Silicon Valley Bank went bust, but not because it was awake
The culture war has come for the banks, and friends, it sucks.
There are a wide variety of proposed explanations for the fall of Silicon Valley Bank. For example, the editorial of The Wall Street Journal suggested that the board of the SVB “may have been distracted by diversity demands” since, in my opinion, it had too many women, too many black people (one), too many queer people (one more ) and too many veterans (???).
Meanwhile, in The Financial Times, the problem is that Silicon Valley Bank is letting people work from home. “It’s harder to have a challenging conversation over Zoom. It makes it harder to challenge management,” said Nicholas Bloom, a professor at Stanford University who chose to quote the FT for some reason. “Ideas like hedging interest rate risk often come up over lunch or in small meetings.” Another problem was that the SVB didn’t have the “abrasive, roll-up culture of Wall Street,” an anonymous source complained to the FT.
As we all learned during the banking run on Silicon Valley Bank, a community of individualists is not a community at all
We’re going to find out what happened. Silicon Valley Bank is under at least three investigations: one by the Fed into its own actions, one by the SEC, and one by the DOJ. Certainly operating without a risk officer seems bad. It also doesn’t look good for upper management to sell stocks when the bank isn’t doing very well. Of course, there is an obvious, unbiased explanation for this: greed.
Still, I’m confident that what happened at SVB had little to do with diversity efforts or work-from-home policies, and much more to do with the growth of deposits and its VC clientele. The bank was also unable to correctly predict the future if interest rates eventually rose.
And predicting the future is the point of banking and venture capital. Do it right and you’ll make money. If you get it wrong, the results can be catastrophic, not just for you, but for your entire community. Sure, SVB failed and depositors were bailed out by the Federal Deposit Insurance Corporation – call it a “bailout” if you will, who cares – but it will be years before we see the full effects of that collapse.
The Silicon Valley venture capital community likes to call themselves a bunch of rugged individualists. As we all learned during the run on Silicon Valley Bank, a community of individualists is not a community at all.
Silicon Valley Bank was a community bank and its relationships were one of the most notable things. It understood how to work with companies that were not yet making money. To reward itself for that risk, it did two things: First, it sometimes required those companies to bank exclusively. Second, it was given rights to buy shares of those companies in the future, often at bargain prices. That second function echoed the VC industry it served: It bet some of those money-losing startups would make it really, really big — thus covering any losses of the companies that failed.
Thiel has, of course, publicly put ESG investing on his enemy list
The VC-like part of Silicon Valley Bank is not what went wrong. The banking portion of the bank is where the bankruptcy happened: Many deposits came in during the pandemic, and the SVB chose to put half of them into a $91 billion investment portfolio that was vulnerable to rising interest rates. But because the startup culture is also vulnerable to interest rate hikes, the SVB was more exposed than other types of banks. Because the startups started to withdraw their money instead of putting more in, SVB had to lose its investments at a loss.
These right-wing talking points aren’t serious, so it’s worth wondering why we hear them at all. One possible answer is the involvement of Peter Thiel’s Founders Fund in the bank run. Thiel is one of the largest donors to the Republican Party.
A mysterious anonymous person told Axios that Thiel was not directly involved in the decision to tell portfolio companies to raise their money. Of course, after Thiel gave a big speech about how great Bitcoin was while Founders Fund was busy selling it, people might be a little skeptical about that. That may be why we hear about “woke Wall Street.”
I’ve ignored the raging battle over ESG investing, mostly because it’s boring, but I think we have to deal with it now. Thiel has, of course, publicly put ESG investing on his enemy list.
Most investors aren’t actually sociopaths
Markets are made up of people. ESG investing – it stands for “environmental, social, and governance” – is a capitalist product, born out of a demand that companies do more than make a profit. It exists because investors want a basic level of environmental friendliness, pro-social actions and good governance.
ESG is not really a new concept. While some investors just want to make money, others are concerned about how that will affect those around them. The prime example is tobacco companies, which sell an addictive product that can and does kill people. In Barbarians at the Gate, Warren Buffett extolled the virtues of investing in cigarette companies: “It costs a penny to make. Sell it for a dollar. It’s addicting. And there is fantastic brand loyalty.” If you don’t care about cancer deaths, this is a pretty good formula to invest.
Except that many people care about these things. Most investors aren’t actually sociopaths; some of the largest investors manage pension and retirement funds for everyday people. ESG investing is primarily institutional investors, especially BlackRock, trying to bring to market a product that allows people to make money without feeling too guilty. Customers actually ask for this! That’s called market demand!
But ESG is about saying the right thing, not necessarily doing it. So why do we see conservatives taking it seriously? Well, Republicans can’t admit that there isn’t much market demand for their beliefs. After all, they should be pro-capitalism.
Money is the abstract version of our social bonds. It is, quite literally, what we owe each other. Silicon Valley Bank served a community, one where “every man for himself” is the prevailing philosophy. That’s part of what leads to a bank run — because if Silicon Valley’s VC culture had been more interested in preserving its own community, it wouldn’t have tanked its own bank.
Then there is deregulation. In 2018, then-President Donald Trump signed into law a law that exempted smaller banks from some of the requirements of the Dodd-Frank Act of 2010, a post-financial crisis attempt to reform the banking industry. The new law meant that smaller banks, such as Silicon Valley Bank, were not subject to the same regulatory requirements as “systemically important” banks, with more than $250 billion in assets. SVB itself lobbied for this!
I don’t necessarily believe that the market is everything and everyone of society. People often want things that are bad for them, for example cigarettes. But if you’ve been following the libertarians trying to signal virtue over the Almighty Market, there’s another funny little wrinkle here. A lot of money has flowed to large banks, which are perceived as safer than small banks such as the SVB. Those ‘safer’ banks are also much more strictly regulated. It’s almost as if the market is asking to be less free. You can see how that can corner the Republicans.