Lessons Learned From A Panic Attack (Banks)
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Lessons Learned From A (Bank) Panic Attack
I believe it was Hemingway who most famously nailed how we go bankrupt: "Gradually, then suddenly".
Well, I don't know how many of you were affected by last week's Silicon Valley Bank (SVB) panic, the volatility of both markets and emotions, and the problems resulting from it. As of now, no one knows for sure all that we learned and what the consequences will be. And all of us are affected to varying degrees. If we aren't dealing with contagious viruses, we are dealing with contagious fear. Never a dull moment these last few years.
It was not pleasant. For sure. Panics aren't. And this was a real one. And whether you believe this or not, the importance of trust in our banking sector cannot be exaggerated. So much of modern life rests upon capital flowing the way it is supposed to flow. And distrust goes far beyond the financial sector. Trust in society is like the blood flow in our bodies. Right now, our society at large functions like a patient with very clogged arteries. Trust in institutions is at a modern time all-time low. It makes every movement, every decision, and every interaction filled with friction and resistance. And it is not good. Trust is essential and we must find a way to restore it.
I won't, at least this week, go into the details around this particular situation regarding the banks in trouble. Others have written extensively about it. I will link to some of the better articles below for those that are more interested. And I am sure as the dust settles, we will have more information. Down the line, more lessons can and will be drawn on how we can avoid similar problems in the future.
I am mainly interested in what this experience says about our human behaviors, at large. And so far, I am reflecting on three dimensions:
Emotionality over Rationality
Group Think over Individuality
Speed over Intelligence
1. Emotionality over Rationality
If you looked at this rationally, it doesn't seem like SVB necessarily had a massive problem paying its depositors the money they owed them. Yes, they did some really stupid and irresponsible things like buying very long-duration bonds (out of greed) when the duration of deposits is kind of immediate. We can think of this mainly as an asset-liability duration mismatch. Not good. Clearly.
This created the underlying uncertainty which in turn led to questions and criticism. But if all had stayed calm and NOT moved their deposits elsewhere, it's not certain that this would ever have become a problem. But, telling people to stay calm (which they did) had the opposite effect. We know it never works. Try telling someone angry not to be angry. I guess that is what characterizes a bank panic. It's more emotional in nature than it is rational. Probably true for most panics.
Furthermore, emotions don’t just often beat rationality when it comes to panics. For better and for worse, it’s a human tendency that guides and dominates much of our human existence. And it's not entirely a bad thing.
I mean, how boring would life be if we were totally rational?
If we never let our hair down? If we never fell madly in love at an inconvenient time? If we didn't experience drama, art, and poetry? I mean, isn't art in some ways a much-needed juxtaposition to a world that is too steeped in logic? Or, if we always resisted foods we know we shouldn't eat? If we never laughed at inappropriate jokes? Or even worse, weren't allowed to even hear them?
So, I am not saying I want us to be fully rational. I don't. At least, not entirely.
As with anything in these newsletters, it comes back to Lagom (just the right amount). Some emotionality is attractive and great. But, too much is too much. And none is boring. So, whenever we are about to make big decisions, we should always check the facts and make sure our emotional reaction is justified.
So, to go back to the bank panic. It was pretty clear based on facts that the likelihood of losing your deposits with SVB over the long run was small. Some allegedly sold their deposits at as little as 55% of the deposit value only to learn 2-4 days later that they would have gotten 100%. Some probably were desperate, and they needed those funds on Friday. But in retrospect, they should have cooled down for a few days at least. Oh, well. Hindsight is 20/20.
2. Group Think over Individuality
As readers of these newsletters know I am quite fascinated with social contagion. The notion that we are not that different from the people we spend the most time with. I think it is one of life's most consequential truths and insights. It's of critical importance to curate and edit who you spend time with. They influence your life more than you think.
Want to laugh more? Spend time with funny people. Want to learn more? Spend time with smart and curious people. Want to lose weight? Spend time with people who exercise and eat well. If you want to change anything in life, surround yourself with people either equally committed to the same change OR people who have already done it. Otherwise, it's going to be impossible.
So you take our emotionality and then you add the social contagion factor and what the brilliant French Scientist, René Girard coined mimetic desire, i.e., our deeply held tendency to imitate the desires of other people, and it's not difficult to see the foundation for a panic like a herd mentality spinning out of control.
3. Speed over Intelligence
And then, add to this foundation, our new technologies that continue to enable time and distances to shrink. Radically. They make it possible to do things instantly. Often without proper reflection, fact-checking, or perspective. We do now inhabit an INSTAWORLD.
Could this particular crisis have happened before the internet? I am sure it could and to some extent it has. But perhaps not to this degree. In hours, the emotionality of people in and around SVB shared their concerns on platforms like Twitter. By then, the social contagion was in full swing. It spread like a real virus in ways we now, sadly, are more familiar with, and there was simply NOTHING that the bank could do. It simply needed the backing of the US government to calm things down. Thankfully, that calming trustworthiness arrived before too much pain had passed.
The point is that in between stimuli and response, there must be a pause. If we act immediately to whatever happens to us, we often make uninformed and bad decisions. It is in that pause that we can reflect and process whatever it is that happened. I am certain that technologies help shrink BOTH the data we need to make informed decisions AND the time we are allowed to make those decisions. So, we should use technologies to be more informed, but try to resist the temptation of joining the stampede without proper reflection.
It's important to state that NONE of this would have happened without the mismanagement on behalf of the bank itself. We can blame eras of unique FED policies, COVID, and social media all day long. And yes, for sure, they played a role. But without the underlying mismanagement and mismatching of assets and liabilities, this problem would not have happened.
This was not something I expected at all. I had no room in my own plans for this. My partners and I went to work hard to protect the portfolio companies we are involved in. I learned a lot about accounts and non-insured deposits. Things that I should have known before, but simply didn't. There is never any pain without some gain.
I continue to be amazed, mystified, and intrigued by our more enigmatic human qualities. Particularly as we act as groups. We do need to protect our banking system in reasonable ways. But as we consider how to do that, let's recognize that what we really need are tools, systems, and commitments to build trust again. Trust between people. This was yet another reminder, as if we needed one, that we are all a bit jittery, anxious, and perhaps trigger-happy. Bank panics are like canaries in the coal mine. They are indicators that our trust levels are low. And as we continue to address the many challenges and opportunities that lie ahead, all of us would benefit from increasing overall trust levels.
So, besides the shorter-term efforts to calm down global financial markets, as well as the longer-term political conversations around what regulatory changes would help avoid these problems in the future, I am desperately hoping for more. Particularly around elevating trust. As is a disease across most of our challenges, we tend to rush towards numbing symptoms rather than dealing with the underlying causes. Trust is the cause. Deposit withdrawals are the symptoms. Let’s go attack the cause this time. I'd love to see a larger conversation about what we can do to rebuild trust between all active stakeholders in our society. If not, we will keep seeing more and more trust erosions like the one we lived through last week. And they will most likely have more severe consequences.
Here are a few articles that I found thoughtful relative to what we just experienced:
This is very comprehensive in Fortune and this is Alan Murray's 1-minute version of it. If you only read one thing, Read Alan's summary of the article. It's good.
Another good complete one is from Net Interest titled “The Demise of Silicon Valley Bank”. Mark Rubinstein's follow-on is interestingly called "Contagion" (I swear I read this AFTER I wrote this post!!).
If you want to "nerd out", you can read Ray Dalio's LinkedIn post from the master of asset allocations
Long (but worth reading): Larry Fink's latest letter to shareholders. BlackRock is, after all, the world's largest asset manager. I often find his reasoning thoughtful, complete, and well-balanced. Optimistic realism. He covers just about everything, but also the SVB crisis.
Great article by Luke Burgis in The Free Press about this SVB Bank Panic, in general, and also more about the above-referenced Mimetic Desire.
And last, but not least, for levity: The clip from the 1946 movie It's a wonderful life with the famous “Bank Panic” scene. Only if you want to relive last week!
It is not lost on me that THIS community operates at high levels of trust. I am constantly reminded of the blessing of having friends and partners like you. Please share any ideas you have for how we can extend the trust we enjoy to a broader community of people. Trust is a two-way street. To trust is a verb. It requires constant action and forward motion. It's not something we just receive. We earn it. Every day.
Have a great week. Hope it will be a bit calmer.
