A security guard stands outside of the entrance of the Silicon Valley Bank headquarters in Santa Clara, Calif., March 13, 2023. (Brittany Hosea-Small/Reuters)
On the menu today: The partisan blame game for the collapse of Silicon Valley Bank and Signature Bank is in full swing. Politico offers a heroic narrative of President Biden saving Silicon Valley, while a 2018 partial rollback of the Dodd-Frank banking reforms is becoming a convenient scapegoat — never mind that Barney Frank himself supported loosening the rules for mid-sized banks such as SVB and Signature. One of the “big four” accounting firms gave both Silicon Valley Bank and Signature clean bills of health just two weeks ago. Also . . . weren’t the states of California and New York, and the Federal Reserve, supposed to be on the lookout for banks taking unhealthy risks? Finally, it’s hard not to notice that the federal government is changing the rules on FDIC protection of deposits on the fly in order to protect some of America’s wealthiest venture capitalists — who, you know, are supposed to be good at evaluating financial risks.
Biden Didn’t Save Silicon Valley
Man, when Biden administration sources choose to give the “tick-tock” — a story that focuses on the chronological order of events — to Politico, the publication responds with exactly the kind of headline the administration wants to see: “How Biden saved Silicon Valley startups: Inside the 72 hours that transformed U.S. banking.” I wouldn’t be surprised if that headline reappears in a Biden reelection-campaign ad.
The Real Reason Silicon Valley Bank Collapsed
As discussed yesterday, everyone who was keeping more than $250,000 in Silicon Valley Bank should have known that the money in their accounts beyond that threshold was not covered by the FDIC. When you choose to keep $3.3 billion in a particular bank, as payment-technology firm Circle did, you have an enormous incentive to keep an eye on the financial health of that bank.
There are serious questions to be asked about what both private auditors and federal overseers should have known, seen, and warned about before the collapse of SVB and Signature Bank. KPMG, one of the “big four” accounting firms, gave Silicon Valley Bank a clean bill of health just two weeks before the collapse, and the same firm offered an all’s good evaluation for Signature Bank eleven days before it collapsed. As the Financial Times reports, Silicon Valley Bank was overseen by both the Federal Reserve and the California Department of Financial Protection and Innovation; neither one sounded any alarms until it was too late.
There are people in this world who want the answer to every question to be, “It’s the fault of Republicans.” Thus, this week, you’re hearing a lot of Democrats blame the 2018 passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act, a.k.a, the Dodd-Frank rollback bill. That bill passed the Senate 67–31, and passed the House 258–159. The bill enjoyed the support of almost all congressional Republicans, as well as 16 Senate Democrats and 33 House Democrats.
As David Enrich of the New York Times points out, one of the reasons a good portion of congressional Democrats thought this was not a harmful change to Dodd-Frank was the endorsement of former Massachusetts Democratic congressman Barney Frank:
Frank was a primary architect of the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. But since his retirement in 2013, he had repeatedly voiced support for softening one of the law’s key planks: that any bank with more than $50 billion in assets should face especially intensive federal supervision.
The ensuing tweak — lifting the threshold to $250 billion — had big consequences. Among other things, scores of very large banks would escape, at least initially, the Federal Reserve’s annual “stress tests” and enjoy easier financial-safety requirements.
One beneficiary of the change was Signature Bank, a New York lender whose board of directors included Mr. Frank.
Enrich interviewed Frank Monday:
In the interview on Monday, Mr. Frank said the legislation’s goal had been to focus on the country’s very largest banks and not to saddle smaller institutions with stringent rules or oversight. . . .
Mr. Frank, who received more than $2.4 million in cash and stock from Signature during his seven-plus years on the board, left the job on Sunday as regulators dissolved the board. He said on Monday that the bank was the victim of overzealous regulators. “We were the ones who they shot to encourage others to stay away from crypto,” he said.
No individual depositor caused this mess, but the collective, herd-like decision-making of Silicon Valley venture capitalists did.
Silicon Valley Bank was the bank of choice for 1,074 private-equity and venture-capital funds in recent years. Fortune explains that, “As venture capitalists are legally required to ‘custody’ their fund assets at a financial institution, they use ‘custodians,’ which are banks like SVB that will monitor and safekeep the capital and ensure it is not stolen or lost.” In other words, when venture capitalists invest in a start-up company, they require that company to use their bank, in this case, Silicon Valley Bank. In retrospect, it was wildly risky to have almost an entire sector of the U.S. economy doing so much of its banking through one mid-sized bank.
Then, late last week, spooked venture capitalists instructed their portfolio companies to move money out of SVB. This is more or less firing the starter’s pistol for a run on the bank; as more companies withdrew their funds, everyone else panicked and tried to take out their money, too.
(By the way, what are venture capitalists supposed to be good at? Looking hard at business plans and fiscal information, evaluating financial risks, and seeing opportunities where everyone else doesn’t see them.)
And the federal government raced to the rescue of venture capitalists to save them from the consequences of a bank run that they themselves had started. In National Review today, Michael Ryall and Siri Terjesen of the Madden Center for Value Creation at Florida Atlantic University College of Business point out the inconvenient facts that disrupt the administration’s narrative that “Biden saved Silicon Valley”:
First, the biggest venture-capital depositors already took their money out of SVB during the run that caused the bank’s collapse. Second, the DIF fees the government levies on banks impose a cost that, ultimately, gets passed on to those banks’ customers. And finally, SVB’s depositors are mainly the portfolio companies of [venture capital] firms, meaning the main purpose of the bailout is to keep the VC firms whole.
Also note that everyone who was in danger of losing their money from personal accounts in Silicon Valley Bank was, by any common measure, wealthy. Many of the companies that kept all their cash in the bank were big, or at least sizable. In addition to Circle mentioned above, streaming service Roku had $487 million in Silicon Valley Bank; defunct crypto lender BlockFi had $227 million; and Roblox, the California-based online-gaming platform, had $150 million. BuzzFeed “said it had about $56 million in cash and cash equivalents at the end of 2022, majority of which was held at SVB.”
Credit Politico for at least remembering that this is a hasty rewrite of the rules for protecting bank deposits which is creating a new and sweeping precedent:
The swift and forceful action to rescue depositors at the two failed midsize lenders rewrote crucial banking guardrails in ways that could reverberate for years. It put the Biden administration’s stamp — for good or ill — on the sector’s future financial stability, while sending a message about the government’s willingness to rescue private businesses in new ways. It also was done without passing a single new act of Congress or holding hearings among elected officials in recent days.
What lesson will venture capitalists, bankers, and everyone else take from this? I suspect the lesson is that if your bad judgment creates a problem big enough for the rest of the economy, the U.S. government will come riding to the rescue. “Too big to fail” is alive and well.
Investors and bankers don’t have to evaluate risk anymore, because Uncle Sam will always be there to borrow more and save them from the consequences of their actions. Source
Keep looking up. Our Lord Jesus is in full control!