There Are No Libertarians in a Bank Failure

The collapse of the Silicon Valley Bank may be a bigger deal than I first realized. As I live far from Silicon Valley I had never heard of this bank before. Here’s a basic explanation of what happened:

On Friday, regulators took over Silicon Valley Bank, a 40-year-old institution known for lending to tech startups, seizing all deposits. Earlier in the week the company had announced emergency measures in order to preserve its liquidity, leading to a customer bank run. On Friday, the Federal Deposit Insurance Corporation took control of the insolvent bank. CNBC called it “the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever.” Thousands of tech companies are now scrambling to figure out what this means for their future. The bank liked to brag that nearly half of all venture-capital funded startups had accounts there. $250,000 is insured by the F.D.I.C. But that’s not much of a comfort to a company like Roku, the creator of a popular digital media player, which had nearly $500 million in the bank, according to an SEC filing.

On the other hand, a company called CAMP that sells toys and play spaces used it for a sales promo:

l hope CAMP gets its money back. Here’s some more background:

The regulation that was put in place for the nation’s biggest banks after the financial crisis includes stringent capital requirements, which means they must have a certain amount of reserves for moments of crisis, as well as stipulations about how diversified their businesses must be.

But Silicon Valley Bank and others its size do not have the same regulatory oversight. In 2018, President Donald J. Trump signed a bill that lessened scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the move. Among other things, it changed requirements for the amount of cash that these banks had to keep on their balance sheets to protect against shocks.

The financial sector guys cannot learn. They always think they’re smarter than the last financial sector guys who screwed up and caused a meltdown. But they aren’t. Anyway, I understand the fallout of this on other financial institutions has been mixed.

Word is that Peter Thiel had many millions in Silicon Valley Bank but pulled it all out last week at the first sign of trouble, and that’s what precipitated the run on the bank.

Matt Levine writes at Bloomberg that part of SVB’s problem was that it had a lot of its assets in fixed-rate bonds rather than in loans, which means rising interest rates really messed it up. The bank was buying fixed-rate bonds with money on deposit because the tech startup companies it catered to had lots of cash from equity investors and didn’t need loans. I’m sure that’s an oversimplification of the situation, but that’s how I understand it. Banks usually profit from higher interest rates, because they raise the interest rates on loans. But SVB was stuck with long-term fixed-rate bonds, and the market rate of the bonds was going down. At the same time, the startup clients were withdrawing deposits to keep their companies afloat during a slow time for IPOs.

Anyway, on Wednesday the bank sold almost all of its securities, some $21 billion worth, at a $1.8 billion loss. Then the bank tried to sell $2.25 billion in new shares, but failed. Then Theil pulled his money out and told all his clients to pull their money out. SVB was done for.

There’s been much snickering about all the Silicon Valley libertarians who hate government regulation but now want the feds to bail out Silicon Valley Bank. Just as there are no atheists in a foxhole, perhaps there are no libertarians in a bank failure.