Bank Men, Freed

Ed Zitron 12 min read

When I started work on this piece, I was writing about Silvergate bank, one of the only banks willing to do business with “digital asset companies.” Silvergate, an institution that had been around for nearly 30 years, imploded in what seemed an instant, going from $4 billion in deposits at the end of 2022 to shutting down operations and liquidating itself.

I then started writing another piece as Silicon Valley Bank, the 16th-largest bank in the country, which had just entered FDIC receivership due to a massive bank run sparked by a hysterical venture capital industry that scared their portfolio companies into yanking all of their money, then quickly turned around and begged the government for a bailout.

The mood was grim. Half the valley’s startups banked with SVB. Startups and venture capitalists dominated its client list. These organizations were cash-rich, but some had little by way of revenue. And, in some cases, they were wholly reliant on this institution. SVB imposed exclusivity clauses on some of its borrowers, preventing them from using the services of other banks, further exacerbating their vulnerability.

Without drastic government intervention, these young companies would find themselves losing access to all but $250,000 of their funds. How much they recovered of their remaining balances depended on how quickly and effectively the authorities could liquidate SVB’s assets. Nothing was guaranteed.

Relief came on Sunday, when the Department of Treasury, Federal Reserve and FDIC made a joint announcement that they intended to backstop the deposits of SVB…and Signature Bank.

Up until this point, there had not been much public hysteria about deposits held at Signature, which was widely regarded as one of the few remaining safe havens for cryptocurrency companies, although it also served normal business customers too. As it stands, depositors of both Signature Bank and SVB have been able to access their money (though I’m not sure about Silvergate’s customers). The crisis has, to some extent, been averted.

So what happened? CNBC has a good summary (though keep in mind, it was written before the Department of Treasury and FDIC’s announcement):

The roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. It had been forced to sell all of its available-for-sale bonds at a $1.8 billion loss, the bank said late Wednesday.

The sudden need for fresh capital, coming on the heels of the collapse of crypto-focused Silvergate bank, sparked another wave of deposit withdrawals Thursday as VCs instructed their portfolio companies to move funds, according to people with knowledge of the matter. The concern: a bank run at SVB could pose an existential threat to startups who couldn’t tap their deposits.

The Verge reports that Silvergate’s big issue was investing client funds in long-term treasury bonds (which is standard practice for banks, although most diversify with other assets, including those that can be sold at short notice) at a time of historically low return rates, meaning that when the FTX collapse occurred, they were left having to suddenly fulfill billions of dollars of obligations to their customers. As a result, they had to liquidate massive amounts of bonds at a loss (before they reached maturity).

As interest rates rose, the value of the long-term bonds (and their 1% yield) was suddenly torturously low. Nobody would buy Silvergate’s bonds, given the option to buy a newly-issued 10-year treasury bond that offers a 3.66% yield. Silvergate was effectively illiquid, with no ability to wait for maturity or meet the withdrawal demands of its customers.

The same thing happened to SVB, except in their case it was a panic caused by venture capitalists calling their portfolio companies and saying “get your money out of Silicon Valley Bank.” There was no reason that I can tell for any of these companies to begin pulling their funds other than the fact that they were worried someone else might do it faster. California regulators reported that $42 billion dollars was pulled from SVB on Thursday, leaving the bank with a cash balance of negative $958 million, which is - to use a technical term - not good.

Though some may call it a bailout, the protection of SVB and Signature Bank’s deposits are not a taxpayer burden. The US Government will pay these deposits out of the Deposit Insurance Fund, a fund that US banks all pay into specifically to address this kind of situation. Though some suggest that this will somehow be borne by the customers of the banks, with higher deposit insurance premiums resulting in higher fees or rates, the alternative would see a cash and credit crunch among the US life sciences and technology sectors, resulting in thousands — potentially hundreds of thousands — of layoffs.

What’s far more important to consider is the fact that in 2018 Silicon Valley Bank’s executives - former staffers of Speaker of the House Kevin McCarthy - lobbied the FDIC to roll back post-financial crisis regulations that governed small-to-medium-sized institutions like SVB, Signature Bank, and Silvergate. To quote Ken - or Kevin as I originally called him - Klippenstein at the Intercept:

AFTER SUCCESSFULLY LOBBYING for the rollback of new rules applied to Wall Street in the wake of the financial crisis, lobbyists for Silicon Valley Bank immediately began pressing their case further to the federal authority that insures bank deposits in the event of another crisis, according to lobbying disclosures reviewed by The Intercept. The lobbying effort managed to exempt banks the size of Silicon Valley Bank from more stringent regulations, including stress tests aimed at uncovering the type of weaknesses that led to the bank’s implosion Friday. Two of the bank’s top lobbyists previously served as senior staffers for House Speaker Kevin McCarthy, who himself pushed for the repeal of significant pieces of the landmark Wall Street reform legislation known as Dodd-Frank.

This isn’t a case where - as some venture capitalists would have you believe - the Fed somehow hoodwinked innocent bankers. The collapse of Silicon Valley Bank was created by a combination of abysmally short-sighted investment decisions (namely a portfolio that consisted of low-rate, long-term treasury bonds that lost value the minute the Fed raised rates), the deliberate removal of stress tests that would have prevented the bank from making such stupid decisions, and then exacerbated by a large-scale prisoner’s dilemma where every single party chose to turn on their friends.

The Valley may pretend to be a united front fighting for innovation, but in the one situation where that unity had any value, they all turned on each other and pulled their money at once. They then had the temerity to pull together a meaningless “statement of support” two days after the bank run had begun, calling the situation that they all caused “deeply disappointing and concerning.”

Being a little fairer than I might be usually, I realize that this was likely an impossible situation for everybody involved. The more panic that grew, the more necessary it was to yank your money, which in turn made the panic grow. But people like Peter Thiel who chose to exacerbate this panic should - but likely won’t - be held accountable for creating a situation that endangered the entire startup ecosystem.

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So, What Now?

It’s fair for you to ask “why do we have to care about the startup ecosystem?”, and, well, here’s the thing: whether or not you like big tech, or technology, or venture capital, the situation that would have occurred had these deposits been lost would have been terrible.

In a situation where industry scuttlebutt leads to some sort of dire financial situation, the rich and powerful are the ones that get their money out first. Venture capitalists were the ones that sounded the alarm, which means that they absolutely got their money out before they told anyone, because, well, they didn’t want to lose it. The next people to find out were most likely wealthy founders and individuals, who then - again, before warning anybody - pulled all of their capital.

This is generally what you call the “smart money” in any market - it leaves first, before regular (or in this case more regular) people have an inkling of what was happening. Thiel’s Founder’s Fund drained their SVB accounts on Thursday morning, the day before regulators shut down the bank. It then advised its portfolio companies to do the same.

The real victims would have been people working at smaller startups and companies that would have simply not been paid. Startups kept their cash in Silicon Valley Bank - the cash they were paid for their services, that they used to pay for services, and that they used to pay for the people who work for the company. Rippling, a payroll outsourcing firm, used SVB’s infrastructure to pay salaries on behalf of its clients. The bank’s collapse delayed paychecks for many, and forced the company to scramble — and quickly — for an alternative.

While it’s convenient to imagine the people who would have been washed out were all the platonic form of “opulent tech bro,” the grimmer reality would have been the seed and series A companies that would have fallen apart almost overnight, leaving thousands of people jobless. Worse still, these people would struggle to walk into another company, given the fact that 50% of America’s startups would have suddenly had no ability to hire and pay them.

I have also heard the argument that “some of these companies shouldn’t exist.” The problem is that we really don’t know who banked with SVB, or what they did, or who they are. Despite the name, SVB’s clients weren’t exclusively in the technology industry. As Crunchbase noted on the day it collapsed, the bank was increasingly focusing on the life sciences sector, with 12% of its deposits coming from biotech and healthcare companies.

And even if said company “should” die, does that mean that everybody working for them should be unemployed? Should we delight in their suffering because we didn’t like the business? While I may have strong feelings about companies that can only stay alive through the grace of venture capital, there is a vast difference between critiquing a stupid business model and actively wishing thousands - if not hundreds of thousands - of people would become unemployed at a moment’s notice.

There are exceptions, of course. Roku had 26% of its cash reserves - nearly $500m - in Silicon Valley Bank. $3.3 billion of popular crypto stablecoin Circle’s reserves sat in the bank. And there were plenty of wealthy individuals who had money at the bank when it collapsed. But what are (or were) we wishing for here? The total collapse of tech in general? For the entire tech industry to become even more subordinate to big tech companies like Meta and Apple?

I will say that it’s justifiable to be angry at how quickly the venture class turned from “student loan forgiveness is bad for the economy” to “please save me Mr. Government my bank account is very sick.” And while you can be angry at this situation where rich people are “bailed out” (though they were not actually bailed out), it is an entirely different part of the government that handled it in a way that did not cost the taxpayer anything, monetized in a different system.

That being said, Bernie Sanders - who specifically warned of this situation when regulations were pulled back in 2018 - put it well in his statement, paraphrasing a Martin Luther King Jr. quote to say that “we cannot continue down the road of more socialism for the rich and rugged individualism for everyone else.”

He’s fucking right. The loudest voices in tech continue to treat labor with disgust, and many of the ghouls demanding government help for SVB - such as David Sacks - have previously treated government programs that help average people (such as student loan forgiveness) with disgust and outrage. As Edward Ongweso Jr. wrote for Slate:

To put it more plainly, for the past 10 years venture capitalists have had near-perfect laboratory conditions to create a lot of money and make the world a much better place. And yet, some of their proudest accomplishments that have attracted some of the most eye-watering sums have been: 1) chasing the dream of zeroing out labor costs while monopolizing a sector to charge the highest price possible (A.I. and the gig economy); 2) creating infrastructure for speculating on digital assets that will be used to commodify more and more of our daily lives (cryptocurrency and the metaverse); and 3) militarizing public space, or helping bolster police and military operations.

Ongweso Jr.’s piece - one of the best things you’ll read on this subject - successfully threads the needle to an important point: the “tech industry” will vaguely be attacked for this situation, but the true villains are the broken venture capital system.

The valley’s venture elite choose which bets to make, or which to follow. They are the ones who invest in “growth companies” that do not resemble sustainable businesses. The “exotic bets” that Ongweso Jr. mentions were partially a symptom of assuming money would always be cheap, rather than an unprecedented phenomenon brought about by a near-meltdown of the global economy and a massively-disruptive pandemic. But they’re also a condition of an industry-wide assumption that nobody would break stride and say “are we all investing in stupid shit?”

When your only criteria for success is “number go up,” either through “growth” or the multiplier of a company’s valuation, you remove room for an ethical element to your decision-making — or even just basic fiscal prudence. Venture capital investing is constantly referred to as “taking risks,” but that risk is not one really shouldered by venture itself - it’s held by the company they fund and society at large, which must wrestle with the consequences of said company existing.

Venture capital does not conceptualize the risk of bringing something to life, or the risk of pumping money into a company that cannot survive without debt financing or further capital injections, or the risk of creating an ecosystem that celebrates doing business in a societally and economically perilous fashion.

People are not angry at tech - they are angry about how “the tech industry” has become entirely subordinate to venture capital at the expense of everything else — from worker’s rights to tax justice, the environment, and economic stability.

When you conjure up the most offensive tech stories of the last 10 years - Theranos and WeWork, for example - you notice  an underlying force of venture capital that legitimized the existence of enterprises ranging from “bullshit” to “terrible.”

Venture capital created the first dot com bust. The entire FTX situation was caused by venture capitalists pumping dollars into nakedly illegal and corrupt businesses without a single bit of due diligence, and, again, the people that suffered were real people rather than those that invested. Angry at Uber? You should be angry at the venture capitalists that pumped billions into a company that was always predicated on destroying labor laws. Had venture capital said “hey man, that’s a fucked up business you’re in,” Travis Kalanick would have had to find another way, or shut down.

The conditions that led to these banks collapsing were not a result of the tech workers. They were created by a venture capital elite that has completely outsourced the risk they face to both the companies they fund, the people that work for them, and the markets these companies operate within.

Silvergate and Signature Bank both failed because they were willing to associate with the deposits of an industry best known for volatility, and failed to account for the risks because — like so many of the people I’ve written about in the last year — they assumed nothing bad would ever happen to them.

But where did those massive flows of inconsistent, capricious capital come from? A venture capital industry that far too often chooses to invest in bad companies that make no money,  focusing more on whatever they believe will get them the highest multiplier, damn the consequences or the instability such actions create. The conditions of the startup ecosystem have entirely focused on “big ideas” that will “capture a huge addressable market,” with funding conditions rapidly shifting based on what’s “cool” or “hot” rather than whether the original business was good.

The result of this recklessness and lack of ideology beyond “I am smart and I have money” led to the death of a bank that was at the core of the tech industry. The people that will suffer will be startup founders who worked with SVB for financing, or even for banking, because other banks will likely view startups as even riskier because of the conditions that venture capital created. The same venture capitalists that created these conditions will also now have more of a monopoly on how money makes it into the hands of founders as a result of this lack of choice. And while new CEO Timothy Mayopolous may say that the new Silicon Valley Bank will be “conducting business as usual,” it’s hard to imagine such a thing is possible after such a large shift in depositors’ confidence in the bank - and vice versa.

To fairly evaluate this situation, you need to clearly understand the villains, and the villains are not the people working in the tech industry. They are those at Silicon Valley Bank that acted stupidly with their deposits and failed to absorb the one lesson anyone with a Robinhood account knows — diversification is really fucking important.

The villains are those who actively pushed for deregulation that would eventually destroy their bank, and the venture capitalists who have burned the concept of “innovation” to the ground in exchange for the chance to make themselves money. “Moonshots” barely exist anymore, because venture doesn’t really want to risk capital making anything cool - they just want something that they can sell as quickly as possible.

Other than straight-up job creation (and one cannot discount the truly disgraceful damage the tech industry has done to labor in general), what heroic purpose has the valley had in the last 15 years? What has venture sought to create, other than more money for itself? And how can we say that the valley is “disruptive” when it has become - like so many other parts of the economy - entirely beholden to who has the largest checkbook and the biggest rolodex?

There are exceptions to this, of course. BioNTech, the company that developed the mRNA Covid vaccine that allowed life to return to normal after two years of Covid-19 restrictions, raised $270m in its 2018 series A — a time before the pandemic, and indeed, before mRNA vaccines were a proven quantity. Github raised $100m in its first post-seed round and ended up changing the way developers work for the better, while also facilitating a renaissance in open-source software.

But these are outliers, and it’s not hard to find examples of failed or fraudulent companies raising even more. FTX US’s series A was $400m, its investors ranging from the Ontario Teachers’ Pension Plan and the (hilariously shit at investing) Softbank, previously of WeWork and Theranos fame.

The valley isn’t disruptive - it’s stagnant. And it’s a result of outright greed and recklessness of the entrenched venture capital elite who, despite their status, will forever act as if they are a discarded, forgotten part of society.

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