why not?

COHAN: Well, because I think in each case, in each bank that has, you know, failed in the last few weeks has a sui generis aspect to it. You know, Silicon Valley Bank was a very unique ecosystem catering to venture capitalists and their portfolio companies, providing those venture capitals with all sorts of special deals on various pieces of financing. And then, you know, many of those depositors at Silicon Valley Bank and more than $250,000, so they were ineffective and vastly uninsured group of depositors. And so, they started blithering with each other, Walter, told each other to, you know, take money out. And no bank can survive a bank run like 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. It’s something to do with crypto related loan portfolio. Something to do with their management team. That’s not exactly clear. I find it fascinating that Barney Frank, the author of the Dodd-Frank law, was on the board of Signature Bank. So, that’s a — still a little bit of a mystery, but again not really connected to the main financial system. And then, of course, Credit Suisse failing last week. It’s a sad end to a great institution, but that bank has been failing for years. So, this was probably inevitable.

ISAACSON: Well, let’s get back to Silicon Valley Bank because you call it the failure. You referred to the Jerk Theory (ph), although I think you and the banking industry have a more technical term for it which begins with A. Explain to me what that theory is.

COHAN: Well, I think that the A theory, shall we call it, is frankly, again, getting back to who the clients 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 that this was also a bank that was used to catering to these individuals by giving them sweetheart deals and their portfolio companies. Companies, Walter, that were pre-revenue, pre-profitability and yet, still managed to get very favorable loans, and that just became a portfolio that isn’t all that attractive.

ISAACSON: You mean it was sort of a fear of missing out crowd out there that made people want to cater to them?

COHAN: Exactly. And if your name is Silicon Valley Bank, well, I think you’d better be catering to the Silicon Valley crowd, or else somebody else will.

ISAACSON: What was the big underlying problem? Was it that interest rates were rising and that the people who ran to Silicon Valley Bank just didn’t realize that interest rates were going to rise, and they got caught short?

COHAN: So, I think it’s, naturally, a combination of factors. On the one side, you had this whisper campaign by the bank’s clients. You know, the bank’s in trouble. We’ve got to get our money out and fast. No bank can survive a run on the bank like that.

ISAACSON: Well, wait. Let me ask there. Was that sort of happening on social media as well? Do you think Twitter contributed to this?

COHAN: Absolutely. You know, I wrote my second book, it was the “House of Cards,” about the collapse of Bear Stearns. First in, literally, 15 years ago, in 2008, March of 2008 Bear Stearns collapsed in about a week, Walter, and that was considered lightning fast. This happened in about 24 hours, maybe 36. And I think the effect of social media on this situation was exacerbating and ultimately devastating. People would have had more time to get their mind around what was happening, you know, as recently as 15 years ago. But now, it just happens too fast. You know, a rumor can get around the world before the truth gets out of bed in the morning.

ISAACSON: Congress passed a D. Rag (ph) Act back in, what, 2018. To what extent did that deregulation contribute to this problem?

COHAN: I think greatly because you know, Silicon Valley Bank was one of the banks that got effectively exempted from careful and detailed oversight by 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 been remained at 50 billion, then there’s a great degree of possibility. I think it would have been likely that Silicon Valley Bank would have been the failings of Silicon Valley Bank. The clientele concentration, its portfolio concentration, it’s buying bonds in the top of the market, that would have been picked up by the Fed’s testing and stress testing. And I think we probably would have avoided this, quite frankly. But, you know, that’s a hypothetical that you’ll never know. Signature Bank also was exempted. They had about 100 billion of deposits. Had the limit been kept at 50 billion, both Signature in Silicon Valley Bank, First Republic, they would have all been caught up in the stress testing, and they didn’t want that, of course, because it’s too rigorous and then, probably very annoying, but it would have revealed to the regulators the risks that were inherent at these banks. Frankly, they should have seen it anyway. And I don’t know exactly why they didn’t because, obviously, in retrospect, hindsight is 20/20, it’s obvious the mistakes they were making. And I think anybody actually studying it would have seen that.

ISAACSON: Well, if we’re going to ensure everybody’s deposits for a long while to an almost unlimited wait, don’t we have to put these regulations back on?

COHAN: 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 CEOs CFOs and COOs or 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. And so hopefully, it’ll remain temporary unless we are in effect, you know, nationalizing banks like you know, Mitterrand did in France and in the 1980s. If that’s what we’re doing, we should have open and full debate about that.

ISAACSON: Wait. Should we be doing that? What do you think?

COHAN: Well, I mean, that’s not our system. That’s never been our system. We’ve never had — well, we probably have had with — in history of various central banks. But now, we have the Fed. The Fed is our central bank, right? We have private banks in this country, profit oriented private banks. We have capitals of capital system that is the envy of the world, right? Even post the 2008 financial crisis, our banks, our big banks are the envy of the world. They are intellectual leaders. They are capital leaders. There were, you know, for better or for worse, maybe floors (ph), the best and the brightest minds in this country often want to work, either at the banks or bank like businesses like private equity or hedge funds. Maybe there’s too much talent in this country going that way, but it has really created a capital market system that is the envy of the world. And if the banks are owned by the 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 will wither on the bind and we will lose what is essentially a national champion and the envy of the world. So, you know, 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 like a discussion about it. And right now, that haven’t had that discussion. It was just decreed. And I don’t think we want to go that way, because I think we want our banks to still be the envy of the world.

ISAACSON: For 17 years, your bank or yourself, I think you were at Lazard and, JPMorgan Chase.

COHAN: Merrill Lynch.

ISAACSON: Merrill Lynch.

COHAN: JPMorgan Chase. Yes.

ISAACSON: How are things changed?

COHAN: You know, when I was at Lazard, Walter, which was founded in New Orleans, you’d probably be —

ISAACSON: Of course.

COHAN: — glad to know, in 1848. I mean, it was a private partnership. And, you know, the kinds of risks that we saw at Silicon Valley Bank, you know, they weren’t taking. We were solely in the business of providing M&A advice to, you know, 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, you know, M&A banker’s generally, people who give advice to CEOs 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, have — that’s a big part of their business. But, I mean, you know, the question is, you know, obviously, 15 years ago we had a major financial crisis because — even much worse than this, in my opinion, because the banks then, at the center of that crisis, you know, Bear Stearns, Lehman Brothers, Merrill Lynch were literally in the left metrical of capitalism. They were responsible for providing the capital, that we basically take for granted and use all around the world every day. Again, Silicon Valley Bank was more of a sui generis ecosystem and catering to a very special clientele and not at the center of our financial system. But, you know, I think banking has always been a very dangerous place, Walter. And I’m afraid that the well compensated management teams that these banks forget just how dangerous banking can be. The business of borrowing short and lending long is a formula for financial disaster every single time, we forget that, but we just saw it again. You know, you — we could not have had a better example of that danger than we had in the last few weeks between Silicon Valley Bank, Signature Bank and Credit Suisse.

ISAACSON: Calvin Trillin, the great humorous, said that back in the day when he went to Yale, the B students were the ones who went into banking, and that made it a much better system. Is one of the problems that we’ve allocated to many IQ points to Wall Street and they’re all trying to outdo each other?

COHAN: I mean, I’ve always said that the moment the MBA’s started going to Wall Street was the time that banking became even riskier, more risky than it than it already is. Analysis, paralysis, literally hiring rocket scientists to create products that people don’t understand, whether their credit defaults (INAUDIBLE) derivatives, mortgage-backed securities, all of that has made what is already a very complicated and dangerous environment even more so. I’ve been journalist for many years before I went and got my MBA. And then, the next thing I knew after I got my MBA, as I was, you know, doing leveraged buyouts and financing leveraged buyouts, how I went from a guy covering public schools in Wake County, North Carolina to financing leveraged buyouts is the alchemy of the MBA, is the alchemy of what was going on in 1980s Wall Street when they needed bodies and something like an MBA gave you credential that you really, frankly, didn’t deserve, you didn’t know what you were doing but you know you had to do it anyway. Now, I learned, and hopefully I did, you know, a good job, but if you do not understand the risks and how risky banking is, then you are essentially at risk of having the whole thing blow up on your watch.

ISAACSON: Ever since SVB started melting down, normal consumers, a lot of them have started moving to the bigger banks again. People putting deposits in Bank of American and Citibank and Chase. Do you think we’re entering an era again of just some really big banks that are too big to fail dominating?

COHAN: Well, I think we have been in an era of what are called city banks systemically important financial institutions post 2008 financial crisis. We have been in that era now for, you know, 15 years, and it’s OK. This crisis did not start in the city banks. And there’s a reason for that. And I think Dodd-Frank is the reason and the vocal rule of the reason and the tighter regulation on these banks. Now, they come under the purview of the Fed is the reason. You know the truth is that these big banks, JPMorgan Chase does not want these deposits. And you know how we know that? Because if you look at what they’re paying people who deposit there, including me, I have my deposits at JPMorgan Chase, they pay me one basis point or two basis points. People who want your deposits pay you a lot more than that. I don’t think we’re in any danger of you know the city banks becoming even more systemically important, we’ve got a lot of banks in this country. I don’t know what the number is, 7,000, 8,000. We could do with some more bank consolidation, frankly. The Fed has not allowed any of these city banks or any of the other big banks to do any consolidation since the financial crisis, and that’s for a reason. They don’t want there to be too much concentration among these banks. That’s why you don’t see JPMorgan Chase buying Silicon Valley Bank. You know, it’s a distress situation, maybe they would like to buy it, maybe they wouldn’t. But they’d have to get a special waiver from the Fed. The Fed hasn’t given any city bank a waiver since 2008. And by the way, I think that’s OK. I think our central banking system is probably as safe now as it’s ever been, and I’m not just saying that because I want — I don’t want people to panic. I think that is the real truth. I think there are these isolated cases with special ecosystems that caused and has rather poor choices made by management teams that have made them vulnerable to a run on the bank that caused these bank failures. Knock wood, Walter. I hope I don’t regret saying this, but I think our banking system is in pretty good shape right now, despite the events of recent weeks.

ISAACSON: William Cohan, thank you so much for joining us. Appreciate it.

COHAN: Thank you, Walter. Appreciate it.