The Silicon Valley Bank Collapse explained - when libertarians learn to love the government
Everyone is a hypocrite
After a hiatus this blog is back! In the last post I took a look at the collapse of the crypto exchange FTX. As is usual on this blog, my focus wasn’t why FTX failed but what were the unique cultural currents that underpinned the hero workshop of FTX Founder right until the moment FTX collapsed (and for some even after).
Another financial collapse is on our hands, this time of famed Silicon Valley institution the Silicon Valley Bank(SVB) and once again I will look at what cultural lessons we can learn from its collapse.
Briefly first, why did the bank collapse? It is quite simple actually. All banks borrow short and lend long. They take deposits which can be withdrawn at short notice, i.e borrow short and they usually lend that money out to others/invest it in instruments that can’t always be liquidated at short notice like a car loan i.e. lend long. The bank is owed this money back but it can’t claim it whenever it wants.
The Bank gets more return on its investment from what it does with your money that the interest it gives you for your deposit and that is how it makes money. Now what would happen if all the depositors asked for their money back at the same time? The bank would go bankrupt as it doesn’t have all that cash handy, it has invested/loaned out a good portion of it that it can’t get back instantly.
This happens only in extreme circumstances, usually the bank has enough cash or cash like reserves to pay whichever depositors happen to come calling on any given day. However, in this case enough depositors came calling to cause the bank to collapse. For a more detailed understanding of why they did so and and how it all unfolded this podcast with well known venture captialists(VCs)
and David Freidberg explains it all in good detail.The podcast is also a good tool for us to dip into the psyche of the VC world and take the temperature of the cultural zeitgeist.
Silicon valley bank was the darling of this tech VC world. The bankers spoke movingly about being the financial engine of innovation. Most VC firms deposited their money in it, startups they funded deposited their money in it. SVB also gave loans to some of those startups. However it was the VC’s who triggered the bank run themselves. When SVB announced losses they made when liquidating some of those investments to meet depositors needs, they ran in like a thundering herd. Get your money out while you can went the call. 42 billion was withdrawn before SVB had to cry for mercy and go belly up.
Surely if the VC’s cared about the bank they wouldn’t have run in, they would have done their bit to support the bank? Surely these prominent VCs would be calling for the VC world to come in with a rescue plan, to help out their ally? That’s not what we hear on this podcast and on twitter and everywhere else. Prominent VCs like
are calling for the government to step in and guarantee deposits for everyone in all American banks. So upto Uncle Sam again to clean up our messes, just like Wall Street expected (and got).Then there is the howling thunder of ‘how could the regulators allow this?’ David Sacks seems to be especially vociferous here. It is a bit odd. David Sacks is a really bright guy whom I have immense respect for and while I don’t know him personally I was at PayPal in the somewhat early days so know of him and a few of the PayPal Mafia (the early employees of PayPal) were my colleagues.
Much of the Mafia were strongly libertarian. Reducing the state, eliminating regulation, free enterprise was very much their mantra. Indeed, most of the time VC’s complain about too much regulation, that the startups they are funding are hampered from doing ground breaking work because of the leviathan state. If only it was left to its own devices the free market will handle all that is needed, or so is the spoken belief. And yet now we have this call from such a prominent member of this libertarian team to strictly regulate banks so mess-ups like SVB don’t happen. What can we make of this?
Firstly, it is good to appreciate that the more things change, the more they remain the same. It is always one rule for thee, another for me. I am a libertarian, I believe in small government until something I do messes things up, or something that impacts me gets messed up, in that case it was the government’s job to ensure it didn’t happen in the first place and it is the government’s job to bail me out.
Please note that ultimately the political inclination doesn’t matter, libertarian, conservative, liberal or whatever. Human nature remains the same, self-interest rules, we want a safety net for when we are affected, and others can drown when we are not.
What would be a classical libertarian response to the SVB crisis? Most certainly not a call for regulation for surely there is a market opportunity here, a room for a new kind of bank that holds all its deposits in highly liquid form and ensures that on a daily basis there is enough marked to market liquid assets in the bank to match all the deposits in the event of a bank run? This is after all the condition that David Sacks seems to be calling regulators to enforce. Why do you need the Government to enforce these? Surely a new startup could offer this service if there was a real need and surely these VCs would fund such a startup?
Does Uncle Sam have to step in right away because there is an urgent risk of complete collapse of the start up ecosystem as well as other small regional banks? These VCs seem to think so. We shall see in the upcoming days, however even in the worst case scenario there are free market options. Surely VCs could quickly cobble together a fund to support these startups whose money is locked up in SVB? They could offer short term no interest(or low interest) credit to these companies to tide them over until the SVB bankruptcy is completed and the companies get their money back.
So there are options, however as a libertarian it is always the Government’s fault no matter what. Come on fellas, you are smart guys. Even if you are firmly convinced your logic is impeccable, perception is 9/10th of reality, surely you know that. See how bad you look. Your community patronized SVB, your community triggered the run on the bank and the average Joe taxpayer must bear the cost of the bailout and take the haircut? It is no use blaming the rate hikes either. Interest rates should never go up? Savers should never be rewarded? Money should just be printed freely forever, inflation be damned?
The other cultural lesson here is just like the FTX collapse showed, Silicon Valley is not filled with altruistic angels. It is as ruthless as Wall Street, if not more. Only here in California we enjoy being nice on the surface, we love speaking in yoga babble, about how we are connecting the world and the power of ‘we’ and all that other nonsense. Underneath all that touchy-feely talk is a cold hard pursuit of the cash. Now, mind you, there are folks in the tech business who are in it just for the love of the tech itself and these people are magnificent. But overall, it’s all about the returns, baby.
This is a very American thing. This is a land of dreamers, creators, schemers, plotters and hucksters after all and no where more so than silicon valley. And so also this is no country for old men, as the Coen Brothers so aptly showed.
Another important moment of note in the zeitgeist, judging by the responses on twitter and news websites, comments on Youtube etc, it does appear that the sheen has fully worn off the tech industry’s image of doing good and being good. Wall Street’s image was soured a long time ago. The tech industry has still held out some hope but there is little sympathy for the VCs and startups that may lose money/suffer some disruption and little appetite for a taxpayer bailout. This is definitely a significant change.
What can the tech business do to change this image? That will be subject of a future post.
By the way do you live in California and feel tired of all the yoga babble, the fake niceness? Wish that for once people would actually say what they think? Watch my (award winning) short for some comic relief. Best 2m 16s you will ever spend, I promise.