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- Indispensable Newsletter #4
Hello readers!
Welcome back to another issue of The Indispensable Newsletter! I’ve had an action-packed few weeks, ones filled with travel and exciting conversations.
This issue, I’ll give you my thoughts on the very avoidable collapse of SVB, show you some of the things I’ve been doing to spread the gospel of good leadership, and share what I’ve been reading, watching, and listening to.
Buckle up, and let’s get going!
Deep Dive: SVB Collapse—The Naïveté of Peaceful Times
I believe Jamie Dimon once said something along the lines of, “Financial crises are roughly one banker’s career apart.” He wasn’t talking about the demise of Silicon Valley Bank, but the sentiment couldn’t be more fitting.
One generation experiences a crisis and learns to avoid the same mistake, then the next generation, blissfully unaware of what they’ve been sheltered from, makes the same mistake again—and the cycle continues.
Greg Becker (the CEO of Silicon Valley Bank)’s metaphorical banking father might have known better, but he didn’t pass that sensitivity down. And so Becker chose to run a bank without a Chief Risk Officer, one where risk models that gave results senior managers didn’t like were ignored or altered. SVB’s collapse can be almost entirely pinned on Becker, the culture he created, and the bank’s unintentional but very consequential unidirectional bet on low interest rates.
Interest rates have been incredibly low for 23 years. There’s an entire generation of finance professionals who have never experienced historically normal interest rates. So for someone who’s never known otherwise, like Becker and his team at SVB, there’s the naive expectation that rates will stay low. Under that assumption, sure, SVB’s dependence on deposits from startups - which were flush with cash because investors drove into risky assets like startups because safe ones like bonds had low or zero returns - and investment in mortgage backed securities and bonds makes a lot of sense. They got a little return for, they thought, even less risk.
But what SVB didn’t understand was that the bubble in VC/startup valuations was driven by really low interest rates. Low interest rates create low discount rates, so future valuations become more valuable in the present. And low interest rates drive down bond yields. If you’re seeking returns (and who isn’t?), this drives you up the risk spectrum, making VCs and private equity more appealing. So VCs give startups higher valuations, which lead to larger investments. Startups need to deposit that cash somewhere. And usually, that somewhere was SVB. SVB then invested in mortgage-backed securities. But when interest rates went up, the spigot of cash to startups got cut off, so that money started flowing out the door as startups spent down their cash on hand. And simultaneously, the mortgage-backed securities SVB had invested in dropped in value. SVB, in other words, was counting on continuing low interest rates on both parts of its banking business, both how it borrowed money from customers (that’s what a bank deposit is—the bank is borrowing money from you) and how it invested on the other side. They weren’t hedging interest rate risk—they were doubling down.
That risk was something a Chief Risk Officer should have caught. It’s one that regulators would have caught. But SVB was exempt from the tight scrutiny that federal regulators levy on larger banks. Why? Well, because a prominent banking executive named—that’s right—Greg Becker, personally lobbied Congress to make sure that smaller banks weren’t covered.
Even then, they probably could have made it out if they had just held all those mortgage-backed instruments to maturity. In that case, their day-to-day market value wouldn’t have mattered, just as you don’t care what the day-to-day value of those savings bonds your grandparents gave you for your birthday is. But if you sell even one of those, you have to mark all of them down. When SVB did, they had to book a huge loss. And the panic was on, spurred on even more by their awful communications.
The consequences have certainly rippled through the financial system. SVB was a major financial intermediary for everything in startup culture in Silicon Valley. We may well dip into recession because Becker was bad at the most basic parts of his job.
And yet, this isn’t a story about Greg Becker’s incompetence. He was indeed incompetent, but I’m not sure this is a situation where a single person matters all that much.
Rather, there’s a much larger question of why Becker—and other banks following similar strategies—were permitted to carry on the way they did for so long. The system must regulate against such risk taking in times of quiescence, because when the storm inevitably comes, it will be too late. That’s why it’s so ironic Becker actively lobbied against the regulation—it would’ve saved him from himself.
Recall that prior to the ‘08 financial crisis, people weren’t totally certain that Jamie Dimon was going to keep his job, precisely because the actions he took that protected his bank during the crisis made it less profitable before the crisis hit. It’s only in hindsight that he looks like a genius.
It’s not that every bank needs a leader like Jamie Dimon. What we need instead are systems in place so that banks don’t need a Jamie Dimon at the helm to survive.
The alternative is to repeat this cycle every generation or so until we reach the point that saving the system isn’t possible.
My First Endorsement
Angela Sun
So, I’ve never done this before, but this is important Harvard stuff (skip if you’re not an alum!). I’ve known Angela Sun for 20 years. I’m not going to bore you with her resume. I’ll just say that of all of the people I’ve ever met, Angela is one of the ones I most trust, most respect, and most admire. If you know me, you know just what it means to say that. Angela is running to be an Elected Director of the Harvard Alumni Association. I’ve never voted in a single one of those elections. You probably haven’t either. I’m proud to say that I’ll cast my vote for Angela—for the first time ever—with the total certainty that I’ll never vote for someone else with half as much confidence that they’re the right person for the job. If you can cast a vote in this election, vote for her. You’ll be glad you did.
Voting for Angela is easy. Look for an email from [email protected] with a link to your online ballot, or you can mail in your paper ballot.
If you don’t see your ballot, call Election Services at 1-866-720-4357
or email [email protected] with your name, degree, and graduation year. Voting is open from March 31 to May 16.
From the Pod
World Reimagined is on hiatus right now after wrapping up Season 4, but our season finale was a great one (and Season 5 is in production!).
My guests were cognitive scientist and former world-champion poker player Annie Duke and Amazon VP of Global Innovation Policy and Communication Paul Misener. Together we discussed the process of decision-making and innovation in uncertain conditions. INCREDIBLY relevant to both the turbulent political and economic landscapes in which we’re currently finding ourselves.
In the Arena
Axelbank Reports History and Today
Choosing the president is quite possibly the most important duty American citizens perform, and as I told Nick Axelbank on his podcast, picking the wrong one could quite literally mean disaster.
In this episode, Nick and I discuss the good, bad, and ugly of our country’s presidential choices, as well as how we could adjust the election process to improve our chances of electing the right leader.
Private Capital with Joe Reilly
While my new book, Picking Presidents, focuses on government leadership, the concepts I discuss are absolutely applicable to the investment management world as well. That’s what I discussed with Joe Reilly on his Private Capital podcast.
Joe and I talk about disruptive innovation, as well as how one of my mentors, Clayton Christensen, inspired a good deal of my work and career. In my eyes, any time I get to talk about Clay is the mark of a good conversation!
Mukunda's Media: What I'm Reading, Watching, and Listening to
Scholoromance Trilogy by Naomi Novik
Lately, I’ve been reading the Scholoromance trilogy by Naomi Novik. Like much of my career, this trilogy is set in academia, but unlike my experiences, Novik’s characters inhabit a school for magically gifted children. The stakes for these students are high—one wrong move could mean certain death. I like the way Novik keeps the story moving along. Even more, I like the (very pointed) social commentary about kids trying to do the right thing in a society that’s forcing them to care only about themselves. Fantastically entertaining and thought-provoking at the same time. Definitely worth a read.
Ted Lasso Season 3
I’d be remiss if I didn’t mention one of the best shows in recent memory. Apple TV began releasing its third season of Ted Lasso last month, delighting audiences who’ve been waiting over a year for a new installment. Of course, the show is full of funny moments and touching scenes, but in many episodes, Lasso conducts a masterclass on leadership concepts that are absolutely applicable to the real world.
If you haven’t started this show yet, now’s the time.
Huberman Lab Podcast
Dr. Andrew Huberman is always good for some interesting science on his Huberman Lab podcast. Episode topics have included the science of hair loss, the psychology of stress and aging, and the importance of drinking water.
The one recent episode that I really enjoyed was on the concept of inherited memories. Dr. Huberman is joined by Dr. Oded Rechavi, a professor of neurobiology at Tel Aviv University. It’s a fascinating and technical discussion on how epigenetics and RNA biology can account for some of the passage of certain experience-based memories. The best part is that the experiments were conducted on nematodes, which in my opinion is one of the most underrated worms.
Tweet of the Week
Moment of Zen
"Never doubt that a small group of thoughtful, concerned citizens can change the world. Indeed it is the only thing that ever has."
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