[ The most important bank in Silicon Valley has failed, triggering
economic uncertainty nationwide. To blame: tough-talking tech dudes, a
reckless Congress, contradictory monetary policy, and even Barney
Frank.]
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THIS BANK PANIC SHOULD NOT EXIST  
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Zachary D. Carter
March 14, 2023
Vanity Fair
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_ The most important bank in Silicon Valley has failed, triggering
economic uncertainty nationwide. To blame: tough-talking tech dudes, a
reckless Congress, contradictory monetary policy, and even Barney
Frank. _

Right-wing billionaire Peter Theil regained access to his account in
Silicon Valley Bank, reportedly totaling more than $50 million, after
US regulators intervened on Sunday with emergency measures to protect
depositors., Bloomberg

 

The most important bank in Silicon Valley failed on Friday, prompting
a Sunday night bailout
[[link removed]] for
some of the wealthiest people in the world as the Federal Reserve
opened a new emergency lending program hoping to prevent the crisis in
California from triggering a nationwide banking collapse. As with any
financial crash, it’s impossible to predict where exactly the money
will flow next, but it’s clear that the tech sector that reshaped
American business and culture in the 21st century is coming apart.

The nexus of this breakdown is Silicon Valley Bank, a firm with $209
billion in assets as of December 31, 2022. SVB works hand-in-glove
with venture capital firms, tech start-ups, and a lot of very rich
people in California, claiming
[[link removed]] nearly
half of all VC-backed tech companies and over 2,500 VCs as its
clients. Its demise is the immediate product of horrendous risk
management by the bank’s officers—but there are also important
public policy failures here, particularly the Fed’s high-interest
rate policy and a reckless, bipartisan bank deregulation law
[[link removed]] signed
by President DONALD TRUMP in 2018.

It’s hard to imagine a deeper embarrassment for Silicon Valley.
Tough-talking tech dudes who spent years celebrating the genius of
free markets totally lost their minds in a bank panic, failed to
coordinate a private rescue _of their own sector,_ and then went
whining to the federal government for a bailout. What’s worse, many
of these guys—including SVB Bank CEO GREG BECKER—lobbied Congress
to eliminate tougher capital and liquidity regulations for banks like
SVB, and got what they wanted. Becker’s testimony to the Senate
Banking Committee (see p. 114
[[link removed]])
feels destined for the corporate hubris canon. Hailing “SVB’s deep
understanding of the markets it serves, our strong risk management
practices, and the fundamental strength of the innovation economy,”
Becker declared that, “SVB, like our mid-sized bank peers, does not
present systemic risk.”

And yet, on Sunday night, the federal government officially declared
SVB a “systemically important financial institution” in order to
ensure that its depositors didn’t get wrecked by Becker’s shoddy
risk management. So many people stood to lose so much money from
SVB’s failure that the government invoked special emergency powers
to keep the bank’s clients from losing their shirts. 

The mechanics of SVB’s collapse are relatively straightforward. The
bank bought up a ton of long-term Treasury bonds and mortgage
securities when interest rates were low over the past few years. When
the Fed raised interest rates, those bonds became less attractive on
the open market—newer bonds came with higher payouts, making SVB’s
older bonds harder to sell off in a pinch. So when SVB’s depositors
began drawing down their balances this year to meet business expenses,
the bank was forced to dump its bonds at fire-sale prices to obtain
the cash it needed to meet customer withdrawals. As the bank ran low
on cash, it announced plans to raise more, and a bunch of influential
people
[[link removed]] in
Silicon Valley panicked, withdrawing their money en masse in a classic
bank run. Fail fast, indeed.

The Federal Deposit Insurance Corporation has long guaranteed that
depositors will not lose a penny in a bank failure, provided they have
less than $250,000 in their bank account. But in SVB’s case, over
95% of the bank’s deposits were stashed in much larger accounts. A
lot of these customers are rich people who were too lazy to manage
their money more carefully, but a lot of them are also actual
businesses that used those accounts to meet payroll and other basic
expenses. Roku, which sells consumer hardware for digital streaming
services, had nearly half a billion dollars
[[link removed]] stashed
at SVB. Thanks to the emergency measures the government announced on
Sunday night, none of these accounts will suffer losses from the
bank’s failure.

Rescuing SVP’s depositors is a prudent and reasonable step for the
government to take. As anyone with a checking account understands,
depositors don’t manage the banks where they keep their money. There
is no moral hazard involved in shielding them from losses.
SVB’s _shareholders and executives_ screwed up here, and unlike
the bank bailouts of 2008 and 2009, the government is not
rescuing _them._ And despite the $250,000 threshold, there’s quite
a bit of precedent for rescuing depositors with large accounts—the
FDIC has essentially been doing it since 2008. During the crash, the
deposit insurance limit was formally raised from $100,000 to $250,000,
and in the years since the FDIC has arranged mergers and taken other
measures to keep depositors from losing money while other creditors
are forced to take haircuts.

That is generally a good policy. Deposit insurance is a critical way
to prevent financial contagion from spreading and to fend off
unnecessary bankruptcies. Roku might have been stupid to park so much
money with SVB, but it would be insane for it to be forced out of
business for that mistake. If regulators allow other banks and
businesses to be pushed into failure by one bank’s mismanagement,
then the scope of a relatively small banking crisis can grow
exponentially in a matter of days. The fact that SVB’s depositors
include some of the worst people in the world does not invalidate a
century of hard-won financial crisis-fighting wisdom. 

The real outrage is that any of this became necessary at all. If
Congress hadn’t gone out of its way to deregulate banks like
[[link removed]] SVB,
SVB very likely would not be in this situation. Back in 2018, 17
Senate Democrats joined a unanimous bloc of Senate Republicans to
eliminate important capital and liquidity rules for 25 of the 38
largest financial institutions covered by American banking law. Becker
and other executives of large regional banks insisted that the rules
written in the aftermath of the 2008 financial crisis were too
stringent—they were designed for multitrillion-dollar behemoths, but
firms with as little as $50 billion in assets were being subjected to
them. Sensing a political fundraising opportunity, swing-state
Democrats helped Republicans write a bill to aid guys like Becker, and
then pitched it to the public as a lifeline for mom-and-pop
operations. 

Senator MARK WARNER (D-Va.) wrote a down-home op-ed in
the _Tidewater News_
[[link removed]] claiming
the bill would abolish “excessive regulations” that were “making
it too expensive, too time consuming for small banks and credit unions
to serve consumers, farmers, and small businesses.” His colleague
Senator TIM KAINE (D-Va.) called the bill a victory
[[link removed]] for
“rural and underserved communities,” while senators HEIDI
HEITKAMP (D-N.D.), JON TESTER (D-Mont.) and JOE
DONNELLY (D-Ind.) declared
[[link removed]] that
the bill would “provide mortgage and other credit to hardworking
Americans, helping them and their families grow and start
businesses.” Trump agreed
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“We are unleashing the economic potential of our people.”

These claims were preposterous. The regulations in question involved
basic banking practices—how much debt banks were allowed to rely on,
and how much cash they had to keep stashed away to meet an emergency.
The entire point of the rollback was to permit bigger short-term
profits from bigger long-term risks, and it was tailored for banks
with up to $250 billion in assets—not exactly a hardscrabble set. 

When pressed on these points, bank-friendly Democrats pointed
to BARNEY FRANK, the Massachusetts liberal who cowrote the
congressional response to the 2008 financial crisis. After he retired
from government, Frank joined the board of Signature Bank, a New
York–based firm that, at the time, controlled about $40 billion in
assets. By 2018, the bank was up to $47 billion, and Frank decided to
join Becker and others in calling to roll back the very regulations he
had written in Congress, enabling Signature to grow past the $50
billion threshold without triggering stricter liquidity and capital
requirements.

Signature got a pretty good deal out of Frank. They’ve paid him
almost $2.5 million since he joined the board at the end of 2015, as
the bank nearly tripled its balance sheet to $110 billion, with a
particular focus on the cryptocurrency sector. On Sunday night, the
feds took over Signature Bank too. Its involvement in the cratering
crypto world and the fears spreading from the SVB failure had sparked
a run on Signature, and regulators were unwilling to chance any
further losses. Again, this is probably the right move to ensure that
the government can take care of Signature’s depositors at the lowest
cost possible.

But there is more to economic management than rescuing deposits. Civil
and criminal probes are warranted here. Becker has been paid more than
$45 million since 2018, according to SEC filings, and he dumped $3.6
million in SVB stock on February 27 as his firm was collapsing
[[link removed]]—not
a traditional marker of sound fiduciary stewardship. It is extremely
unusual for so many companies to be keeping so much cash in a single
institution—particularly when the VC bigwigs they worked with were
also carrying very large accounts at the same firm. It is essential
that the government not repeat the mistakes it made after 2008, when
prosecutors simply decided not to pursue clear-cut cases against
fraudulent activity. Anything illegal must be pursued—to do
otherwise would damage American democracy.

The entire debacle, moreover, reveals that the Fed hasn’t been
paying enough attention to financial stability. Federal officials do
not announce Sunday night bailouts when things are going according to
plan. In his quest to eradicate inflation, central bank
chairman JEROME POWELL has been raising interest rates fast,
ignoring the possibility that doing so could trigger a rapid repricing
of assets and set off an event like the SVB failure. Regulatory
failures don’t excuse reckless bank management, but they’re still
failures.

There is, in fact, a dissonance between the Fed’s recent bank
rescues and its stated policy on inflation. By raising interest rates,
central bankers deliberately impose higher financing costs on
businesses and restrict the supply of credit. This forces companies to
either cut back on labor costs or simply go out of business. The idea
is to reduce the purchasing power of ordinary people, which will
eventually encourage retailers to slash prices. Voila, inflation
vanquished. 

In theory, anyway. So far, the tech sector has proved uniquely
sensitive to higher rates. After months of rate hikes, job growth
remains very strong
[[link removed]] in
the economy at large. Tech, by contrast, is really hurting, with more
than 120,000 layoffs announced in 2023 alone
[[link removed]]. 

This makes the SVB rescue a little curious. With one hand, Powell and
the Fed induce tech layoffs to curb inflation, while with the other,
they rescue tech workers to prevent a financial crisis. This is not a
particularly effective way to run an economy. 

But whatever the Fed does next, it’s hard to imagine the tech
landscape surviving long in its present state. All of these layoffs
and bank failures indicate that the VC-oriented tech world was largely
dependent on ultralow interest rates. The chaotic irresponsibility of
Silicon Valley’s best and brightest in the SVB crash certainly does
not inspire much confidence in the entrepreneurial savvy of
California’s investor class. They’ve already told us they can’t
save themselves.

_[ZACHARY D. CARTER [[link removed]] is a consultant
with the Hewlett Foundation's Economy and Society Initiative. He was
previously a Writer in Residence with the Omidyar Network's
Reimagining Capitalism initiative, and spent 10 years as a senior
reporter at HuffPost [[link removed]],
where he covered economic policy and American politics. His work has 
appeared in The New York Times, The Wall Street Journal, The
Washington Post, The Atlantic, The New Republic, The Nation, The
American Prospect and other outlets.​_

_Zachary began his career at SNL Financial (now a division of S&P
Global), where he was a banking reporter during the financial crisis
of 2008. He wrote features about macroeconomic policy, regional
economic instability, and the bank bailouts, but his passion was for
the complex, arcane world of financial regulatory policy. He covered
the accounting standards that both fed the crisis and shielded bank
executives from its blowback, detailed the consumer protection abuses
that consumed the mortgage business and exposed oversight failures at
the Federal Reserve and other government agencies that allowed
reckless debts to pile up around the world.​_

_At HuffPost, Zachary covered the implementation of the 2010
Dodd-Frank financial reform law, political standoffs over trade policy
and the federal budget, and the fight over the future of the
Democratic Party. His feature story, “Swiped: Banks, Merchants and
Why Washington Doesn't Work for You
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was included in the Columbia Journalism Review’s compilation Best
Business Writing
[[link removed]].​_

_Zachary graduated from the University of Virginia, where he studied
philosophy and politics. He lives in Brooklyn, New York.]_

* Banks
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* big banks
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* Bank failures
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* Economic Crisis
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* Silicon Valley Bank
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* Wall Street bailout
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* Federal Reserve Bank
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* Peter Theil
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* financial crash
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* Tech sector
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* banking
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* venture capital
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* Donald Trump
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* Deregulation
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* Congress
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