Why Even George Bailey Couldn't Save Silicon Valley Bank
The Silicon Valley Bank collapse caused some of us (OK, maybe just me) to recall the scene in It's A Wonderful Life when George Bailey prevents a run on his bank by giving his desperate customers enough money to tide them over until the crisis ends. George and Mary sacrifice their honeymoon fund but they foil that mean old Mr. Potter. Of course, that's just the movies, and SVB President & CEO Greg Becker is hardly Jimmy Stewart. (Stewart was a right-wing Republican who "fanatically" supported Barry Goldwater in 1964, so maybe we should stick to fiction here.)
George Bailey could personally appeal to his customers, but SVB was in the "big pants" bank business. Most of their deposits came from large tech companies. Ryan Falvey, a fintech investor of Restive Ventures, told CNBC that SVB collapsed because of a "hysteria-induced bank run caused by VCs" (venture capitalists).
Billionaire Peter Thiel was among the first to bail on SVB. His Founders Fund had withdrawn millions from SVB by Thursday morning. The Founders Fund reportedly advised its portfolio companies that there was "no downside to moving their money away from SVB, even if the risk was low." (There is significant downside if a major bank fails.) But Thiel isn't known for his great judgement. He thought Blake Masters was a good investment.
Thiel defenders will argue that abandoning the struggling SVB was necessary so that startup funding deals scheduled to close in the coming days weren't delayed. It's not Thiel's fault that Silicon Valley Bank had taken it on the chin in its securities portfolio. The insurance limit on deposits is $250,000, and while that covers most normal people, it's nowhere enough to protect even a small business.
A corporation with a $100 million in deposits is just an unsecured creditor. And it’s easy for a company to move its money from one bank to another, or to buy treasury bills or commercial paper. So when it appeared to the corporate depositors that Silicon Valley Bank was in trouble, the smart and easy response was to withdraw money.
So, the companies that didn't get their money out in time are just screwed, right? No, yet again, we're looking at a "too big to fail" scenario. Saturday, billionaire businessman Mark Cuban was arguing for a full federal bailout.
CUBAN: A couple SVB thoughts. 1. 250k is too low. It's insane that a small company with say 2.5m in payables and payroll at the end of the month should be "prudent" and split their cash across 10 banks in case of a run. The fees and admin would be crazy. But great for banks
That is not ironic quotes "prudent." It's literally the responsible thing to do avoid ruin when a situation like this occurs. If an old retired couple had foolishly deposited their entire life savings of $500,000 in SVB, Cuban wouldn't suggest saving them from their own choices. No, this is another example of socializing corporate risk while privatizing corporate success.
CUBAN: The Fed should IMMEDIATELY buy all the securities/debt the bank owns at near par, which should be enough to cover most deposits. Any losses paid for in equity and new debt from the new bank or whoever buys it. The Fed knew this was a risk. They should own it.
If the Fed doesn't own it, trust in the banking system becomes an issue. There are a ton of banks with more than 50 pct uninsured deposits. What would be best practices to protect from a future run if your company writes millions in checks weekly ?
Why can't companies just learn from this public financial face plant and diversify where they keep their cash? Unfortunately, there is some logic behind the "too big too fail" concept. A lot of people will lose their jobs through no fault of their own if the government doesn't clean up SVB's mess. That doesn't mean that the decision makers at SVB should walk away unscathed.
SVB apparently invested a large amount of its deposits into long-term treasuries when, and as Twitter user AmyLizTweets noted, "It was obvious to everyone with the slightest financial literacy that the Fed was going to raise interest rates rapidly." It also looks like the SVB CEO, CFO and CMO sold more than $4.4 million in stock over the past two weeks. That's not reassuring. Rep. Eric Swalwell says this should be investigated, but in the meantime, it's time for the government to protect the public from corporate idiocy.
Swalwell tweeted Friday:
I’m working with my CA colleagues to address the Silicon Valley Bank crisis. We must make sure all deposits exceeding the FDIC $250k limit are honored. Banking is about confidence. If depositors lose confidence on the safety of their deposits over 250k then we are in trouble.
Bank management must be investigated. Risk-taking investors should not benefit. But bank customers and innocent employees depending on paychecks should not suffer for greed and recklessness of the wealthiest.
Crypto-focused (LOL!) Signature Bank also went kaput this weekend, with the FDIC seizing control. Fortunately, President Joe Biden, the closest America gets today to George Bailey, put US Treasury Secretary Janet Yellen and his top economic adviser Lael Brainard to work with financial regulators so businesses and individual households impacted by affected by the Silicon Valley Bank and Signature Bank failures could access their deposits. Everyone’s saved. Most importantly, this is not a bailout. SVB and Signature Bank remain toast, but the public isn't left holding the crumbs.
Biden said in a statement, “I am pleased that they reached a prompt solution that protects American workers and small businesses, and keeps our financial system safe. The solution also ensures that taxpayer dollars are not put at risk.”
“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” he added.
SVB President Greg Becker personally asked Congress in 2015 to exempt his bank from the very regulations passed after the 2008 financial crisis that would've imposed more stress tests and capital requirements. He told a Senate panel that “enhanced prudential standards” should be lifted “given the low risk profile of our activities."
Becker was obviously wrong, and we'll keep ending up right back here if we don't stop listening to these people. That's the first step toward true accountability.
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Stephen Robinson is a writer and social kibbitzer based in Portland, Oregon. He writes make believe for Cafe Nordo, an immersive theatre space in Seattle. Once, he wrote a novel called “Mahogany Slade,” which you should read or at least buy. He's also on the board of the Portland Playhouse theatre. His son describes him as a “play typer guy."