I blame the tech bros. Edward Ongweso Jr. writes at Slate,
If the technological innovation coming out of Silicon Valley is as important as venture capitalists insist, the past few days suggest they haven’t been very responsible stewards of it. The collapse of Silicon Valley Bank late last week may have resulted from a perfect storm of ugly events. But it was also emblematic of a startup ecosystem and venture-capital apparatus that are too unstable, too risky, and too unmoored from reality to be left in charge of something as important as the direction of our technological development.
As the startups that make up Silicon Valley Bank’s customer base scrambled to figure out whether they would be able to make payroll, a group of extremely online venture capitalists spent four days emoting on Twitter, ginning up confusion and hysteria about the threat of a systemic risk if depositors didn’t get all their money back, pronto. All weekend, they screamed that there would be an economic collapse, that they were concerned about the workers, that the Federal Reserve was responsible, that-that-that … until finally, on Sunday evening, they got what they wanted: the government promising full account access to all Silicon Valley Bank depositors.
The Republicans are screaming about bank bailouts today. It’s important to stipulate that the bank is not getting a bailout. It is gone. “The banks’ equity and bond holders are being wiped out,” said the official at Treasury. “They took a risk as owners of the securities, they will take the losses,” it says here. The DEPOSITORS will get back the money they had on deposit, including deposits in excess of the $250,000 that already was insured by FDIC. But this money is not coming out of our taxes. It is being paid out of the Deposit Insurance Fund, which is funded with quarterly fees assessed on financial institutions and interest on government bonds.
But the venture capitalists helped cause the freaking problem by being willing to fund just about anything with “tech” attached to it. The Silicon Valley bros got used to snapping their fingers and getting wads of cash for it. Ongweso continues,
For over a decade, low interest rates have allowed venture capitalists to accumulate huge funds to give increasingly unprofitable firms with unrealistic business models increasingly larger valuations—one 2021 analysis found that not only were 90 percent of U.S. startups that were valued over $1 billion unprofitable, but that most would remain so. Give metens of billions of dollars and a $120 billion valuation and someday, somehow, I will replace every taxi driver with gig workers paid subminimum wages—or robot taxis paid no wages—while charging exorbitant fares for rides, increasing pollution, and adding to traffic. Or not, and I will sell off all the science-fiction projects I’ve promised, but still fail to make a profit.
Over the last year, rising interest rates to combat inflation have meant less free money for science-fiction projects, pressuring investors to change their entire approach and actually fund realistic ventures at realistic valuations with realistically sized funds and deals. Drops in valuations meant smaller checks, which meant smaller deposits at Silicon Valley Bank, and more and more withdrawals as startups ran out of cash themselves. It also meant the bonds SVB bought were now worth less than when purchased, so they’d have to be sold at a loss to generate some liquidity, so that clients could withdraw their deposits.
Martin Levine wrote last week at Bloomberg that the SVB collapse was a problem having to do with venture-capital backed tech startups, not the financial system generally. And here Ongweso is saying the same thing. Until recently the tech startups were having big wads of cash thrown at them by the venture capital people, so they didn’t need business loans. Since SVB wasn’t being called on to make a lot of business loans, it put its money into long-range fixed-rate securities, which are usually safe unless there is inflation. But there was inflation, and SVB’s securities lost market value, and suddenly the bank was short of cash on hand to cover deposits.
Some writers at the Wall Street Journal put it more succinctly: “Bankers that grew up in the easy-money era following the 2008 crisis failed to ready themselves for rates to rise again. And when rates went up, they forgot the playbook.” Jeez, that was just 15 years ago, people.
SVB got caught with its pants down as interest rates went up. Everyone, except SVB management it seems, knew interest rates were heading up. Federal Reserve Chairman Jerome Powell has been shouting this from the mountain tops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term, without any interest-rate hedging.
The bear market started in January 2022, 14 months ago. Surely it shouldn’t have taken more than a year for management at SVB to figure out that credit would tighten and the IPO market would dry up. Or that companies would need to spend money on salaries and cloud services. Nope, and that was mistake No. 2. SVB misread its customers’ cash needs. Risk management seemed to be an afterthought. The bank didn’t even have a chief risk officer for eight months last year. CEO Greg Becker sat on the risk committee.
Mistake number 1, Kessler wrote, was what they did with the mountain of venture capital startup cash that they had on deposit. “There was no way SVB was going to initiate $131 billion in new loans. So the bank put some of this new capital into higher-yielding long-term government bonds and $80 billion into 10-year mortgage-backed securities paying 1.5% instead of short-term Treasurys paying 0.25%.”
I’m reading now that an accounting firm called KPMG gave both Silicon Valley and Signature banks clean bills of health just days before they both failed. (Signature was big into crypto; the feds just took it over, too.) Is KPMG the new Arthur Andersen?
But at the Guardian, Joseph Stiglitz puts some of the blame on Federal Reserve chair Jerome Powell and his interest rate hikes. This was bound to put a lot of strain on the financial sector, Stiglitz said.
Now, as a result of Powell’s callous – and totally unnecessary – advocacy of pain, we have a new set of victims, and America’s most dynamic sector and region will be put on hold. Silicon Valley’s startup entrepreneurs, often young, thought the government was doing its job, so they focused on innovation, not on checking their bank’s balance sheet daily – which in any case they couldn’t have done. (Full disclosure: my daughter, the CEO of an education startup, is one of those dynamic entrepreneurs.)
Stiglitz understands the economy a lot better than I do, and there have been many reasons to criticize the interest rate hikes. But I’m leaning more toward Edward Ongweso on this one. The venture capitalists and the tech bros generally have been operating with serious disregard for reality. And anyone managing a bank should have noticed the interest rate hikes, which started just about a year ago. Did SVB take any steps starting a year ago to be sure it had cash on hand? Not that I’ve seen.
Spreaking of Arthur Andersen, I wrote back in 2006 when the Enron boys were on trial that people who become Captains of Industry tend to be very sure of themselves and their ways of doing things. As their companies start to go south, all too often they keep doing the same old thing and figure that with enough time it will all right itself. They will always be proved to be right, if given enough time. If they fail, it’s because someone lacked faith. And this is why these people need to be regulated.
Oh, and Ron DeSantis is going around saying that SVB failed because of its diversity programs. It’s too woke. I’m serious. And here is more proof the Right has a collective IQ of minus seven and should not be trusted with anything more complicated than a squeaky toy.