Goodness, Gracious, Great Banks a-FIRE!!
Headline: So, what DID happen to Silicon Valley Bank?
Body: OK, so I promise not to be too click-baity here. But, in the most recent issue we went over what happened to Silvergate Bank. At nearly the same time, Silicon Valley Bank also went under, and the natural question is, did they both succumb to the same malady. Well, sorry to hit you with this one, but, the answer is “sort of.” Think of their relationship as a popular song, and then the parody song as written by Weird Al Yankovic. The rhythms are the same, most of the notes are the same, the orchestration is often the same… just the story told through the song is sometimes completely different. (I never thought I’d mention Weird Al in one of my columns, but here we are.) Let’s dig in.
Who’s on First?
To get the basics of the case, I think we need to look at an authoritative source. Relax, I will summarize the words of the FDIC and others, so as not to make many fall asleep. To my mind, the first significant quotation is as follows. “Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” So, with coverage by the FDIC, individual accounts are usually insured up to $250,000 each. But, the Federal Government seems to be suggesting that they will backstop the defunct entity so that it can return 100% of the losses. So, the question that must be asked is why is the government doing this? This is my opinion only, but I think the federal government is trying to send a signal to tech companies that they are safe to continue expanding and adding jobs to the economy. If they didn’t do something similar to this, these new companies might take a look at what happened to the bank, and decide to put off expansion of their labor force, or execution of projects. The announcement also said the following. “ Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. “ With these 2 statements, I think the federal government is trying to tell both new and existing small businesses that they will continue to be financially protected, even if their bank goes under. If the Public began to have doubts about this protection, the entire economic system could be in some danger.
So, what DID happen?
Silicon Valley Bank executives took their eyes off the ball. (This is a very human thing. Akin to some of the Shakespearean tragedies.) Deposits began rolling in, and then executives wanted to loan out that money with the goal of achieving the highest rate of interest possible. To do this, they tended to back the projects with higher levels of risk, and these were usually newly minted tech startups. Now, this is an acceptable business model if they also use a largish amount of available resources to also invest in safer, more short-term projects. (Think of this as a version of hedging… the good type of hedging.) Point is, with this mix of investments, the Bank would always have a significant amount of cash available to pay off customer demands. Simply put: They didn’t do this. (Like a fisherman, instead of being happy with the 600 pound tuna, they had to chase the 50-foot shark.) Everybody knows that ti is theoretically possible to exist, but nobody has seen it. SVB was shut down by the California Department of Financial Protection and Innovation on March 10, with no specific reason offered behind the bank’s forced closure. Interestingly, SVB was identified as “systemically important” to the US economy, and this designation did a number of things, including giving the FDIC a larger set of tools to settle these accounts.
Wait, didn’t we see this movie before?
Yeah, we did. In the wake of the 2008 financial market meltdown, the lawmakers tried to enact onerous new paperwork requirements upon banks having more than $50 Billion in deposits. Then, there was an Army film inspired barrage of lobbyists air-dropped on Congress, and the threshold was reset at $250 Billion of deposits. SVB studiously stayed below that threshold, reaching $220 Billion in deposits at its apogee. This situation was made even more dire when, in 2019, the liquidity requirements for banks under this $250 Billlion threshold were significantly softened. Many suggest that this combination of policy changes set the table for these current issues
So, who’s to blame?
In short, everybody. We could blame regulators for being too soft on these entities. We could blame the executives for taking on too much risk. We could blame venture capitalists for actually starting this run on SVB. There is a lot of people who could be credibly blamed. We could also blame Twitter for helping to spread news of the liquidity crisis that SVB was having In the past, rumors and other information had to travel from individual to individual. But, in the world of social media, thousands of people could see the article and then decide to withdraw their funds also, “just to be safe.”
In this light, the SVB saga is just the latest episode of the American tech industry struggling through three overlapping transitions. First is the macro transition from an era of low interest rates that supported cash-burning consumer-tech companies to an era of high interest rates that require discipline and unit economics. Second is the existential transition from tech’s dominance of attention economics and cloud computing to its expensive struggle to figure out the next mountain to climb, whether it’s crypto, the metaverse, artificial intelligence, climate, or something else. Third is the cultural transition from “tech” as a metonym for high-growth start-ups to “Big Tech” as a description of the largest companies in the world. All three transitions are contributing to a scarcity mentality in Silicon Valley, where, as Thompson observed, “tech has been shifting away from greenfield opportunities and expanding the pie to taking share in zero sum contests for end users, from their attention to their pocketbooks.” This is the cultural climate that explains a crippling run on SVB followed by a call for national bailouts.
The verdict
On Monday, the tech writer Ben Thompson wrote that the collapse of SVB pointed to a broader rot in Silicon Valley itself. “I assumed that the venture capitalist set knew about Silicon Valley Bank’s situation [and] I assumed that Silicon Valley broadly was in the business of taking care of their own,” he wrote. “Last week showed that both [theories] were totally wrong.” Far from the familiar metaphor of Silicon Valley as a symbiotic ecosystem, where investors, mentors, and collaborators benefit from a culture of trust and faith in progress, the SVB collapse makes the tech world seem more like an actual jungle, where everything looks lovely and peaceful until a jaguar comes along and lays waste to some capybara.
This evocative quote was pulled from one of the commentary articles, and I think it is very important. It indicates to me that even an expert in the industry thinks that the industry is “growing up” and developing. Consider the media industry. At first, there were newspapers, and they would often work together to ensure that they all had information to write about: ?They started as colleagues. Then there were radio stations and TV stations and they competed to get the best interviews first. Now there are competing interests so serious, there ase photographers who drive around urban centers at 3AM on the off chance that their police scanner might reveal a crime in progress, and they might get a picture or video that nets them millions of dollars. Admittedly, the media example is rather extreme, but it does seem that most industries mature in a similar manner. Now banks are over-extending themselves to help support the tech companies. This is one reason that I think the tech sector is maturing, and I think this is a good thing. But, every child needs an adult to guide them on their way. One who is strict, but not too strict. The government has this role and, like parents, they will likely take a while to find their balance.
REFERENCES
https://home.treasury.gov/news/press-releases/jy1337
https://cointelegraph.com/news/fdic-to-attempt-another-auction-of-silicon-valley-bank-report
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.