Summary
âž¡ In 2019, a large bank had a healthy loan-to-deposit ratio of 80%, with $40 billion in loans and $50 billion in deposits. However, when COVID-19 hit, the Federal Reserve flooded the market with cash, causing the bank’s deposits to skyrocket to over $200 billion. The bank’s CFO decided to invest these excess deposits into long-term bonds, a risky move that could lead to losses if interest rates increased. Unfortunately, this gamble didn’t pay off, leading to significant losses for the bank and almost causing a financial crisis similar to 2008. This incident highlights the need for banks to be more conservative and avoid risky investments.
âž¡ The text discusses the importance of investing in gold and silver as a hedge against economic uncertainties and potential government overreach. It also shares the story of a bank CEO who shifted the bank’s focus to financing technology companies, believing it to be a unique and profitable strategy. The CEO also expanded the bank’s operations globally, particularly in China, to stay competitive in the technology industry. The text emphasizes the need to understand the business environment and culture when expanding into foreign markets like China.
âž¡ The speaker shares their experience of trying to set up a bank in China. Despite visiting China multiple times, they didn’t fully understand the country until they lived there. They were promised help in setting up the bank, but later found out they needed a joint venture partner, who would own a majority share and control the bank. Despite being granted a banking license, they were unable to operate fully due to needing additional licenses and being unable to use Chinese currency for the first three years. The speaker believes the Chinese partners were more interested in gaining knowledge and understanding of their banking operations than in making a profit.
âž¡ In 2011, the speaker was accused of not being fair because he supposedly had an algorithm to predict successful companies. He clarified that there was no such algorithm and that it was a matter of pattern recognition, which takes years of training. Despite an agreement that the joint venture would not lend money to technology companies, the other party changed their mind and wanted to be trained in the speaker’s methods. The speaker felt duped and spent years trying to get an exception, but was unsuccessful. The other party eventually started their own bank using the speaker’s business model, which they presented as a compliment. The speaker believes that many Western companies in China are being played in similar ways, either knowingly or unknowingly.
âž¡ The speaker discusses their experiences in China, highlighting the wonderful people but also the heavy-handed government control. They mention the fear this control instills in citizens and compare it to recent events in the U.S. The speaker also talks about the Chinese Communist Party’s influence on U.S. universities and the challenges of understanding pro-China perspectives. They emphasize the importance of maintaining relationships without resorting to war, and promote their book, “The China Business Conundrum,” available on Amazon.
Transcript
We are being bombarded with this crap from all over the place, and we need to get it out of our bodies that you are more susceptible to every disease imaginable when that’s in your bloodstream. And I like Masterpiece. That’s the company I endorse. Why? Because they’re the only company out there that’s actually doing trials to prove to you that their product works. It removes graphene oxide, it removes aluminum, it removes microplastics and all sorts of toxins. You can try yours today as well by going sarawesthal.com under shop or with the link below. Welcome to business. Game changers.
I’m Sarah Westall. I had the opportunity of interviewing Ken Wilcox. He’s a former CEO of Silicon Valley Bank. And those of you who might remember, Silicon Valley bank was the largest bank failure in the United States since 2008. And it’s the third largest bank failure of US history. Now, he wasn’t the CEO at the time it failed. He was the CEO previously, but he was the one that built that bank to be the big tech bank that you saw today that that affected Silicon Valley so much. He was the man who built it to that level.
And, and so he had a lot of insight into what happened. We also talk about his role in building a bank like it in China and all the activities he went through. That is really what he wanted to come and talk about. But I could not let him start without talking about the bank failures of Silicon Valley Bank. Okay, people need to understand Bank. Silicon Valley bank was the 16th largest bank in the country when it failed, the third largest bank in US history to fail. And last spring, the bank failures, there’s three large banks that failed.
And last spring when they failed, it was larger than 2008. And it, you know, the central bankers, the Feds, they knew how to deal with it because of 2008. And they were able to push the can down the road again, recover, not let the Whole economy fail. And that was because they had that experience in 2008. But this situation last spring was worse than 2008. And I covered that is a big deal. And that’s why when I got the opportunity to interview him, I really wanted to talk to him and get his insight on what the heck happened.
And he’ll provide that. And then we dive into what it was like to create a bank in China and all the different elements of that. It’s very insightful. He’s probably the first one to come out and talk about how business and entrepreneurs are being duped by China and what it’s like to work with the Chinese Communist Party. We made it very clear that the people of China are amazing. I went there in 2019, and I got to tell you, I loved the people. The culture is great. It’s actually. The culture is really fascinating. The thousands of years of history of China and the people are wonderful.
It’s just the Chinese Communist Party and how they operate and what they’re doing. And so we talk about that. It’s important that we talk about that. At the end. I bring up the fact that there’s people I really respect who are journalists, who live in China, which people I don’t respect, who support the Chinese Communist Party. But there’s other people who I really do. I like them as people, and they like China. And I’m trying to understand why don’t they see this element? They’re not business people. They’re not really that big. You know, they don’t think about it from that perspective.
So maybe that’s why, I don’t know, we’re gonna. It’s something I want to dive into more and understand. And the reason why I want to understand this more is that we need to protect our interests while not going to war with somebody. We don’t want to go to war with China. We want to be friends with them, let them have their world. We have our world. We can work together, we can trade with each other, but we protect our interests. They protect their interests, but yet we’re friends. That’s how the world should work. But we’re not like that.
We have to be enemies with everybody. They have to be. Everybody’s always enemies with each other. That’s silly. But yet we also have to not be naive and understand how we can protect ourselves. So this is a really good, insightful conversation, and I hope you listen to the whole interview and you can get something out of it. He has a new book out about his time in China. And I will have the link below it. You can buy it pre order now. It’s from Ken Wilcox Cox but the Chinese conundrum. And you can also, you can get it now pre order.
You can buy it. I think he said November. What did he say? November 20th I think. I don’t remember the exact date. Sometime later November. It’s actually available. It’ll be start getting shipped out. It’s a Christmas opportunity. But you can pre order it now. Again it’s the only. He’s the first one especially high profile person to come out and admit to what’s really going on there. So I think there’s a lot of value to this. Okay, before I get into that I want to talk to you about Body Align. These sleep patches are amazing. I’ve been using them every night.
I’ve been trying to see if this helps with sleep and I haven’t had any sleep. I also use the sleeping pod which I show you which helps with EMF as well. The combination has really made a difference I think for me. I hope you tried this because since I started using this I haven’t woken up in the middle of the night. I’ve just been sleeping all the way through. So hopefully this will have that same effect for you. I know a lot of people are having a hard time sleeping right now, so give this a try.
The other thing that they have is are these body relief patches. If you have a lot of pain, this is something you just take a patch, put it on where you have your injury. It really helps. It’s fast acting and it is amazing. So if you’re interested in getting this, it’s bodyaligned.com Sarah I will also have the link below or you can go to sarah westall.com under shop they have more than just these two patches so you can see what kind of issues you have. They have another one that is this overall wellness band that just helps with feeling.
Overall wellness. They have over 300 frequencies that they use to create this that create overall wellness from getting your vitamins, your minerals. It helps reduce stress. So you should try this as well again bodyalign.com Sarah or go to Sarah wessel.com under shop okay, let’s get into my fascinating discussion with the former CEO of Silicon Valley Bank, Ken Wilcox. Hi Ken, welcome to the program. Hi Sarah, thank you so much for having me. I was very much looking forward to this once I realized I could do this interview because I’ve had lots of questions about what happened to Silicon Valley bank last spring when it was the third largest bank failure in US history and the largest since 2008, which really put this bank on people’s radar.
What caused it? I’ll do my best. I’m personally baffled and very, very disappointed. You may well know that I was CEO from 2001 through 2010. And then I did something that was quite unusual. I retired. However, the board called me back because we got a signal from Beijing that they wanted us to develop a similar bank in China. And it turned out I was the only one who was really interested in going. A lot of people wanted us to go, but nobody else wanted to go themselves. So I was in China then for four years and came back and continued focusing on China with regular trips until the end of 2019.
And at that point I resigned. And I. I’m telling you that somewhat defensively because I am not personally responsible for the disappearance of svb. And I can only guess because I’ve had limited contact with the organization during those years. You know, new management teams don’t call up the old CEO every day and say, well, what should we do now? But here’s what I. You should have a pretty good. You will have a best insight other than maybe the current, maybe even better than the current management because they were so close to it that still probably they’re bruised, their egos are bruised.
I like the way you worded that. I would agree with what you said. So here is fundamentally what happened. Of course there’s a lot of things happening, but what happened is this. Around 2019, about the time that I severed my ties, the bank had roughly 40 billion in loans and 50 billion in deposits. And that ratio is important because 40 to 50 would be an 80% loan to deposit ratio. And that’s just perfect. You need that extra 20% in case somebody, one of the depositors wants their money back. Right. So that was more or less perfect on the surface.
Anyway, then Covid came. And in the wake of COVID the central bank, the Federal Reserve, flooded the market with cash. And that was in order to help buoy us up in the wake of the COVID The unfortunate part about that is that a lot of that cash ended up in our bank. I mean, after all, we are one of the biggest banks in the country. I think we were 17th at the time. 16th. 16th. Woo. Even better. And. And a lot of that cash found its way into our innovation ecosystem. And because we were the dominant force in our innovation ecosystem on the banking side, commercial banking side, a lot of it ended up in our bank.
Now between 2019 and the day the bank disappeared, the deposit shot up from 50 billion to over 200 billion. That’s an amazing climb. And the loans, they didn’t stay exactly just the same, but they didn’t go up that much. So maybe they went from 40 billion up to 50 or 60 billion, but the deposits went from 50 billion up to over 200 billion. Now that’s a problem for a bank because. Well, because the way the banking system works, per regulation and accounting principle, the bank has to set aside more capital in proportion to the increase in deposits.
But those deposits are there in the bank, right? Yeah, they are. Okay, they have it. But you have to have a certain amount of capital in proportion to your deposits. So if your deposits get bigger, you have to have more capital. From a CFO’s point of view, that’s a waste of capital. It’s an opportunity cost. But more importantly, in my opinion, whenever a bank CFO has a whole bunch of capital of deposits lying around that are not being used for anything, they immediately begin to dream about what they could do with that. Those deposits because they want to deploy them, because everybody wants to be a hero, so they want to deploy them in a way that will earn more money for the bank.
Yep. The CFO at the time, I wasn’t inside his head, I’m surmising. But he looked at those deposits and said we certainly can make a lot more money if we deploy those deposits. So he decided to put them into long term bonds. Now bonds because they are interest bearing and long term because the longer out you go, the higher the interest rate that you earn. The only problem with that is it’s anybody who took Banking 101 knows that that’s dangerous because if you’ve got a long term bond and rates go down, your bond’s worth more, you win.
But if you have a long term bond and rates go up, your bond is worth less and you lose. So in other words, taking excess deposits and putting them into long term bonds is tantamount to gambling. My personal way of looking at this is nobody can predict interest rates. If that were true, that people could successfully and with great accuracy predict interest rates, then a whole industry would be wiped out because there are tons of people out there on Wall street predicting interest rates. Commercial banks should not be guessing about the direction of interest rates because for us that’s gambling.
What we do well is as analyze companies and predict whether or not they’ll pay us back if we lend them money. They should be super conservative. Right. I mean Banks should be super conservative. That was the whole point of the 2008 crisis, is they got involved in all this risky investments. They decoupled from being their conservative self and then it collapsed. Do you think that this was purely then just bad decision by management when the rates went up in. You know, because the rates went up, right? A lot. Yeah. And so it was just a bad decision to put it in bonds when the rates went up.
Or do you think there was outside orchestration or funny games or anything? I have absolutely no idea. I don’t know of any outside orchestration. But I do know that it was very bad judgment. And to make matters even worse, they didn’t hedge. They did for a short period of time and then they withdrew the hedge and they weren’t even hedging. So in my mind they were gambling in effect and they were gambling in order to make more money for the bank. Presumably their bonuses might be bigger if they made more money for the bank. But I don’t know the exact formula for that.
I don’t know. Is this just really an advertisement for why banks need to be more conservative, get out of the whole investment gambling scene and be utilities for the country? Well, I certainly think that banks should not be investing excess deposits in long term bonds. Those excess, the deposits are there to make loans and then to have some margin in case depositors want their money back. So it was a terrible decision. As you know, the bank went down in. It almost took the country down. I mean it was so bad that it’s really created almost a cadaver.
It was almost a 2008 situation and they had to step in. And it was when I did the analysis, the losses. Then there’s three banks at that point that went down that it was more than what happened in 2008 in that year. Yeah, that’s right. Bad. They just knew how to stop the, stop the freight train better because they went through 2008. So it didn’t happen this time. Which I don’t know what’s going on. I mean there’s some big questions what’s going on. Right. But that’s how serious this was. And let me add one more thing to it because as you I’m sure know, commercial banks, we’re talking about commercial banks now, not investment banks.
I’m not an expert on investment banks and they are totally different animals. They just have the word bank in their title. But commercial banks have what the Fed refers to, what commercial bankers refer to as lines of defense, meaning if the CFO makes a bad decision. There are multiple lines of defense there to reverse that decision before you get into serious trouble. So the first line of defense would be the CEO, but the CEO didn’t stop it. Second line of defense would be this thing. Every bank has it, it’s called Alco Asset Liability Committee. And that Alco should have said don’t do this, stop it.
And then there are others. There’s the chief risk Officer, there is the board, there’s the board finance committee. There’s the outside advisors, Goldman Sachs and ultimately there’s the regulators. Because when you’re as big a bank as we were, your regulators, they’re not just visiting every couple of months, they’re living with you. They have our own offices in the building. They’re there all the time. So everybody failed exactly what you’re doing. Everybody messed up, then everybody did everybody get greedy? It was kind of like 2008 where they were getting greedy and too risky and too cocky on the situation.
And then this happened. I guess that’s it because I have no other explanation. Obviously I can’t read. I think there might be more, but. Okay, but the other thing is this was the go to bank for startups, for capitalist. This was the high tech, big tech. So what did that do to big tech? What kind of fear did it put through the investment community and through venture funds? Well, it kind of put the hole on the market and it makes us, in my opinion, it makes us on the international front less competitive because innovation has to be financed by somebody.
And SVB was a kingpin in the financing of innovation in our country. And if you don’t have it, then I really believe that it puts you at somewhat of a competitive advantage. I don’t, I don’t mean that SVB’s contribution to innovation in the US was the most important factor. There are other contributors too. But I do think that it does put a hole in the interest you have to fund innovation and shutting down, suppressing innovation wherever it is hurt. Yeah. And there’s a lot more ways that they do that. But you have a curious background. You got involved in trying to set the same model up in China.
Yes. You ended up doing a 180 on your views of China based situation. Why did you get involved? What were the pressures to get involved? Since you were the largest big tech bank, why were you interested in doing this in China? And then I want to get into the other stuff. Yeah. So let’s go back to 2001. Just a quick break from the program. Are you worried about the government Overreach. And about the freedom crushing CBDCs that are threatening to be put in place that will take away our freedom and our independence. I am too. You can have a hedge against all these economic uncertainties by investing in gold and silver.
They have been holding the price of gold and silver down and it not only is a hedge against these uncertainties, it’s also a good investment. So contact the company that I use, which is Miles Franklin. You can contact them@infomilesfranklin.com tell them that Sarah sent you and Andy Schectman, the president, promised me that he’ll give you the best prices and service in the country. Again infomilesfranklin.com tell them that Sara sent 2001 the bank the board appoints me CEO of the bank. I’ve been there 10 years, 11 years already. And I’d been financing technology companies for 20 years at that point.
And so I become the CEO at that point. Silicon Valley bank had what we call the three legged stool strategy, which was developed by the first CEO and then further developed by the second one. Three legged stool strategy looked like this. One third of our portfolio consists of real estate developers, one third of the portfolio consists of small business and the final third of the portfolio consists primarily of venture backed technology companies. And I looked at that and I said, I’d been saying it to myself for years, that strategy is not the best one. It’s not the best one for this reason.
Every other bank in the country lends money to real estate developers. Every other bank in the country lends money to small business. We were virtually the only ones who lent money to venture backed technology companies. And we were really good at it. We had developed an art, a way of doing it that worked very, very well. And we weren’t, we always made money. So I said, why are we wasting our time in these other two areas where there are thousands of competitors, many of them do it better than we do. So what my first decision, I made two or three decisions in that first couple of years as CEO was to get rid of all the real estate developers, get rid of all the small business and fill up the empty space with more technology companies.
That’s number one. Number two is I didn’t want to just bake the little guys the startups, I wanted to bank the big ones too. And so we made a decision to invest a lot of money in production so that we could compete with bigger banks for bigger technology companies. Because up until that point we just baked the startups and then the Third thing I wanted to do was go global. And that’s for this reason we had already come close to saturating the US we had over 50% market share in the US and yet technology is a lot different from almost any other industry you can think of.
It’s one of the only industries which is inherently global. Meaning if you’re cutting edge here, you have to be cutting edge everywhere, or if you’re cutting edge someplace else, you have to be cutting edge everywhere. So in all these technology companies, technology moves around the globe. You can’t build walls high enough to stop it. You could work to prevent it from going to your enemies, if you will, but it still is a global industry. I felt that unless we were dominant in all of the innovation centers around the world, that eventually somebody else would be and it would come back to haunt us here in the U.S.
so while I was CEO, we. We went to Israel and built a big presence. We went to London, serving all of Europe, built a big presence. We went to India, tried to build a big presence. That was more difficult. China was the mystery to us. So in 2000, I got invited to go to China to speak at the first meeting of the Beijing chapter of the Chinese Venture Capital association, which was just getting started. Then there were. There were probably 20 people at this meeting. Subsequent to that, we started sending teams to China to understand the environment.
We wanted to better understand how this innovations base in China was developing. Two thousand, I think, three, we organized a big trip for the best venture capitalists in the United States. You name anybody you think was among the best venture capitalists in the United States in 2003, and I’ll guarantee you they were on that trip with us to China. Every one of them was so impressed, they set up an operation in China. In the years to come, 2005, we set up our first office in China. But we couldn’t do anything except talk to people because every single business activity in China requires a license, and we had no license.
So starting in 2005, we had people on the ground every single day, and we were doing what I call kissing frogs looking for a prince. And it was difficult work. We kept doing it and doing it and doing it, finally trying to get a license. Your goal was to get a business license? It was get a business license. That’s right. Understand what was going on, how it worked. And finally we had a breakthrough. In 2008, we had a breakthrough, and that is that I met the man who was the party secretary of the Yangpu district, which is one of the, I believe, 19 districts in Shanghai.
So big city, state divided up into 19 districts. Yangpu was one that had been prominent when we were more manufactured, when China was more manufacturing oriented. But by then it was a rust belt. And the party secretary there wanted to turn it from a rust belt into an innovation center. And he’s, he sidled up next to us and said, you know, we really want you here. And the rest is the story after that. Okay. And then you got. Okay, so what year was that that they decided that you guys were capable of being. They wanted you.
What happened? Yeah, that was about 2008. Okay. And when did you, when did you start doing that? About that time. When did I start. Yeah, when did you become. Was brought in to create. So I, my wife and I moved to China at the beginning of 2011. So the way it works is this, you find a sponsor. And this was our sponsor, this party secretary of the Yangpu district, because he felt a need to have our bank there. And then he introduced us to different people at various levels in the Chinese government. And ultimately. Well, I’ll tell you the progression because actually that’s what the book is about.
What the book is about is this, if you’re going to take your business to China, you better understand what you’re getting into and you better understand the way it works, because otherwise it’s not going to be a wonderful experience. There are steps in the process, and my argument is that every, every Western company that goes to China goes through these steps to one degree or another. And let me just take a minute and describe the steps to you and then we can go back, circle back for more to dig deeper into various points. The first step in the process is you end up being introduced to a very high level official, depending on the importance level of your institution.
In my case, the party secretary I mentioned to you introduced me to the party secretary of all of Shanghai. This would have been about a year later, the beginning of, to 2009. This is the Party Secretary of Shanghai at the time, already a very important guy because of his position. His name was Yu Zhengcheng. And three years later, when Xi Jinping took control of China, Yu Zheng Sheng was promoted from Party Secretary of Shanghai to member of the Standing Committee, making him one of the seven most important people in China. Okay, so Yu Zheng Shung sits with me at the beginning of 2009 actually on multiple occasions.
And this is what he basically says. He says, you know, we have scoured the universe. We’ve looked at all the banks of the World and yours is the bank that is most important to us. And he actually explicitly said, which I’ve often laughed about, in the meantime, you are more important than Goldman Sachs, you’re more important than Morgan Stanley. And they layer it on they for sure. Do you think that now, do you now that in hindsight, do you believe that that was something to butter you up or do you think they really believed that? Both.
First of all, they really believed it. They did win our bank because they thought we could be helpful to them in terms of understanding the best way to finance innovation. But it’s is. As the years went by, I learned that it’s a very typical approach. It’s usually it’s along the lines of, Sarah, you are maybe the most intelligent American I have met. Really, you’re the only one I’ve met that truly understands China. You are so smart. We need you here, we need your organization here. That’s a very typical. You may think I’m maybe this. So even though we.
That’s awesome. Well, here’s what happens. You, first of all, you don’t understand China until you live there. I had visited, by 2009, I had visited at least 20 times for a week or two. But you don’t understand China until you live there. You know that it’s. There’s a certain element of BS in this, but it does feel good. And you think, you know, maybe, possibly I’ll be one of the first people to crack the code, who knows. But you wanna, you want, you want to set up a bank in China. And this guy is saying he’ll make it possible.
He says, we’ll pave the way for you. We’ll get you the licenses you need. That’s step one. Step two comes a little later, maybe a few months later, maybe several months later. But step two looks like this. We’re making great progress. We’re so pleased this is working out well for us and for you. But one thing we didn’t mention and we need to. You need to have a joint venture partner. It’s not for us, it’s for you. Because China’s complicated. And if with a joint venture partner, you’ll. The partner will be there to guide you. And they own half of it or do they own the majority? It all depends.
Good question. But typically they own about 80%, but they let us negotiate hard and bring it up to 50% as a result of which we thought we were, you know, borderline geniuses. They already had it figured out where their level would be and what they would end you at. And anyways, it doesn’t make any difference how much you own. Okay. If you’re part of a joint venture in China, be absolutely certain China is in control. That makes sense, actually. Yeah. So they would have probably. If I, if I’d whined loud enough or negotiated hard enough, I could have got it up to 60 or 70 maybe, but it wouldn’t have made any difference.
10%, 50%, 70%. They’re. They’re still going to control the organization. They control it. But do they get that percentage of profits? Oh yeah, that’s a good question. You’re obviously paying close attention here. They’ll get the percentage of profit that they negotiate. But that’s not profit they’re looking for, it’s control. It’s control and it’s knowledge. They’re looking for. Knowledge they wanted. Oh, let me tell. They wanted it in on all on the innovations that are going on. So they could you. Okay, keep going. Less that, more they wanted. That’s true too, but more they wanted to understand how we do it.
How do we. So successful finance technology companies. And I’ll get to this in a few moments, but they actually thought we had an algorithm that enabled us to differentiate between startups that weren’t going to be successful and startups that were going to be successful. They just. Let me, correct me if I’m wrong, they coming from a communist background. They’ve been shifting to investing because they know they have to invest in innovation. They know that they’ve changed it. So it’s not. People say it’s all, it’s not all communist. It’s. Maybe it’s technocracy, I don’t know, but it’s there.
Or maybe it’s fascism, I don’t know. But they really invest in capital and innovation and in entrepreneurs. It’s not what people think. It’s this hybrid animal. Right. And so they, and they didn’t have the background and so they needed to suck the information from you. Suck your soul. They wanted us there so that we could, they could learn from us, they could observe us, they could copy us. That was the whole name of the game. It’s not, at least initially, it’s not profit there. Thereafter, it’s knowledge. So the, the next step in the process. By the way, looks like this.
It came actually a year after, about 10 months after we arrived, it came in. Oh, by the way, let me finish up about the joint venture partner. They have one ready for you. You don’t have to go looking for it. They have one ready. And then so we went to China. When I say we, my wife and I, she wasn’t working at the bank, obviously. She was studying art and culture, and I was building the bank. And 10 months into 2011, in October of 2011, they grant us the license. And there’s. They come to you and they say, we’re so happy because we are now in a position to grant you a banking license.
And this is just a wonderful day for all of us. However, did you invest anything in helping to build it, or was the investment all on your part at this point? No, no, they. They put in half the equity. Wow. Okay. Yeah, they put in half the equity. And in terms of the management, we supplied the CEO and the head of credit. CEO was me, and the head of credit was another man from our bank. And they supply the CFO and a couple of other positions, and then we hire in the market. But they also gave us three or four people from our joint venture partner, seconded them to us, I think the head of operations and the head of it.
Yeah, so they, they. And then we hire about 60 people in the market. But here’s the rub. When they granted us the license, the banking license, it became almost instantly apparent that this banking license didn’t entitle us to do anything other than call ourselves a bank and open the door and greet customers. It didn’t allow us to do any banking whatsoever. Because China is different. They control the economy through. In many different ways, but one is through licensing. So if you, Sarah, were from some other place and you decided you wanted to start a bank and you applied and the Federal Reserve or the Comptroller of the Currency gave you a banking license, that single license would entitle you to do anything that any other bank would do.
So, okay, so if they don’t give you license, if the businesses only can operate if they have licenses, they were trying to figure out how to vet what businesses they should give licenses to. I would think using you or were they not that astute, Their culture was so off from us that they couldn’t really even learn from you? Well, I don’t know the answer to that. I just know that to have to actually operate a bank like ours in China requires about 20 or 30 different licenses. And even when our bank disappeared a couple of months ago in China, and I’ll tell you how in a minute, we only.
We didn’t have all the licenses we needed. They granted us each meal over time. So what were you doing? I mean, were you actually even could make Money? Not much. No, not at all. Because I, there’s one other thing that I haven’t told you yet and that is they also told us that sadly, unfortunately, there’s been a law in China for the past 40 years to the effect of which if you start a brand new bank in China and there’s any foreign ownership whatsoever, and of course there was 50% owned by SVB, you cannot use Chinese currency for the first three years.
We didn’t know that until then till we got the license. So here’s your license. It’s wonderful. But you need 20 more to actually, actually do business. And by the way, you can’t use Chinese currency for the first three years. So they really control their economy. They don’t allow foreigners in, whereas we’re like, come on in China. So we, we have a totally different. And they see that and take advantage of that for sure. Clearly. Because like, we’re for us, we’re so. But, but they, they didn’t learn anything from you, it sounds like, because they weren’t. If you couldn’t operate like you needed to operate, then they couldn’t even really learn from you because it’s like, well, I can’t even do it.
So you’re not going to learn how we do stuff because you’re not allowing us to. Well, you’re right, but they thought they were learning and I’ll tell you why I say that. First of all, when they explained to us that we aren’t going to be able to use Chinese currency, it was pretty obvious that there wasn’t much we could do because our target market was Chinese technology companies and they use Chinese currency. They don’t use US dollars, they have no use for dollars. So what are we going to do? Well, first of all, we spent a huge amount of time training our employees over training them for three years.
But more importantly, they tried to use every opportunity to get us to divulge to them how we do things without actually being able to, allowed to do them ourselves. So for example, going back to that question about the algorithm, the about sometime in 2011, my counterpart at the joint venture partner came to me and said he was very, very disappointed in me. He thought that I was not being fair or honest. Well, the Chinese counterpart, the person in China. Okay, yeah, yeah, I saw him, you know, every week, sometimes every day. But on this particular day, sometime in the, in the middle of 2011, only months after we got there, he showed up and was very, very unhappy.
He said I wasn’t being fair. What do you mean? Well, because I know you have an algorithm which will enable you to pick the right companies. You can tell using this algorithm which companies are going to be successful and which aren’t. And I said, well, I hate to disappoint you, but there is no algorithm. That’s not the way we do it. It’s pattern recognition. And it takes years to train a lender. You can’t just hand him an algorithm and he can. He or she can do what they have to do. It takes years and years, and it’s hard work.
And it’s just over and over and over again looking at companies and developing an understanding of the patterns that. It’s pattern recognition, the patterns that imply the potential for success. He was very disappointed. The next thing was, they wanted to know if, of course, we can’t lend money, but could they start lending money to technology companies and we would train them in how to do it. They were constantly pushing us to train people in their bank to do what we do. Now, bear in mind, this is a. This is a joint venture. A joint venture is like a small family.
There’s a parent and there’s a baby. We were the baby. We were the child of the two parents. And when we negotiated the shareholder agreement in the year before my wife and I moved to China, they agreed that they would never lend money to technology companies in China because that was going to be the business of the joint venture. Right. It was the baby’s business. So they. They changed their mind and we’re just fine now then. Now they wanted us to trade them to do it. So what happened then? Well, we wouldn’t do it. Well, did you feel duped at the end of the day? Do anything I didn’t get? You didn’t really have a business.
You’re just kind of messing around, and all you were doing is training people. Did you feel like you were being duped? Yes, of course. Of course I felt stupid. You’re not stupid, but you felt stupid. And then what happened? Did you eventually just. Well, I decided. I decided that I would spend the majority of my time trying to get an exception, lobbying for an exception, and the rest of what was going on in the bank. We had 60, about 62, 63, 64, 65 people. I assigned them to training activities and other things, sort of make work, if you will.
And then I devoted my time to try to get an exception. I looked at the. I mapped out the Chinese government and I mapped out four potential paths to an exception. And I worked those paths for about two years, three Years. About three years. And you didn’t get anywhere? No, not really. Well, that’s because they had their mind made up. They knew what they were doing. Oh, absolutely. So now do you think that they, they tried to learn this? This was like. I, I think. Tell me if I’m wrong. They wanted to learn our business practices with this method and see if you could just train their employees and learn.
But don’t they have spies? Isn’t it almost a better use of their time to. Or they’re just probably doing everything. All the above. Bringing in employees here who are really part of the Communist Chinese Party, infiltrating into businesses, learning our practices and even being investors here. Because we don’t. We allow everybody invest here and then they bring it back. Right, that’s totally true. But wouldn’t it be. This is just a part of an overall effort. Yeah, part of it. One off. This is part of a whole program. So what did, what was your main takeaway from this, besides feeling duped? What was your main takeaway from the Communist Chinese Party and their role in the world and what they’re trying to do? All right, let me answer that question in a minute because I want to tell you the last step.
Okay? Yeah. Because there is a playbook here that is applied. And the last step is three years go by and they come to me and they say, we are so happy the three years have gone by. Now we can grant you the license, allow you to use Chinese currency. Excuse me, Allow you to use Chinese currency. Oh, the three year wait. Yeah, the three year wait during which you can’t use Chinese currency. And so they, they grant us permission to use Chinese currency. And in the same meeting they say to me one other thing. We so admire your business model.
We’re going to start a new bank ourselves next week and we’re going to use your business model. And they present that as if I should feel flattered that they admire us so. That’s not a flat. They didn’t understand our culture to make that statement to you, but go, keep going. No, no, that’s absolutely true. They don’t. Then we don’t understand theirs either. Copying is not looked down on in China the way it is here. It’s not. It’s viewed here, it’s viewed as theft, and in China it’s viewed as admiration. Well, we get competitive. You what? You know, but that’s not necessarily.
You can copy a business model. You can copy a marketing technique here legally. But it pisses us off because they, they played us this Whole time. Right. Exactly. Well. And what I’m here to tell you is, Sarah, that I’m the only one who admits to being played, but I’m not the only one who’s been played. I would say the vast majority of Western companies that go to China are played. They fit into two or three categories. Some of them are played and know it, but don’t want to admit it. That’s a cultural flaw of ours. Keep going.
And they also know that the Chinese government often or Chinese Communist Party tries to get even with people who tell the truth. Okay. So that’s number one. Or they don’t even know they’re being played. They don’t get it. Or the. It hasn’t become apparent yet. It will become apparent at some point in the process, but they haven’t figured it out yet. So have you seen retribution? Pardon me? Have you said that the Communist Party, Chinese Party typically will come back and they don’t like it when you tell the truth. So have you seen retribution for your truth telling? Well, first of all, my book isn’t in print until November 13th.
Okay. But I do know that there are many situations, particularly in these last several months now, where people that have written things that criticize the Chinese in America, that criticize the Chinese Communist Party are hiring American law firms and those firms are threatening the people who write things along the lines of a typical threat will sound like this, cease and desist. Take your book or your off your paper off the web or your book out of the bookstores and apologize to us and never write about us again. That’s going on right now in this country. And astoundingly there are American law firms who will apparently do anything for money.
Yeah, that’s true. Yeah, very true. And the threat a lot of times will just the threat of the lawsuit will keep people from doing it. But a lot of times those kind of lawsuits, if it hits the media, it makes it worse for them. So they, you know, you bring more attention to the book. So. Right. They’re going to go after you with your high profile. It’ll bring more attention to the book. So it might backfire on them in this. It might. It might. In China though, you’re entirely right there when you say it’s to scare people because they’re.
Their goal is to cause people to self censor. Yeah. And then China doing here new censorship thing and it might be because of that influence, but I’m sorry, keep going. Yeah. There’s a phrase in China that translated is this kill the chicken to Scare the monkey. That phrase has been around for a long, long time, and that’s probably what they’re attempting to do. But if you don’t know this, you need to know there are books out there. Just in the past couple of years, a few books have. They haven’t been written by business people, but they have been written by scholars and think tank people.
I can name a couple of them that you might be interested in because these books are about the activities of the Chinese Communist party in the U.S. yeah, I would. That would be good if you could give me some. Some hints or some. Not hints. Give me the names of someone and I’ll include it in the show notes so I can give them to you right now or I can email them. Well, you can. There’s a couple on the top of your list. Yeah, there are several, but there are two in particular that I like. One is by Bethany Allen and she’s a think tank person and she was a journalist and she’s.
Her name. The title of her book is Beijing Rules. And there’s another book called Hidden Hand. It’s by two academicians. And now I would have to go to my notes to find the authors. Yeah, if you can send. If you can send me that, that would be. And then I’ll include it. We need to have more people like you coming out that have had actual experience. I did go to China. I want to say this before. I know you don’t have that much time left, but I went to China and I actually thought the people were wonderful.
Right. They are. You live there. The people are wonderful. So people are great. They’re wonderful. But I did see an undertone that there is a heavy hand there by the. By the government. And there’s a different sense of freedom. And that heavy hand I’m starting to feel come into this country. That heavy hand of fear. Covid really showed some of that. I live in the Twin Cities, which is. Has that heavy hand of government control where the people start fearing. And it doesn’t mean they’re not great people, but they start fearing their own government. And there isn’t that freedom that allows us to thrive.
They have a different mentality. And I’m sure that’s what you saw in your business experience. Oh, yeah. And I can tell you there are several instances of universities in the United States that have been threatened by the party. So an example would be. And I’m not going to name names because it wouldn’t be really fair, but one university I know where they invited the Dalai Dalai Lama to speak. And of course the Chinese Communist Party hates the Dalai Lama. And so they come back to the university at the highest levels and say if you, if you let the Dalai Lama speak, we are going to punish you.
And we’ll do things like we won’t recognize your degrees so this will not, won’t continue to go to your university or we’ll cut off all contacts so your researchers can’t come to China and research work on their research projects. It’s the same games that we started seeing with COVID I suppose all governments kind of do, all powerful entities do this kind of thing. But we started seeing our government do a lot more of that in the last five years, which is probably the influence of this thing. One thing I want to ask you, because I know you got to go is I have some people that I know that are in China, great, nice people, people that I, I really like and I like the culture of China, but they have a different perspective.
I want to understand them because I don’t like to have countries fight. I don’t like people fight. I don’t like wars. I think they can be different than us and we can protect our interests and not get duped like this happen, but yet not get sucked into a war. Right. I mean, I think we have to be smart about this. But there are people I know, journalists living in China who are pro China and I don’t understand because I don’t understand and this might be a follow up conversation and I don’t understand where, why they can’t see, see through some of these elements.
If it’s just because they’re info, they’re with the people and they like the people so much but can’t recognize the government. I mean, I don’t know, do you have any insight on that? And it might just be too big of a con, you know, topic at this point. It’s a bigger, we’ve got only a couple of minutes left here and that’s a much bigger topic. But I do have insight and there are other people who have insight too. But I’d be happy to try to help you to understand that. But it definitely is because that’s worthwhile to understand that because these are genuine people.
I mean, I don’t think they’re genuine people and we got to get through that, understand it and protect our interests and we don’t want to go to war with people. We just need, and we need to be smarter about protecting our interests because clearly we’re not while also having a relationship with these people without needing to go to war because war is not good for anybody. No, I agree with you. And I will tell you that whenever anybody asks my wife or me, what was it like during your four years in China? We have the same answer.
It was great. The most interesting four years of our lives. Chinese people were just fine and we really enjoyed our life there. However, the Chinese Communist Party is the worst imaginable joint venture partner on earth. Yeah, I could see that. That would be for an entrepreneur and all the hoops. That would be awful. Okay, where can people get your book? Because that is a must read. Oh, you can get it on Amazon. You can pre order it right now on Amazon. And what’s the name of it again? Pardon me? Oh, the name of the book here, just a second.
He’s for everybody who’s listening at Audio. He went and got his book. There we go. Mock up of the COVID for you. Back it up a little bit. Oh, well, I’ve got a bit up here. Oh yeah, the China Business. Yeah, there we go. The China Business Conundrum by Ken. Yeah, I can’t even pronounce it. By Ken Wilcox. And it’s available on Amazon right now for pre order. Otherwise you can get it November 3rd. Is that when it is? 13th. 13th. Okay. It’s a Christmas book for people. And the subtitle, you need to know the subtitle too, right? I.
The China Business Conundrum. Ensure that when. Let’s see if you read it. Let’s see if I can read it. You can back it up. Okay. Ensure that win win doesn’t mean Western companies lose twice. Yeah, well, this is a good insight. Yeah, this is a good insight on what the realities are. And you’re one of the first to admit what really happened to you, which is really useful. Thank you very much. I really appreciate this. It’s fun talking with you and thank you so much. Yes, and we might need to do this again because I gotta dive in and understand that.
So yeah, I could do my best to help you there. I’m not the world’s expert, but I. I have spent a lot of time reading and thinking and observing so I could give you some answers. Thank you very much. Have a wonderful day and thank you so much for your time and thank you for yours. Bye. By
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