͏John,

Bank run update

The last time you heard from me, it was 2:00 a.m. and Congress had just met via Zoom because we had a bank panic that was becoming a domino effect.

The situation has improved.

Here are three things we’ve learned since then:

First

This whole panic started with a group chat.

On an afternoon a little more than two weeks ago, a handful of the depositors with Silicon Valley Bank saw that it had just announced a loss of about $2b on some of its investments. Despite the bank having a value of roughly $200b, the people on this group chat decided to immediately pull their money out.

That spilled onto Twitter, it went viral, and in just a few hours depositors withdrew $42b from the bank - and it killed the bank.

That much money has never been withdrawn from a bank that fast. Set a record.

Another $100b was set to go out the door the next day, but the bank failed before those orders were executed.

The combination of digital banking (which makes withdrawals easy) and social media (which spreads panic quickly) means that money can flow out of a bank much faster than confidence can be restored. And that’s been the whole challenge.

The latest news with respect to Silicon Valley Bank is good: Its loans and deposits were just purchased by First Citizens Bank, a North Carolina-based bank.

Second

After we saw two banks fail, the next domino to fall was going to be a regional bank called First Republic.

Why this bank? Because, like the first two, it had a large percentage of deposits that were over the $250,000 limit, which means a lot of the money that people kept there would be uninsured in the event the bank failed.

Here’s why it hasn’t failed:

Since the bank run began, the general effect has been people withdrawing funds from regional banks and transferring them to big banks in the belief that their funds will be safer in banks less likely to fail. The big banks have since become the beneficiaries of hundreds of billions in new deposits.

So, what we asked the big banks to do was to transfer a bunch of the money they had just received into First Republic to try and change it from a domino into a firewall.

Basically, the idea was to reverse the flow of money from the big banks to this imperiled regional bank to make it strong enough to survive getting hit with all these withdrawals, which would hopefully calm things down.

That was two weeks ago, and it may have worked. First Republic still stands and reports are that withdrawals have slowed considerably - both from that individual bank and from regional banks as a whole. That’s good news.

Third

The first of many congressional hearings on these bank runs was held this week. It is already clear that the run-up to all of this involved failure on multiple levels.

Executives at Silicon Valley Bank made bad investments and then sold millions of dollars of stock just before they told everyone about the money they lost.

Federal regulators didn’t step in soon enough despite obvious signs that they should.

Congress rolled back regulations on banks like the ones that are in trouble right now about five years ago, letting them take more risk with less scrutiny.

And, of course, a number of Silicon Valley Bank’s own customers worked themselves into such a frenzy they started a bank run that took down their own bank and then spread.

Bottom-line: No one is declaring victory, but the situation is much more stable than it was last week.

Also, the TikTok congressional hearing

I try to stick to one subject per email, but I can’t skip this one.

I’ve only been in Congress for a few months but I’ve never seen a congressional hearing like the one on TikTok this week.

It was brutal.

Some of the questions were good… and some definitely were not.

It was somewhat frustrating that the majority of the complaints that were raised apply to almost all social media platforms. All the concerns about declining mental health - especially for teenagers - about the addictive nature of the platform, and about the sheer volume of data that is getting sucked up apply to many other platforms as well.

The truth is, it’s been Congress’s failure to pass a data privacy law that has gotten us into this situation. And this week, TikTok became the symbol for a lot of general concern.

There is, however, a specific concern with TikTok about the potential for data access or algorithm influence in the hands of an adversarial government.

The issue that keeps coming up is a law in China that was put in place about six years ago to give its intelligence operations a lot more power. What it basically says is that if Chinese intelligence services tell TikTok to hand over all of your data, they have to do it, and they don’t have to tell you.

When this came up at the hearing, the CEO basically agreed that’s what the law says.

Many bills related to TikTok have been filed in the last few weeks. Some would ban it immediately, some would look to force its sale to an American company (which was done with another app under the previous administration), others are more broad and would look at all foreign-owned apps. It’s unclear which, if any, of those bills will gain traction. It’s worth noting that if you look at Apple’s App Store rankings, four out of the top five apps are owned by China, so it seems likely that we’re going to need a way to deal with this going forward that isn’t just a series of one-off proposals.

Separately, we still need a data privacy law that protects us from all internet companies and all social media platforms - not just ones that are owned by foreign governments.

The good news on that front is that a data privacy bill actually passed out of committee in the last Congress on a bipartisan basis. It never got a full vote in the House because there was a concern by some members that it would interfere with a stricter data privacy law in California.

However, I’ve spent the last two days talking with members who had a hand in that effort and asking them what the chances are for reviving it - and they’ve been solidly optimistic. I believe that data privacy will be one of the largest opportunities for bipartisan legislation this term, which would be great.

One more thing…

I’ve had the opportunity to do some television interviews lately on CNN, MSNBC, and Fox News.

They’ve all been done remotely from my kitchen.

What takes some getting used to is the difference between what I’m seeing versus what you’re seeing.

Here’s what I’m seeing:

Jeff's POV when doing a television interview. The picture is of a laptop hosting a call and a camera on a tripod behind it. [[link removed]]

And here’s what you’re seeing:

A screenshot of a Fox News interview featuring Jeff. [[link removed]]

In other words, I have to forcefully remind myself that I really am speaking to a television audience, because it sure feels like it’s just a small chat at my kitchen table.

That’s the latest. See you next week.

Best,
Jeff

P.S. - For everyone who has asked, yes, please feel free to forward this email to anyone you’d like. And if you’re receiving this from a kind friend who forwarded it to you, you can always sign up here. [[link removed]]
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