Episode Transcript
Speaker 0 00:00:00 Hello and welcome to the Managing Uncertainty Podcast. This is Brian Strauser, principal and Chief Executive here at Breit Path.
Speaker 1 00:00:06 This is Bre Wheeler, senior consultant here at Bright
Speaker 0 00:00:09 Path. And we're doing something special here. We are because there's a lot going on from a resilience standpoint and an uncertainty standpoint. So in this episode, episode 189, we are talking, uh, the week after the collapse of Silicon Valley Bank, S V B, um, a bank that had $200 billion, almost 200 billion in deposits on hand at the time of their crash on Friday. They were closed Friday by the California Bank regulator and the F D I C and the assets turned over to the Federal Deposit Insurance Corporation, which then established a new bank, which now it seems here. Uh, and we're recording this the following Monday afternoon. Um, depositors are gonna be made whole. Yeah. But of course, equity holders, stakeholders, bond holders in the bank, they're out. They've lost probably everything probably, but we'll, we'll see in the long term. So, we're here to talk a little bit about what you should be thinking about from a resilience standpoint as a business leader, as a resilience program leader. Um, and we're gonna touch on a couple different domains related to this. But the thing that, um, I should also say there's been other bank failures now in the last 72 hours. Yep. Right. Um,
Speaker 1 00:01:35 Associated
Speaker 0 00:01:36 Banks associated some associated banks, some
Speaker 1 00:01:39 Just market uncertainty pieces of, for weak, weaker banks
Speaker 0 00:01:43 That Yeah. Weaker banks that, uh, you know, and one of the challenges here, one of the things that brought SVB down is that they had, as all banks do, they had made investments and they had made investments in, um, some mortgage backed securities that were at a relatively low interest rate. And as the interest rates, as the Federal Reserve has raised the interest rate over the last 18 months to combat inflation, these investments suddenly didn't look great. And the value of those investments dropped. And SVB chose to liquidate those, and they took a loss at the same time they were issuing new capital. And the market took that as the hell's going on here, and there was a run on the bank. And the next thing you know, the bank collapsed. And this is the story. We, we've seen the story a nu number of times in history.
Speaker 0 00:02:37 It's similar to what happened. Um, the run on the bank is, is, is, has happened several times in American history. Yep. Um, going back to the early 19 hundreds, uh, that led to market collapse. So we don't know where things are going. Right. Um, but there's a lot of uncertainty. So we're gonna talk about how to, how to embrace some of that and how to, to, you know, some strategies to deal with this. But I can't help but think that kind of at the core of this question with SVB is the question of risk and how companies think about the risk, the dependencies that they have from a continuity of operations standpoint, and the risk that they're, that are kind of inherent to their operation. Cuz I, I'll admit, as a business owner, um, you know, bank stability is not at the top of my list of concerns, um, until I watched what happened with SVB.
Speaker 0 00:03:34 And, you know, when, when the, when there was some warning signs Wednesday, Thursday, and last week, and I knew of svb. I have, um, many friends in this startup entrepreneurial world all over the us and a lot of them bank there, a lot of them were forced to bank there. Sure. Because they raised capital Yep. From hedge funds and private equity, that as a, and they also had very generous loan terms. Maybe that's a factor in this too. But they were forced to bank there in, because that's what was required of them as a part of the, of the, of the terms that they had. And, um, I reached out to one of them, uh, on Thursday night, and he was anxiously trying to get several million dollars out of SVB and couldn't. And then of course, when the bank was closed, and then he thought he'd lost his shirt.
Speaker 0 00:04:25 Like, there's a lot of angst, uh, Friday night over the weekend, and now it seems like they're, they're gonna be made whole, uh, with what's with the takeover and kind of what's happening there. But, you know, like as a business owner, my first reaction was, why don't bank there? Right. I don't have any financial ties to svb. And so it's just that thing that's happening in the marketplace. Yeah. So I was concerned for my friends, I was concerned about the economic impact, but I'm like, well, okay. I mean, that's not my bank. We bank at a large regional bank, uh, here in Minnesota. And like any, uh, wise, um, steward of my company's money, uh, we bank at some other banks and we move money around, uh, as to not be tied to a single, I mean, we're tied to a single bank for operations, but like our cash holdings, we spread around, um, until we need to use them.
Speaker 0 00:05:16 Um, but you know, I, I saw the impact this had on some friends, right? That lasted until about noon on Friday when one of our vendors that we do business with, uh, a software provider, but we pay for them a year in advance at a time, sends a message out that says, don't send any money via ACH or wire to our bank account to hold. Well, that's not good. Please hold off on any payments until we provide new payment information. And then about an hour later, they had a new bank and they're like, send any future payments. Now we are a tiny, like our bill with them for a year is like $1,200, but I'm sure that for a big company, they probably have some six figure bills. I pay them with a credit card. I'm like, I mean, here's my one time a year payment, which is, I think comes up in April.
Speaker 0 00:06:11 Um, but, but they have a bill. Clearly people pay 'em via ACH or Wire. They were at svb, so I have no idea. They're like, we're stable. Uh, this won't have an impact on our operations, but don't send any more money there. And I was like, wow, that's interesting. I hadn't considered that. And then two hours later I get an email from our payroll provider and our payroll provider, uh, is Gusto and Gustos been great? Um, Gustos send an email that says, we've had some questions. So we thought it best to just communicate that we don't bank at svb. We actually use several banks, uh, as a method of payment. Um, and the way our payroll works is they take out, you know, payday Friday, they withdraw the money for payroll on Thursday and Friday. Everybody gets paid by the
Speaker 1 00:07:04 End of the day. Thank you. Appreciate that.
Speaker 0 00:07:05 Yeah, me too. Because that's how I get paid <laugh>, right? Um, so that's the way that process, uh, works. And so I saw the email from Gusto and I'm like, well, that's interesting. And then I started looking at the tech news and Friday night it comes out one Augusta's largest competitors banked at svb. And there were thousands of companies whose payroll didn't run on Friday or over the weekend because they couldn't move money.
Speaker 1 00:07:34 That's not great, especially on payday
Speaker 0 00:07:37 Bad place to be,
Speaker 1 00:07:38 Especially on pd.
Speaker 0 00:07:39 So it, it made me think about this is a long way of, to kinda get to the point about risk. We, from a continuity standpoint, right? We think about who are you dependent upon, you know, and what are you dependent upon? So we're dependent upon, you know, you're dependent upon people and technology, and sometimes facilities if you get your hands on work.
Speaker 1 00:08:01 Yeah. Less, less so now,
Speaker 0 00:08:03 Less so now than pre pandemic. And you're dependent upon third parties. And so obviously your bank is a dependency. And maybe you're thinking about that differently today than you did when you woke up on Friday morning because of this.
Speaker 1 00:08:18 Well, you should. I mean, it's, it, it's one of those things in, like, we were talking just before. This is a lot of times organizations in this space, in this resiliency space, you're looking at your own organization. You're looking at your own operations, your own processes, your own technologies, your own people, facilities, all that kind of stuff. You're looking at your vendors, but what there's not necessarily that next step. There's sort of that trust but verify. You're assuming that those vendors are gonna be there. That's kind of normal human behavior to some extent. The challenge there is what does trust but verify look like on that front? A lot of times organizations are looking at that as well, what's in the sla? What does the contract say? How can we prove that you have a plan? Okay, let us see the plan. Okay, great. You have a plan.
Speaker 1 00:09:14 Oftentimes there's not another layer deeper, there's not another layer deeper in terms of prove it to us. Show us that you've practiced this. Show us that you have a plan. What does, who are you using as your vendors? And understanding what those look like. Now, that can become a huge beast. And a lot of people look at that going, I can't possibly manage my own organization, plus my vendor pool, plus their vendor pool plus their vendor pool. It becomes that slippery slope. But this is a really good example of understanding at least what that looks like at a high level of how they're operating, who their key vendors are, to understand where that exposure may be. So at least somebody in your organization has that information, might be monitoring that information, setting some of that stuff up. That's, that's just from a continuity standpoint to now go, I think this is a lesson in the importance of going a level deeper, and probably for a lot of organizations, a sort of a kick in the pants of what are our vendors doing? What are our third parties doing? How dependent are we on them? Are we diversified enough? And understanding that, because a lot of times it becomes the, again, it gets back to the trust but verify piece. You just sort of trust. But the verify piece, what does that actually look like?
Speaker 0 00:10:48 I think it's one of the best examples around the risk on the, on the other end of third party of a third party that I've seen. Um, I, I remember some circumstances we dealt with 10, 12 years back at our former employer where we were looking at, you know, certain manufacturers that were operating in certain countries that were higher risk. And we were looking at who they were dealing with, not just there, actually, there were two factors I think we really were digging into at the time. One was maybe the vendor is okay from a f CPA perspective, from a, like, can we do business with them? Can they do business with a US company? Right. They're not, they're prohibited. Yeah. But their sub isn't is one of the issues I remember we dug into and another issue we were seeing, we were looking at
Speaker 1 00:11:45 Or even understanding do they have subs? Because part
Speaker 0 00:11:48 Of that was Yeah. Even have subs,
Speaker 1 00:11:49 You know, a lot of companies were starting to discover, Ooh, you are subcontracting. Right. We didn't realize it.
Speaker 0 00:11:57 And the other issue we were dealing with was just on the, it was, uh, you know, resource utilization like water and, uh, sewer and worker treatment. And I mean, there were a lot of different kind of aspects to that, that the
Speaker 1 00:12:10 S E G or ESS
Speaker 0 00:12:12 G Yeah.
Speaker 1 00:12:13 Aspects
Speaker 0 00:12:14 Of it. So, but the, the th this is a third party to a third party, uh, question when it comes to banks and about that kind of stability. But it raises the question of just to your point, like how far down the rabbit hole can you go and how much can you protect yourself with, with just, you know, negotiating the SLA and getting, you know, contract, getting a tight contract around protecting you, but it doesn't solve your problem. Right. You know, like I just go back to the payroll example, you know, have any SLA that you want. It doesn't solve the problem if your payroll provider is tied to just that bank.
Speaker 1 00:12:50 Yep.
Speaker 0 00:12:50 Or if that's where they're keeping their float or that's where the cash is held. Um, as opposed to our payroll provider, which uses a network of banks. But even then I'm like, well, what exactly is the network of banks? Right. Well, tell me
Speaker 1 00:13:04 More. That's just it. It comes down to you just, you know, at a certain point as an organization, you're looking at this going, Ooh, well that wasn't us. Who dodged that one? Mm-hmm. <affirmative>, even if we are distributed, well,
Speaker 0 00:13:16 What about
Speaker 1 00:13:16 Tomorrow? But what about tomorrow? And it's sort of a roll of the dice of who's susceptible, who's not. If as everyone I think has now learned, you're just sort of looking at the financial marketplace from a banking standpoint and just assuming good things are gonna happen. That's right. And all the problems were fixed post mm-hmm. <affirmative> 2007, 2008, and while we're too big to fail and Right. Well, there's still risk. Again, you can't assume anything. You sort of have to stay on guard. But you know, like we're talking, what's that line of staying on guard versus dedicating too much resources to mm-hmm. <affirmative>, you know, watching the paint dry essentially. Mm-hmm. <affirmative>.
Speaker 0 00:14:02 So I think that covers the, you know, I think that covers the, the third party risk aspect of this. Yeah. The other one is just how this fits into your crisis management process. And I think for us, as we've talked to clients, we've talked to several of our clients today on unrelated topics, and the question we've all a we've started asking in these conversations is, have you brought your crisis management team together and talked about what's going on in the financial market? And the answer almost unilaterally wasn't, was no, cuz you know, we're a healthcare company or we're a, we're, uh, you know, a nonprofit. And we're like, yes, but
Speaker 1 00:14:40 Those hundreds of thousands of companies that needed to run payroll
Speaker 0 00:14:44 And couldn't
Speaker 1 00:14:45 Are,
Speaker 0 00:14:46 They're all across the
Speaker 1 00:14:47 Spectrum. They're not, they're industry agnostic. They're all across the spectrum.
Speaker 0 00:14:52 And I know people that use that payroll company that were left out to dry on Friday, while the, I mean, to be fair to the provider, they did figure out some solutions over the weekend, but that doesn't solve the problem if people didn't get paid. Yep. And that's a really hard place to be as an employer and as an employee, um, going through that. But I, I think that the opportunity from a crisis standpoint is to, to take a moment this week and I think pull the group together and say, what's going on and what do we need to be doing to react to that? And are there steps we should be taking? And are there, should we be evaluating some things we're not evaluating today?
Speaker 1 00:15:29 Well, that's the key second piece. So even if you don't have a direct connection or an indirect connection that makes you susceptible to some sort of impact or disruption, what is that secondary portion of that conversation around what might we want to start thinking about? What could we do differently? Are we at risk? What are our triggers for looking at something? What does this look like when, you know, our payroll folks find out that we're now impacted, you know, what's our next step? Then who are they telling so that we can take, take appropriate action? Or our finance folks and our treasury folks, who are they telling mm-hmm. <affirmative> and who should we remind them to tell? Mm-hmm. <affirmative>, it's a good opportunity to sort of leveraging this incident with no impact, to reinforce your process, reinforce your escalation paths, your communication paths, and get ahead of it. I mean, it's, to some extent it's sort of the earthquake or the hurricane that's out there that may have an impact, may not. But what can you sort of do in advance mm-hmm. <affirmative> to prepare yourself?
Speaker 0 00:16:41 Yeah. So there's a lot of, I think this is only the beginning. I think this is gonna be a pretty rough week in the markets. There's, you know, a lot of rumors today in the mainstream media press of Wall Street Journal, Bloomberg, the Financial Times, uh, other, the London Financial Times, the, I'm sorry, the London Times, the Times of London going to grad school there. You think I would be able to say the newspaper correctly?
Speaker 1 00:17:07 We got most of the words. Anyway. I
Speaker 0 00:17:09 Got the words. Um, but there's definitely a lot of, there's a lot of conversation happening, there's a lot of reporting happening about other banks that may have challenges. The, I would encourage, I think we would encourage all of you to stay on top of that, you know, pull your crisis management team together, have some conversations about what this looks like. Have your finance folks come in and brief the team. Like do you know where you're banking? Yeah.
Speaker 1 00:17:31 It's a good opportunity for them to share information that frankly, everybody probably tunes out when they start talking in different meetings and stuff like that, that it's a good opportunity. I think the other, the other piece that you brought up earlier around our providers and things like that is it's a good opportunity to communicate mm-hmm. <affirmative> to your customer base and to your clients where you may have an impact or mm-hmm. <affirmative> where there might be uncertainty. Them reaching out proactively and having those conversations in real time, in a timely fashion made a difference. It allowed us to think about, Ooh, what is that impact to us? Mm-hmm. <affirmative>, it allowed you to sort of noodle on, ooh, this got, this is a little bit more real than just the thing that was happening last Friday. It's now Monday morning. Ooh, okay. I gotta start thinking differently. So where you can, having that proactive, it, it's just a good example of that proactive communication by association as well. Mm-hmm. <affirmative>,
Speaker 0 00:18:33 That's it for this edition of the Managing Uncertainty Podcast. We'll be back next week with another new episode, hopefully not with another special episode before this week is on. No
Speaker 1 00:18:41 <laugh>. We'll just stick to a normal one.
Speaker 0 00:18:43 Thanks for listening. We'll talk with you next week.
