Silicon Valley Bank Goes Under
Scattered thoughts on the usual bullshit.
Silicon Valley Bank collapsed last week, the victim of a good old-fashioned bank run. Too many customers tried to withdraw too much money at once. SVB went under and California regulators shuttered it. Now the Federal Deposit Insurance Corporation is shopping its grisly remains to whoever’s buying. HSBC purchased its UK subsidiary for £1!
SVB’s collapse is the second-largest in U.S. history, trailing only Washington Mutual in 2008. On the surface, its demise is straightforward. The bank was heavily invested in long-term government bonds, generally a safe bet for the last decade or so, when low interest rates reigned supreme. These days, not so much. When interest rates go up, bond prices go down. According to the economist Adam Tooze, “[a]t a rough guess SVB suffered at least a $1bn loss on its books every time interest rates went up by 25 basis points.” They’ve gone up 450 basis points so far. Not great!
Most competent banks hedge against interest rate rises. SVB apparently did not. As Tooze notes, SVB “was, in effect, taking a huge $100-billion-plus, one-way bet on interest rates.”
In the pre-pandemic era of easy money, this model worked fine. Once the Fed started hiking rates to combat inflation, it collapsed. The tech sector is weathering a major downturn, and a lot of the Valley’s darlings are famous for not making any money. A lot of the Valley’s darlings banked at SVB, too. So, as Matt Levine explained in Bloomberg, a startup bank had a startup bank run:
“[W]hen rates went up, your customers all got smoked, because it turned out that they were creatures of low interest rates, and in a higher-interest-rate environment they didn’t have money anymore. So they withdrew their deposits, so you had to sell those securities at a loss to pay them back. Now you have lost money and look financially shaky, so customers get spooked and withdraw more money, so you sell more securities, so you book more losses, oops oops oops.
The tide went out. As usual, no one in the Bay Area was wearing any clothes.
The collapse says a lot about life in the hothouse of Silicon Valley, where venture capitalists all know each other and move in herds and force their companies to do the same weird things. Somehow, word leaked that SVB’s bottom line wasn’t too hot, venture capitalists freaked, and the whole thing went overboard. Then the same VCs (who famously never need any government intervention ever) rage-tweeted at the Treasury Department all weekend demanding a backstop.
By Monday, they got it. The government stepped in, invoking something called the “systemic risk exception” to “fully protect[ ] all depositors.” It is a bailout in all but name - the Fed and the Treasury have already signaled their intent to make depositors whole, even above the FDIC-insured $250,000 limit. 93% of SVB’s deposits are beyond that limit.
I don’t understand economics well enough to say what this means for the wider world. Disaster? Maybe, maybe not. Markets are uneasy. Credit Suisse is looking jittery. So is First Republic. It’s pretty obvious that SVB isn’t the only one sitting on massive unrealized losses from government bonds, but I don’t know how things will play out. I do think it says a lot about the Fed, which seems stuck in this endless purgatory where they’re doomed to pretend like the economy is a speedboat and not an aircraft carrier. By the time things break, it’s too late. The ship goes straight on the rocks.
Regulatory failures will be in the spotlight, justly. In 2018, Congress loosened legislative strictures to exempt regional banks like SVB from the liquidity requirements and stress tests imposed by post-2009 financial regulation. The move came after concerted lobbying efforts, as smaller banks argued that the rules were too strenuous and the associated risks too low (of course - of course! - SVB was one of them.) But it also made some sort of sense, because smaller banks do tend to lose out to their larger competitors in a tighter regulatory environment. If you value small enterprise (maybe you shouldn’t?) you’d be concerned about that because small banks are a whole lot better at getting capital to small businesses than the usual Wall Street behemoths (as long as said shops happen to be located in majority-white neighborhoods).
But we’ve been here before, haven’t we? Sure, there are important differences between SVB’s collapse and the 2008/09 financial crisis, where a slew of bad bets in mortgage-backed securities cratered the global economy. But the players are the same, and so are the stakes. As the other Matt Klein notes:
Banks are speculative investment funds grafted on top of critical infrastructure. This structure is designed to extract subsidies from the rest of society by threatening civilians with crises if the banks’ bets are ever allowed to fail.
The threats usually work. They did in 2009, and they did last weekend. These cyclical crises might, as the FT’s Robert Armstrong argues, be the price we pay for “using the magic of maturity transformation, which turns demand deposits into long-term financing.” But man, what a price.
The U.S. might be better at handling this endless standoff if it was a better place to live. As the historian Yakov Feygin writes, America likes to do social policy through investment and industrial policy. We are great at capitalism and we sort of know how to clean up the mess when things get out of hand (if you forget about the relentless immiseration, the lost decades and the massive wealth inequality). But we’re excruciatingly bad at preventing these things from happening, even when we see them coming.
More importantly, we are a very large nation with a very weak welfare state. Our social safety net feeds off the dregs of whatever filters down through our tortured political system. Our well-being is always hostage to our economy.
In college, I spent a lot of time trying to understand the global financial system. I did a semester abroad in Prague, where I studied the snowballing eurozone crisis instead of talking to girls. Those were weird days. Greece was deeply in debt, and the IMF was demanding massive cuts in government spending in return for interminable bailouts. This was in the years before austerity became unbearable and popular resentment boiled over, sweeping the left-wing Syriza party into power and heralding a wider populist backlash. In those days, I was convinced that the technocrats were right and that I knew everything worth knowing because I read the Economist religiously and had correct opinions about Mario Draghi and quantitative easing.
Nowadays I am utterly convinced that I don’t know anything at all. Still, I can’t shake the sense that, when it comes to the vagaries of global finance, all of it is bullshit. It is a malignant illusion, a maelstrom circling a vacuum. All sound and fury, signifying nothing. Meaningless - and yet so easily capable of wrecking our world.
Over the weekend, economist Larry Summers (who bears no small amount of responsibility for crashing the economy last time around) declared that now is not the time to talk about moral hazards or political consequences for any of this. It never is, is it?
I’ll leave you with Branko Marcetic’s reflections in Jacobin:
How much longer people will tolerate a system like this? One where vast amounts of wealth are misdirected to unproductive ends in the middle of world historical crises, then frittered away in speculative recklessness that nearly brings the entire structure down, only for those with the money to parachute to safety while everyone else remains condemned to austerity. The original bank bailouts set off a cascade of popular anger that’s irrevocably shaped the landscape of twenty-first-century politics, from Occupy Wall Street and the Bernie Sanders campaigns to the Tea Party movement and the Trump presidency. What will it look like if they keep on happening?