How Social Media Is Re-writing the Banking Playbook

[Music] all right very good so you can start the timer uh it's a pleasure to present um this little survey of our work mostly with Professor Sandy pentland um from MIT but also on my own uh so the question is we saw some pretty remarkable defaults uh in the US banking system which eventually propagated towards other parts of the world and the question is why did they happen how can we address them and make sure that going forward uh there is less of a possibility of things like that so I am going to cover a little bit of you know this plan but given how how delayed the whole thing is that probably I will not cover everything so my uh idea is that social media p panics caused flash crushes that bankrupted Silicon Valley Bank and many others and uh wobbled some of the bigger players outside and why is it happening how can we address it and so on right so the first question actually goes to the 13th century it it can be found in the book by uh the Italian mathematician Fibonacci we all know Fibonacci numbers and if you read what he asks is that there is a certain interest you put some money into a bank how much you should be taking out every uh year in order to exhaust all your money plus interest what is interesting here is that the actual interest which he operated in the 13th century was 20% and this is a standard Mediterranean interest rate which goes to the Schuman times and 12 shekels per Mina per year that's what it is so uh as we will see interest rate plays as much a role in this debacle as the social media all right so if you want to know the answer to your qu to this question ask me later on and by the way in reverse that same calculation from the 13th century is being used in the US mortgage Market when they calculate 30-year mortgages which tells you how archaic and actually dangerous this product is for the financial system so this is taken from the uh information provided by the bank of England and shows his hisorical long-term rates so they concluded from this picture that rates actually go down and so on I drew a completely different conclusion that 5% interest is natural and should be uh preserved and here what the Federal Reserve did instead 19 uh this graph covers uh the mighty mighty PowerPoint somehow converted voluntarily the um um formatting date formatting to some something is something else but it starts at 1954 and continues to our days and you can see that from 2008 the interest rate was kept unnaturally low in fact horrendously low and uh that actually brings us straight to the collapse of the Silicon Valley Bank uh which basically was a rather healthy and chery Bank 16th largest bank in the United States uh by the 31st of this December 2022 and quite opposite to what we heard about wire card and so on so forth it was not a fraudulent organization at all we can see that there are assets and liabilities they nicely um they nicely balance each other and what is particularly important is that the bank had 121 billion worth of bonds uh kept to maturity and about 16 or 18 bonds uh which which were available for sale and then something really magnificent and everybody knew this this is absolutely no kind of information which was hidden which was misinterpreted everybody and his uncle or her uncle better to say knew about that right then suddenly suddenly this Drew attention from a completely obscure uh you know newsletter right so it was published in February of 23 which was a Thursday and it declared that if taken if all the bonds kept to maturity were to be sold then there would be enormous losses why would that be the case of course because the bank was actually forced more or less quote unquote to buy longer dated Bonds in order to get some net interest income and of course you can say they should be hedging it etc etc that's actually not the right take because the bank cannot hedge all the risks because if they were to do that there would be nothing left okay and then uh on Fe sorry on uh February 28th which is a th Tuesday the CEO of the bank actually sold 4 million worth of shares that was a very bad and by the way at that time uh the bank value was $289 then it became $288 so this selling of shares was a fishy fishy proposition quite frankly because even though he Fil A permiss for permission to sell shares uh it was filed one month before the actual sale and everybody who has any kind of common sense at all should at least wait for you know have be the regulation have to force them to wait at least for 90 days if not for half a year because otherwise it becomes a tool for Market manipulation anyway so on March 1st Moody informed svb that they will downgrade their credit rating by the way pay attention to the fact that essentially credit ratings of banks are completely useless because on the 1 of March this was a bank in very good standing and C etc etc and the value of the stock started to down a little bit 283 and then on March 10 which was a Friday I'm sorry on March 8th which was a Wednesday Moody actually we did downgrade the stock the price went to 268 then the topic of what we are discussing now started in Earnest there was a Twitter storm on Thursday March the 9th the stock went down quite dramatically and stopped there essentially uh and all kind of VCS who are prominent in the valley including for example teal and others were telling they uh the portfolio um startups to take the money out in the interest of full disclosure I have to say that one of the companies which I co-founded did have account with Silicon Valley Bank and we did run into the in impossibility to actually do the payroll on Friday thanks God uh you know like the US government uh you know bailed us and and everybody else out so anyway so on March 10th the bank was shut down and took over by the California regulator so that's the story of the collapse in the nutshell all right and so this is the role of social media you can see that there was absolutely no interest in this bank until this you know this March whatever second third and then it went up dramatically and the most interesting thing to me personally is that us was not the most interested uh part of the World Singapore uh which is known for its astuteness uh um you know has been the most interesting one uh date uh which is not shown here uh but should have probably been is that on March 1st I had a conversation with a CEO of a prominent stable coin uh company and I right here in Abu Dhabi in actual fact at Salt uh Investopedia conference and I told this gentleman that because his uh money collateral is held by the Banks the uh coin simply cannot be stable it's a an oxymoron you cannot use a stable coin based on that stable banking system of course I got pushed back you know uh I was convinced that I'm wrong and that it's stable needless to say that this particular stable coin had three billion with Silicon Valley Bank and of course on the 9th of March the peg one:1 was broken seldom I have to confess uh my predi s came with such fluidity right and so the role of social media if we summarize it this is the first winter fueled Bank Run as said the house Financial Service chair Patrick McKenry and there are two main reason low how quickly news of Silicon Valley Bank impeded collapse circulated and how easily the banks Bank the clients could took off the the funds and here is the magn defent three the Silicon Valley Bank and a couple of others and you can see that in fact speculation put you know the price of Silicon Valley Bank two or three weeks before it complete Demise by by 40% up compared to the beginning of the year so that much is for the uh the uh rational Market hypothesis I have to say anyone who spent the more than five years in financial markets knows that uh this hypo is this is simply nonsensical however academics continue to push it through presumably because they don't want to spend any money I'm sorry any time working for financial institution it's quite obvious these graphs show you once and for all that this rational Market hypothesis is simply a figment of some academic imagination right so these are the highest losses and you can see when it rains it pours so there are uh you know losses which occur in 200 eight so Washington Mutual is the biggest then there is a trio of these Banks which we looked including Silicon Valley Bank Signature Bank you know First Republic and all that then there are a few others from the great financial crisis and most of the smaller ones are coming from uh the sale uh um Savings and Loans um debuck so now why is this things happening so part of the equation is that the Federal Reserve went up and up and up and beefing up its uh uh its uh balance sheet as a result you know as you can see the proportion of the uh balance sheet of uh the Federal Reserve compared to all the money held by private Banks became 40% which means that it became a very big player in the field where they shouldn't be played in the first time in the and of course you can see what are the consequences of that right the federal res Reserve was founded in 1913 and until 1922 it never had a loss first world war second world war Pearl Harbor this and that never lost but in 2022 they started to accumulate enormous losses at a rate of 2 and a half three billion per week and now you can see that they owe the treasury about 120 billion and it will go further down clearly before it clears the only difference between Silicon Valley Bank and the FED is that the FED does not need to uh declare it as a loss in fact it declares it as deferred assets so as long as you can do this uh you are kind of in business right and so basically this uh claim from um this uh popular movie Napoleon bonapart is I'm the first to admit that I make a mistake I simply never do the interesting thing is that of course reasonable people can disagree whether or not uh fed made a mistake I was claiming from 2008 that you know this load interest rates is have to be avoided like a plague nobody wanted to listen to me but this is how it is and by the way if we go a little further to the movie you will see this famous scene when uh you know during the battle of australites the French artillery starts to shoot the ice covering the pawns and 20,000 Russian troops drown this is an interesting thing I mention it because of course it's the same mistake and here rley Scot should have done it but he didn't of course uh the point is that in reality this was a piece of Market manipulation that's what it was because Napoleon wrote this relation that they drowned 20,000 Russians it was sent to Paris which was on the precipes of default so social media then worked much slower but equally efficiently then you know everybody rejoined the bank of France was reconstituted in January of 19 of 1806 uh based on this uh you know news however if somebody were to bother and read an article about the debacle or aeres in the Journal of English historical Journal published in 1902 by Henry Rose they would see that Napoleon themselves ordered to drain all the pawns and in one Pawn there was nothing found in the other one 100 horses uh 25 guns and two bodies right so that's how 20,000 became this so we should be very cognizant that the um you know like we we should be very cognizant that you know media can manipulate things massively I cannot go through all this but I will sort of go through my conclusions if you wish because here are the potential remedy we need to break uh commercial Banks into narrow and fractional Bank separating daily operation from Landing akin to the glass steagle Act of 1993 narrow Banks should rely on small fees and provide payment uh limit r large depositor with draw amount uh which would mirror practices like Blackstone where the stability at means uh you know increasing stability amidst social driven uh panics allow Banks breathing space to sell a liquid assets uh shaft shift Regulators this is very important from the context of this fin Tech discussion we're having right now shift Regulators to digitally a continuously monitor Banks rather than relying on Ed your annual audits enhance oversight and deter risky Behavior realtime auditing will be really a boon for this type of activity and this shows on the one on the right it shows a narrow Bank where basically has all the Central Bank cash and nothing else and a conventional bank and you can write read more in in this paper with Sandy pentland and this paper with Sandy pentland this book was s pentland and this book was Adrian R trian and I actually have reprints of this paper so if you ask me I can give you a few on the first confence uh first serve basis and that would um close my remarks thank you very much I appreciate it