Key Moments
E120: Banking crisis and the great VC reset
All-In PodcastKey Moments
Banking crisis discussed, VC market reset, and superconductor research.
Key Insights
The recent banking crisis, involving multiple bank failures, stems from rapid Federal Reserve rate hikes and poor risk management by banks, not primarily from VC actions.
The Federal Reserve's intervention, while averting immediate collapse, has kicked the can down the road, creating a one-year problem with potential future implications for the banking system.
The venture capital market is undergoing a significant reset, with reduced fund sizes, lower valuations, and a shift back to fundamentals, favoring practical product development over speculative growth.
Room temperature superconductors, though controversial, represent a potentially revolutionary technology that could transform energy, computing, and transportation if proven viable and scalable.
The US faces a long-term challenge of managing significant unfunded pension liabilities and national debt, potentially requiring higher taxes or major productivity gains to resolve.
There's a debate on how consumers and businesses should interact with banks, with some suggesting a 'bank vault' service for pure storage, separate from lending activities, to enhance trust.
THE RECENT BANKING CRISIS AND ITS CAUSES
The podcast begins by addressing the recent banking crisis, triggered by runs on Silicon Valley Bank, Signature Bank, and others, culminating in Credit Suisse's near-failure. The hosts emphasize that the crisis is systemic, not just a Silicon Valley or crypto issue. The primary cause identified is the Federal Reserve's rapid interest rate hikes, which created significant unrealized losses on banks' balance sheets, particularly those with poor risk management and long-duration assets. While acknowledging the Fed's role in tightening monetary policy, the discussion largely dismisses the idea that Venture Capitalists (VCs) caused the crisis, viewing them as depositors and victims rather than perpetrators.
FEDERAL RESERVE INTERVENTION AND FUTURE IMPLICATIONS
The Federal Reserve's establishment of a Bank Term Funding Program (BTFP) is analyzed as a measure to provide liquidity by allowing banks to borrow against their devalued assets at par value. This move is seen as an emergency backstop that has temporarily stabilized the system, but the hosts argue it merely defers the problem, creating a one-year deadline for resolution. The underlying issue of unrealized losses, estimated at around two trillion dollars across non-GSIB banks, remains. The discussion suggests that without significant interest rate cuts, repaying these loans will be challenging, potentially leading to another crisis in a year.
VENTURE CAPITAL MARKET RESET AND STRUCTURAL CHANGES
The conversation shifts to the venture capital landscape, described as a 'great reset.' Several indicators point to a challenging period: Founders Fund split its eighth fund in half, Stripe faced a significant valuation haircut, Sequoia's returns have been scrutinized, and Y Combinator reduced its growth-stage team. These events signal a move away from the irrational exuberance of recent years, a return to more grounded valuations, and a focus on fundamental business value and product development. Investors are now prioritizing pragmatic founders and tangible progress over speculative growth.
THE QUEST FOR ROOM TEMPERATURE SUPERCONDUCTORS
A significant portion of the podcast is dedicated to the science corner, focusing on room temperature superconductors. The hosts explain the concept of superconductivity—electricity with zero resistance—and its potential applications in lossless power transmission, maglev trains, advanced computing, and energy storage. They discuss the historical pursuit of this technology, the limitations of current superconductors requiring extreme cold, and the controversy surrounding recent claims by Ranga Dias of achieving superconductivity at near-room temperatures under high pressure. The potential societal and economic impact of a true room temperature superconductor is highlighted as transformative.
LONG-TERM ECONOMIC CHALLENGES: DEBT AND PENSIONS
The discussion broadens to address larger macroeconomic challenges. The hosts touch upon the global debt burden, including massive unfunded pension liabilities, which represent a significant underfunding of promises made to workforces. This long-term fiscal tension, combined with the immediate aftermath of the banking crisis and COVID-era spending, suggests a difficult path ahead. Potential solutions range from significantly higher tax rates on corporations and high-net-worth individuals to achieving extraordinary productivity gains through technologies like AI and advanced energy solutions.
REIMAGINING THE BANKING MODEL AND CONSUMER TRUST
The podcast explores potential reforms for the banking system to restore consumer trust. A key proposal is the bifurcation of banking services into 'bank vaults' for secure deposit storage and separate entities for lending and investment. This would allow consumers to pay for specific services, akin to subscribing to a social network for privacy, rather than unknowingly making risky investments when depositing money. The discussion also covers the need for better regulatory oversight, real-time financial dashboards for regulators, and potentially higher FDIC insurance limits to protect businesses and individuals from bank failures.
Mentioned in This Episode
●Products
●Software & Apps
●Companies
●Organizations
●Books
●Concepts
●People Referenced
Common Questions
The banking crisis was triggered by a rapid increase in interest rates by the Fed, which caused unrealized losses on bank balance sheets due to duration mismatching of assets. Additionally, poor risk management by banks, unchecked capitalism, and potentially supervisory failures by regulators contributed to the problem, as highlighted by articles from Seeking Alpha.
Topics
Mentioned in this video
One of the co-hosts, referred to as 'Rain Man' and providing insights into the economic and banking situation.
U.S. Senator believed to be correct in asserting that the deregulation in 2018 contributed to the banking crisis.
Chair of the Federal Reserve, criticized for testifying just two days before bank failures that he saw no stress in the banking system.
Mentioned as an investor who Ranga Dias claimed had invested in his research, a claim that later turned out to be untrue.
Co-founder of Google, who, along with Larry Page, gave Stanford a percentage of Google as part of a tech transfer agreement for their 'BackRub' project.
One of the co-hosts, nicknamed 'dictator' and noted for his comments on the banking crisis and VC practices.
The host of the All-In Podcast, known for his direct communication style and use of all caps on Twitter, initiating discussions on the banking crisis and other topics.
Former President of the Federal Reserve Bank of San Francisco, mentioned in the context of supervisory failure at SVB.
A prominent investor who led the charge to cut the size of Founders Fund's latest fund, described as a 'contrarian's contrarian'.
One of the co-hosts of the All-In Podcast, humorously referred to as 'Sultan of Science' and 'Prince of Panic Attacks'.
A prominent investor mentioned alongside Jason Calacanis for drawing attention to the regional banking crisis.
U.S. Representative who, along with Elizabeth Warren, made a compelling case that 2018 deregulation contributed to the banking crisis.
Mentioned as an investor who Ranga Dias claimed had invested in his research, a claim that later turned out to be untrue.
Co-founder of Google, who, along with Sergey Brin, gave Stanford a percentage of Google as part of a tech transfer agreement for their 'BackRub' project.
The head of Y Combinator, making the decision to cut the growth team and focus on early-stage companies.
A controversial physicist who published a paper claiming to have created a room-temperature superconductor, previously had a paper retracted by Nature.
Runs a battery group at Carnegie Mellon University, introduced one of the hosts to Ranga Dias two years prior.
A political figure whose statements regarding U.S. support for Ukraine prompted criticism from The Atlantic.
One of five banks that failed, initially dismissed as a 'weird crypto bank'.
One of the 'top four' banks, mentioned as a large institution that often packages and sells mortgages.
A venture capital firm that split its latest $1.8 billion fund into two smaller funds, signaling a shift in valuation expectations in the VC market.
An investment firm that wrote down the value of its private book by 33% in 2022, indicative of the broader valuation reset in venture capital.
Another bank that failed, seized on Sunday, which refuted the idea that the crisis was limited to Silicon Valley.
A globally systemically important bank that avoided failure due to a backstop by the Swiss government, facing speculation despite having sufficient liquidity and solvency.
One of the 'top four' banks, mentioned for its practice of packaging up and selling mortgages.
One of the 'top four' banks, mentioned in the context of large institutions not directly impacted by the regional banking crisis.
A well-known startup accelerator that let go of its growth team and continuity fund, signaling a return to its core focus on early-stage investing amidst the VC reset.
A 12-week program designed to help build an MVP, offered for free to founders, which provides 25k checks to co-founders who build an MVP.
A bank that avoided outright failure due to a federal backstop, distinguished from other failed banks by its loan book issues rather than pure liquidity crisis.
One of the 'top four' banks, mentioned as an institution distinct from the regional banks facing systemic stress.
A highly valued Silicon Valley company that took a 50% haircut in its latest funding round, indicating significant adjustments in private company valuations.
The element where superconductivity was first discovered in 1911 when cooled to very low temperatures.
Mentioned as a product of tech transfer, with its founders Larry Page and Sergey Brin giving Stanford a percentage of the company.
A prestigious scientific journal that published and later retracted a paper by Ranga Diaz, and recently published his new controversial superconductor claim.
A university with a sophisticated tech transfer office, mentioned as an example of effectively commercializing research, famously receiving equity from Google.
A prominent venture capital firm whose recent returns from 2018 onwards were questioned in a public report, despite its reputation as a top investor.
The university that blocked efforts to spin out Ranga Diaz's superconductor research into a company due to a lack of a sophisticated tech transfer office.
The central bank of the United States, criticized for its rapid interest rate tightening cycle, delayed response to inflation, and supervisory failures.
A major bank that failed, becoming a key example in the banking crisis, with its issues being attributed to poor risk management and duration mismatching.
A university with a sophisticated tech transfer office, mentioned as an example of effectively commercializing research.
Ranked among the top tech transfer universities.
A company with a stablecoin whose USDC product has a transparency page for its holdings, suggested as a model for bank disclosures.
The U.S. government corporation insuring deposits, criticized for failing to assess bank solvency and its current 250k limit being outdated for businesses.
The University of California, whose investment returns with Sequoia were publicly scrutinized, revealing poor performance since 2018.
A startup accelerator mentioned as a source of early funding for founders, similar to Y Combinator and Founder University.
University where Venkat Viswanathan runs a battery group and is ranked as a top tech transfer university.
A magazine that has reportedly 'turned on' Ron DeSantis due to his skepticism regarding U.S. involvement in the war.
A news organization that reported on Peter Thiel's role in Founders Fund's decision to cut its fund size.
Ranked among the top tech transfer universities.
The university from which David Friedberg obtained liquid nitrogen for his high school science project on superconductors.
A stablecoin that maintains transparency with a public page of its holdings, suggested as a model for bank disclosure statements.
A cheap cooling agent used in industrial applications, such as MRI machines, that enable superconductors to function at higher temperatures.
Regulations that were loosened under the previous administration, with Silicon Valley Bank playing a role in advocating for these changes, which are now seen as a contributing factor to the banking crisis.
A scientific theory on Cooper pairing that happens in ceramics, which is the only way currently understood to explain how superconductivity works in some materials.
The original name of the search engine developed by Larry Page and Sergey Brin while at Stanford, which led to a tech transfer deal with the university.
A government website where individuals and startups can buy short-term government debt directly, used by some startups to mitigate bank risk.
An investor website that published an article in December warning about SVB's financial risks, which went unnoticed by regulators.
The country at the center of a conflict for which the U.S. is providing significant funding, which is increasingly viewed as unsustainable amidst the domestic financial crisis.
Referenced as a past 'monumental waste of money' for the U.S. due to its 20-year, multi-trillion dollar operation, drawing a comparison to current spending in Ukraine.
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