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Greed’ doomed Silicon Valley bank. Ro Khanna has a plan to fix that

Rep. Ro Khanna, left, listens along with Marie Bernard, executive director of Sunnyvale Community Services, as Nico Pinkowski, CEO of Nitricity, discusses the fallout from Silicon Valley Bank's collapse. | Josh Koehn/The Standard

Rep. Ro Khanna understood the gravity of Silicon Valley Bank’s collapse quicker than most. 

Tech leaders were lighting up the Silicon Valley congressman’s phone the night before the shutdown, and his experience working in the Obama administration’s Commerce Department told him swift action would be needed. 

Hours after the federal government took control of the bank, Khanna organized a town hall and reached out to the White House and the Treasury Department to make sure SVB's depositors would be made whole. That advocacy preceded the federal government's announcement that it would protect all deposits. Despite President Biden's assurances, many startups and affordable housing nonprofits still face uncertainty.

In hopes of addressing those anxieties, Khanna hosted a roundtable Saturday at his district office in Santa Clara with several entrepreneurs and nonprofit leaders. The goal was to put a face on the crisis and show how Silicon Valley Bank’s collapse has real consequences for people who don’t have nine-figure bank accounts.

The Standard sat down for an exclusive interview with Khanna following his event to get his candid assessment of the crisis and what action he’s taking. The interview has been edited for clarity and brevity.

The Standard: I’m curious when you realized, ‘Uh oh, something’s really wrong.’

Khanna: Thursday night [March 9]. I started getting calls from a lot of constituents, a lot of tech leaders saying, ‘There’s a crisis coming. It’s in your district. You need to be on top of this.’

Were you in D.C. at the time?

I was in D.C., yeah. I was voting. And then it’s Friday—I mean, my phone blew up. Probably a thousand texts, calls: ‘What’s going on? You’re going to have a regional banking collapse. Thousands of Valley companies are at risk. The entire innovation pipeline is at risk. Employees are not going to get paid.’ And I organized a town hall. At 4 o'clock, I said to my team on Friday, ‘Let’s just get the perspective of some people and our constituents.’ We sent out a blast email for a webinar—600 people joined the call at 7:30, with three-and-a-half-hours notice. We stayed on the phone for three hours, 600 people, 70 to 80 questions, just assuring people that we were going to take action.

You said something that was interesting in the roundtable where you talked about your colleagues in Congress thinking everyone around here is a millionaire driving, like, a Tesla or a Maserati. And, obviously, there’s every kind of person here. Having worked in the Commerce Department, what goes through your mind when you hear people say, ‘Let Silicon Valley Bank fail,’ and the kind of repercussions that could have happened?

It’s a reminder why we need the government. Ultimately, people in the private sector have a responsibility to their shareholders and to profits. Now, I’m all for responsible capitalism and a capitalism with ethics. And one would hope that people in the private sector would care about the consequences to their employees and the consequences to society. But that’s not their incentive. The government is the one place which has a legal, moral, ethical obligation to look after people, and that is a reminder of why libertarianism doesn't work. You need a role for the government to come in in these types of situations, to protect the people who are going to get hurt. Our job is to stand up for people at the very time that some of the finance folks are saying, ‘Let the bank fail.’

I was talking to a buddy who works in banking, and he said something like, ‘This is really bad, and if it’s not handled by Monday we could have a major crisis on our hands.’ But he also said this isn’t Bank of America—if Bank of America were to fail, you would not really worry about money. You would worry about having a handgun at home because people would be rioting in the streets and breaking into homes. Being an economic policy expert, can you explain the differences between when we talk about the too-big-to-fail kind of banks and Silicon Valley Bank?

Bank of America has millions of Americans' accounts, most of them under $250,000. You’re talking about literally everyone’s retirement, everyone’s savings, everyone’s college savings accounts, the money they’re using to pay their mortgages and rent. You would wipe out millions of working-class and middle-class families, which we would never allow, nor can we allow as a government, which is why we have insured people up to $250,000. You wouldn’t have had that kind of crisis if Silicon Valley Bank had collapsed and the depositors weren’t fully covered, but you would have had thousands of businesses go under. You would have had many people not make their payroll. And what you would most have triggered is a move for people pulling out their money from regional banks and moving it into the four big banks. And you don’t want four banks banking for all of America.

The role I played—I think the government would have gotten there anyway by Monday evening to guarantee the depositors. But they were first going to try this idea of giving 50% advance deposits. And, as your friend pointed out, that, I think, would have really triggered panic and could have led to all of these companies and depositors pulling money out of regional banks—not just here, but around the country and consolidating into JP Morgan, Bank of America, Wells Fargo and Citi.

And I pushed the Secretary [of the Treasury Janet Yellen], on Face the Nation on Sunday morning to say, ‘No, it’s not enough to just have advanced deposits. It’s not enough just to help with temporary payroll. We've got to protect the account and have people have full access on Monday morning.’ And I think as a result of all the conversations I had with the White House and certainly the appearance on Face the Nation as well as other people's advocacy, we got the secretary there by Sunday before the Asian markets opened. And the timing was critical. The 24 hours made a big difference. 

You also said you had previously had leaders of Silicon Valley Bank in your office lobbying for the deregulation. 

Back in 2017-18. Whether they were in my office or a phone call, I can’t remember, but I remember having conversations with them. I mean, I knew them. Obviously, you don’t get elected to represent this area without knowing the leaders of the big bank in the area.

Do you think there should have been more obvious warning signs? Because one thing is everybody knew the interest rates were changing and yet they continued to make those investments.

I do think that there should have been more responsible financial management. I think what happened is the bank got carried away on taking unnecessary risk. So, if you’re in a long-term bond, you get a higher interest rate than if you're on a short-term bond. And they took all this money that was in part a result of this stimulus, partly a result of Covid and everyone going digital, so Silicon Valley was flush with resources. They had massive account deposits, and they took it all and said, ‘Well, we want the 4% interest as opposed to the 2% interest, and that was greed.' And they should have hedged, especially with the interest rates going up.

And that failure to hedge, I think, was just a decision of greed. And the big banks would never have done it because of Dodd-Frank and the regulation. That was not just an error of judgment where you make a call and in retrospect it looks like it was a bad call, but at the time it looked reasonable. This was a call that most people in banking would have realized was a bad call. What they did would be like if you're on your own 30-yard line and it's fourth-and-20, and you don’t punt, right? I mean, it's not Monday-morning quarterbacking. It’s a pretty risky bet. And they should have known better. And that’s why we need a better regulatory framework.

I had one entrepreneur in tech tell me it was just known: You get a startup, you get your funding, you invest in Silicon Valley Bank. They said it’s just typical Silicon Valley groupthink.

Yeah, it’s like you go to Wilson Sonsini or Fenwick & West for your lawyer and you go to Silicon Valley Bank for your banker. Yeah, it's an ecosystem.

What do you see going forward for tech, whether it be startups or, say, A.I.? How do you think this impacts the landscape going forward for, say, the next year or two?

It’s a tough time for the Valley with higher interest rates, with the shock this puts into the system, which is going to make capital harder to acquire. And with the kind of layoffs that we’ve been seeing. In high interest rates, tech doesn’t do as well, because tech is a fundamental bet on the future. And high interest rates mean that you're diminishing the future value of money. That said, I am still incredibly bullish on Silicon Valley because, ultimately, it’s about the underlying technology. And if you look at the massive advances we’re making in A.I. right now, and the companies on A.I., you look at the advances we’re making in climate tech and you look at the advances that remain in biotech, the fundamental technology here is pretty extraordinary.

Rep. Ro Khanna, middle, hosted a panel discussion Saturday at his district office in Santa Clara that featured (from left): Andrea Osgood, Senior VP of Eden Housing; Austin Sendek, co-founder and CEO of Aionics; Marie Bernard, executive director of Sunnyvale Community Services; and Nico Pinkowski, CEO of Nitricity. | Josh Koehn/The Standard

You mentioned a bill you’re working on with a Republican colleague in the Senate. A lot of people don’t think the GOP really gets what this crisis is about and has used, as they say, the 'B-word,' bailout, which you were very clear that this is not that. Can you tell maybe a little bit more about what you intend to do?

There are two efforts that are needed. One is strengthening regulations and resisting deregulation. That is going to be harder to get Republicans on board. The second effort is protecting community banks, and a lot of Republicans come from places which have very proud regional community banks. And that means protecting the depositors in those banks. Because to your point, if you put your money in Bank of America, everyone knows we're not going to let that go down. How do you have that guarantee for the community banks? Well, I’m working on some kind of fee for these banks to be paying into a fund with the large deposit-holders, charge a fee so that we can guarantee these larger deposits in these community banks. And there’s a lot of Republican openness to protecting regional and community banks. It’s consistent with their view of federalism. It’s consistent with their view of supporting rural America and small towns.

That’s ambitious going into the 2024 elections next year.

I think ’24 would be almost impossible to get it through. I’m hoping in ’23.

Josh Koehn can be reached at josh@sfstandard.com