A Death in the Valley: What the End of SVB Reveals About VC Class Solidarity

A Death in the Valley: What the End of SVB Reveals About VC Class Solidarity

A Death in the Valley: What the End of SVB Reveals About VC Class Solidarity

With the banking system sitting on $620 billion in paper (unrealized) losses, this saga may be far from over.

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We’ve had thousands of bank failures throughout American history, but it’s hard to recall another that happened overnight. Silicon Valley Bank (SVB) went from “a one-stop shop for tech visionaries,” as Bloomberg put it, to a corpse circled by vulture capitalists hungrily picking over its remaining valuable assets, with a speed that Valley types normally celebrate. The industry that lives by Mark Zuckerberg’s motto, “move fast and break things,” screamed in pain when the forces of creative destruction took down one of theirs. Their discomfort rose to high comedy with the spectacle of hardened libertarians bellowing for a government bailout—which they got after being forced to wait for several very painful hours while the authorities were figuring out just what to do.

SVB’s almost-instant collapse has been dubbed “the first social media driven bank run.” Tech and finance personalities communicated their anxieties to each other privately via Slack and WhatsApp and amplified them publicly on Twitter. Tech investor Jason Calacanis emitted several tweets, all in caps, with messages like “YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW.” (Amusingly, in 2018, the excitable Calacanis was an early investor in a “mindful meditation” app called Calm.)

Hedge fund hotshot Bill Ackman tweeted a scare story about how SVB’s big depositors were likely to get clipped, which would lead directly to multiple bank runs and general financial chaos. With investors like Ackman, most famous for a multiyear, multifront campaign to discredit Herbalife after having shorted the stock (that is, bet “enormously” that it would collapse), you always have to wonder whether they’re speaking as disinterested analysts or are, as the Wall Street saying goes, “talking their book,” using the public airwaves to spread stories that could benefit their own holdings. Was Ackman short bank stocks, and would he profit from the proliferation of fear? We may never know. In any case, the panicking herd of rugged individualists all ran to take out their money, and the bank was promptly ruined.

A striking sociological point: These venture capitalists (VCs) have no sense of class solidarity. When the crisis came, they were unable to band together to save one of their own. As an unnamed VC told the Financial Times, “If you’re going to panic, panic first.” The banking fellowship has come a long way from the days of J.P. Morgan, who, during the Panic of 1907, summoned New York’s leading bankers to his house and locked them in the library until they came to a deal to bail out a troubled brokerage (at no small profit to himself, of course). They don’t make a financial bourgeoisie like they used to.

Social media was an accelerant, not the fuel for the conflagration itself. Over 5,000 banks failed in the US between 1930 and 1932—a time when just 41 percent of households had telephones. Somehow, panic managed to spread in those pre-Internet days; pictures of customers lined up to withdraw their money from dying banks are a staple of early Depression histories.

Media aside, SVB had some serious fundamental problems. SVB was not, as some have argued, a bank that did everything right, making productive loans to innovative entrepreneurs. It did some of that—though I do have reservations about overpraising this sector, whose contributions to human betterment are highly debatable—but it also had a very strange business model.

Over the past few years, the tech sector and the venture capitalists who fund it have been rolling in money. The major reason for this is the Federal Reserve’s easy-money policies that dominated the financial landscape from the financial crisis of 2008 until the turn toward tighter money in the spring of 2022. Except for a modest tightening in 2018 and 2019, the Fed kept interest rates close to zero and bought trillions of dollars worth of bonds, mostly US Treasuries. The idea at first was to support recovery from the Great Recession, and then to counter the effects of the Covid pandemic.

How much these policies helped the real economy is a matter of debate, but there’s no doubt that they supercharged the financial markets. Between March 2009 and December 2021, the stock market, as measured by the S&P 500 index, rose 517 percent, the second-biggest rise of any comparable period over the last century. Venture capital investments rose 1,143 percent. Cryptocurrencies, weirdly, became a thing. There were two important drivers behind those surges: Low interest rates drove investors to seek the better returns that stocks and VC have historically offered, and the plentiful supply of cash from the Fed’s bond-buying operations gave them the means to, as the saying goes, reach for yield.

This especially applied to SVB’s customers, like tech firms and VCs. They had plenty of money to keep on deposit but no particular need for loans. Between 2019 and 2021, deposits at the bank more than tripled, but loans “merely” doubled. SVB put the excess cash into securities, holdings of which more than quadrupled. But with interest rates so low in 2021—three-month Treasury bills, the safest place to put money other than keeping wads of cash in the vault, yielded an average of just 0.05 percent that year—the bank’s managers found themselves also tempted to reach for yield. So they plowed billions into longer-term bonds, which paid higher rates, but exposed the bank to far more risk: Bond prices fall as interest rates rise. They could have hedged this risk with derivatives (the safe, not the radioactive, kind), but they didn’t. That would have cut into their returns.

No doubt there will be investigations into why the bank was so reckless, but the fact that SVB went without a chief risk officer for most of last year might be relevant. But it wasn’t just the bank’s management that was deficient: The FDIC, the Fed, and the California banking authorities should all have intervened, but they didn’t.

SVB is not alone. According to the FDIC, the entire banking system is sitting on $620 billion in unrealized (paper) losses—by far the highest in recent history. According to banking analyst Timothy Coffey of Janney Montgomery Scott, SVB was an outlier, but this may not be the last we’ve seen of this problem. The source is the rise in interest rates and the reversal of the Fed’s massive bond-buying program over the past year. Some would take that as an argument against ever raising interest rates, but capitalism does not work well with 0 percent rates, which generate speculative bubbles and recklessness like that of SVB. If you don’t like that state of affairs—and there’s no reason you should—your problem is with capitalism, not interest rate policy.

Have the US economy and its financial system become so structurally weak that they can’t live with normal levels of interest rates? We’re about to find out.

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