Three thoughts on Silicon Valley Bank
This was almost a literal bank-error-in-Peter-Thiel's-favor
This week is my University’s spring break, which of course means I have ALL OF THE PAPERS to grade. I’ll be back next week with a longer essay that has been in the works for awhile. In the meantime, here are three quick thoughts about the Silicon Valley Bank (SVB) situation:
(1) It’s amazing just how much of the contemporary tech economy is turning out to be a Low-Interest-Rate Phenomenon.
The whole tech crash of 2022 can arguably be boiled down to “the fed increased interest rates for the first time in decades, all the silly investment money dried up, and it turned out that the tech economy was maybe 50-60% silly investment money.”
This is another downstream consequence of the interest rate increase. As soon as the Fed started raising interest rates, VCs stopped throwing mountains of cash at anyone with a pitchdeck. And that meant SVB — the “bank of startups” was in trouble. Its depositors were burning through cash, and it simultaneously had way too much money invested in long-dated treasuries.
It’s such a phenomenally pedestrian crisis compared to the absurd crypto flameouts we’ve gotten accustomed to in the past year. SVB didn’t bet it all on ape JPGs or invent some new derivative scheme that got out of control. It just… borrowed short and lent long.
The myth of Silicon Valley is that it is a font of innovation, the place where the future is being invented. I’ve written before about the underlying ideological project here — in which the inventors, entrepreneurs, engineers and investors are the heroic change-makers, while governments, regulators, and existing institutions are obstacles to be overcome or villains to be defeated. There’s something galling about just how… reduced the whole phenomenon has been by the simple act of interest rates rising. It’s a real Wizard of Oz moment… Really? Low interest rates? Is that all this has ever been?
One bonus, tangential thought: it’s worth (re)reading Margaret O’Mara’s book The Code: Silicon Valley and the Remaking of America. Silicon Valley used to be downstream of the defense budget. She discusses the rise of venture capital as, IIRC, a happenstance carve-out in the tax code. Tech innovation doesn’t have to be financed like this. Increasingly, it seems like this is just an altogether bad way to fund and incentivize the development of new, socially-valuable technologies. It doesn’t have to be this way. We should try something else.
(I’m reading Malcolm Harris’s book Palo Alto right now as well. It’s very good so far, but I’m only 200 pages in, so I haven’t gotten to the chapters on venture capital yet.)
(2) This is what happens when economic inequality gets waaaaaay too far out of hand.
Another simple way of understanding what happened last week is that some dude with a newsletter noted that the bank was technically insolvent. All of the big VCs read his newsletter. They started panicking on group text chains. Then Peter Thiel told all of the companies he was invested in to get their money out. Then the other big VCs told the companies they were invested in the same thing. And the result was, last Friday, $42 billion was withdrawn from SVB by mid-afternoon, and then the FDIC stepped in and shut the whole thing down. (As Matthew Klein wrote, “this was more a case of a “bank-run by idiots” rather than a “bank run by idiots.”)
What stands out to me about this whole thing is that a few dozen guys in a WhatsApp group can freak out, tell people to move $42 billion+ around, and accidentally bring down a bank that they otherwise were all quite fond of.
That seems, y’know, bad. They’d all be better off if they had less unchecked power.
We’d all be better off too.
(3) We dodged some filthy unintended consequences.
I’m ultimately glad that the FDIC stepped in and insured all of the depositors. (Call it a bailout, don’t call it a bailout… I have nothing to add to that semantic debate.) I think we would collectively be worse off if it hadn’t.
I tweeted about this over the weekend, and I think it’s worth elaborating. The collapse of Silicon Valley Bank could have reshaped the entire startup economy. It would have been a cleansing fire, and the worst people on earth would have had fire insurance.
Peter Thiel started the bank run. All of his companies got their money out. Most of their competitors did not get their money out. Many of those competitors might not have survived the week of the FDIC hadn’t stepped in.
I’m not saying he nefariously intended to bring the bank down in order to gain an advantage over his competitors. I wouldn’t put it past him, but I also don’t think there’s much reason to grant him supervillain-level foresight here. (He seems more like a run-of-the-mill villain to me.)
But the practical outcome would have been a massive, literal bank error in Peter Thiel’s favor. And the implications of that error could very well have reverbrated for years to come, reshaping power and influence in Silicon Valley and beyond.
Peter Thiel is the guy behind J.D. Vance. He’s the guy behind Blake Masters. He’s the guy who waged a multi-year secret vendetta to kill Gawker. And, as Max Chafkin shows in his biography of Thiel, The Contrarian, his wealth has been generated through a combination of tenacity and fortuitous timing. Peter Thiel’s good luck has been a corrosive force in American politics.
I don’t love that the VC-class demonstrated once again that they are too rich to have to follow the same rules as everyone else. But this would’ve been a phenomenally strange way for the tech economy to undergo a hard reset. And I think it ultimately would’ve concentrated even more power in the hands of some of the worst people.
That would not have been great. I’m glad it didn’t turn out that way.
Excellent observations! One thing though, you make this observation:
"And that meant SVB — the “bank of startups” was in trouble. Its depositors were burning through cash, and it simultaneously had way too much money invested in long-dated treasuries."
This is absolutely true, but there's a bit of unjustified passive voice in the last clause. I was sitting next to my wife while she was listening to a New York Bar Association webinar for lawyers about responding to the failure of SVB and Signature Bank and the lawyer running it said that in the 3rd quarter of *2022* SVB had INCREASED its holdings in long-term Treasury bonds very substantially. Why? Because the interest rates on them were much higher than they had them. At a time when everybody was predicting that the Fed was going to continue to raise interest rates until inflation was strangled (it strangles inflation by strangling new borrowers *especially* the low interest dependent speculators that you're talking about here). SVB was juicing its earnings on an active and highly risky bet that interest rates were at peak when they bought the bonds and that VC's were going to continue active enough that their deposit base wouldn't erode very fast.
Lou Whiteman, one of my wife's favorite former colleagues as a finance journalist made this observation the day BEFORE the bank run:
"Duration risk is one of the most fundamental things to understand in banking. Every banker knows what it is. And yet, nine out of ten times when a bank fails it is due at least in part to duration risk. Silicon Valley Bank (SVB) failed due to duration risk."
These guys had one job--to manage their durational risk during a dynamic time of raising interest rates--and they chose to make this risky bet for the sake of propping up their revenue stream. They wanted to be heroes, break things, win big, instead of being boring bankers and have some lackluster quarters of earnings. Making the right choices, their stock prices would have sagged in late 2022 and 2023, but they'd still be in business.
Which just goes to show that you're right, and the culture of Silicon Valley has been toxic and worse than useless.
“bank-run by idiots” is pretty great, tbh.
I am going to register a mild dissent from the position taken by Andrew Kadel below. I have no problem with the proposition that risk management at SVB could have been better, but I don't think it likely that it was egregiously bad. This view is statistical: according to the FDIC (https://www.fdic.gov/news/speeches/2023/spfeb2823.html), unrealized losses on securities in the American banking system in Q4 2022 were about $620 billion. That is down a bit from the previous quarter, but still about a quarter of the total capital of American banks. There are plenty of banks with better risk management than SVB but there are also plenty with worse. This is the "systemic risk" posed by SVB: it is not that it plays a significant role in the American banking system, but rather that it is an example of a large class of banks that are in serious trouble because of rate increases. It happened to be the first bank that people noticed and panicked over, and that is because of the special social factors in Silicon Valley that you have identified here.
It is worth noting that the risk of bankruptcy is inherent to the function we demand from banks. We want bank deposits to be money, perfectly safe and available on demand. But we don't want to pay for banking service directly; on the contrary, we expect to be paid. Under these constraints it is absolutely necessary for ANY bank to take more risk on its asset book than it sells on its liabilities. Maybe SVB took more risk than it ought to, but there is a lot of hindsight and selection bias at work here.
Finally, may I point out that the Silicon Valley techbros could have ensured themselves a life free of the heavy hand of the nanny state simply by rescuing it themselves, buying into SVB when it tried to raise capital back on Wednesday the 8th. They were looking for a little over 2 billion and the criticism at the time was that they should have "gone big" and asked for 5? That is, like, change in the couch cushions for some VCs and certainly no problem at all if several had clubbed together. Of course, collective action is not a techbro strength, but it was not beyond the means of some individual investors. Back in the previous gilded age, J.P. Morgan was able to stop the panic of 1907 by arm-twisting his fellows; I guess he must have been a commie.
Why didn't they do this? In my opinion: 1) they valued the opportunity to look smart to their friends above saving their money, 2) as mentioned, they are opposed to cooperation, and 3) they are willing to invest in a 1% chance of making a 1,000 percent return but not a 99% chance of making a 10% return.