By Kenneth Tiven
Many high-tech companies and venture capitalists used Silicon Valley Bank (SVB) which is local and friendly with a determined sensitivity to these new entrepreneurs. Substantial global money flowed into the bank during the pandemic to invest in technology startups, many led by Indian-Americans employing thousands, including Indian information technology experts, working on H1B visas. If the money in the bank was frozen then payrolls and bills due would be in jeopardy. Initially, It had the feel of a banking crisis that could spread.
Two other banks, Credit Suisse, the 167-year-old bank and the second-largest lender in Switzerland which asked for a bailout package, and First Republic Bank in the US are also in deep trouble. In fact, to prevent the re-occurrence of SVB moment again in the US banking scenario, 11 of the biggest banks have come together to form a $30 billion rescue package for First Republic Bank to prevent the California-based bank from becoming the third bank to fail in less than a week and head off a broader crisis in the banking sector. Notably, First Republic Bank caters to the needs of a similar clientele as SVB and was also facing similar issues.
SVB’s failure was an old-fashioned bank “run” where depositors panicked demanding their money in cash. Bad management decisions set this in motion, not fraud, crypto coins, or some other tech scheme. Back in 2021 when the stock market boomed, interest rates were near zero. Banks earn profits by investing deposits, expecting to generate earnings that will be loaned at a higher rate. In SVB’s case, they believed interest rates would be stable, so they invested in low-yield, dependable Treasury long-dated bonds. When tech investment slowed, many startups pulled cash out of the Bank to pay their expenses. SVB needed capital—cash—to meet its liquidity requirements. It had to sell some bonds prematurely, losing over a billion dollars.
The bank may have been able to survive all of this. Under banking regulations, it technically failed because too many of its clients—basically high-tech and venture capital folks who tend to disparage regulation of any sort—misunderstood the implications of the Bank’s misjudgment on interest rate changes. The Bank failed to explain this properly to major clients.
Instead, rich famous Libertarian Peter Thiel’s Founders Fund had all its cash out by Thursday (March 9, 2023) morning, according to Bloomberg news. Bad news travels fast in this business sector, and others follow. To state and federal banking regulators, it looked like a “run” on the bank, and under rules that have been in place for decades, they “seized it” Thursday. The Federal Deposit Insurance Corporation covers bank accounts up to $250,000 in these situations, a number that doesn’t seem relevant in today’s economy.
On Friday, logging on to the bank’s website, people found this stark message:
On Friday, March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection & Innovation and the FDIC was named Receiver. No advance notice is given to the public when a financial institution is closed. The FDIC has created the Deposit Insurance National Bank of Santa Clara (DINB) to facilitate the resolution of Silicon Valley Bank.
Whatever you call it—panic, concern, worry, fear—it resulted on Friday in regional bank stocks across America taking a beating on the share price as individuals and companies wondered if they could get their funds out of similarly endangered banks. A group of extremely online venture capitalists spent four days using Twitter to speculate on the threat of 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, implying the US was on the verge of a financial meltdown. Media coverage reflected these concerns.
Surprised yes, but a responsive Biden administration brought together multiple federal agencies working all weekend on a solution. Remember, then Vice President Biden had watched President Barack Obama get hammered over his role in bailing out giant banks during the 2008 financial crisis. Biden had little desire for a repeat. Government officials worked through the weekend mostly in open-ended virtual meetings to determine the potential extended fallout from SVB’s failure. They concluded that failing to protect the bank’s depositors could leave small businesses nationwide unable to access the money needed to pay workers and stay open. The administration doesn’t consider this a bailout, more of a bridge loan as they calculate the net worth of what is left of SVB.
Politico cites a White House advisor saying: “There’s not a way to help the people he (Biden) wants without also helping the uninsured depositors who made a bad choice by putting too much money into a single bank. I have no doubt in my mind that he feels ambivalent about it. But he’s not willing to take a risk with this economy.”
The swift and forceful action to rescue depositors rewrote crucial banking guardrails in ways that could reverberate for years. The Biden administration’s decisions reflect a government that can find working solutions. It shows a government’s willingness to rescue private businesses in new ways, all done without passing a single new act of Congress or holding hearings among elected officials in recent days. The Federal Reserve will now provide a lifeline to the nation’s banks, giving them access to funds designed to keep them afloat and quell any panic brewing across the country. Nevertheless, banking stocks continued to lose value.
Unprotected and unreimbursed are the shareholders and management of the bank who have already filed a class action lawsuit contending that SVB Financial Group’s Chief Executive Greg Becker, and Chief Financial Officer Daniel Beck concealed how rising interest rates would leave the Bank “particularly susceptible” to a bank run. Please note that the day before being closed, the Bank paid executive bonuses based on 2022 results.
US Senator Elisabeth Warren, consistently critical of insufficient banking regulation, puts the blame on political leaders in Washington for weakening the financial rules. She writes that “President Donald Trump signed a law to roll back critical parts of Dodd-Frank and that Wall Street chief executives and their armies of lawyers and lobbyists hated this law. They spent millions trying to defeat it, and, when they lost, spent millions more trying to weaken it.”
In the aftermath of the 2008 financial crisis, Congress had passed the Dodd-Frank Act to protect consumers and ensure that big banks could never again take down the economy and destroy millions of lives. Becker, as the chief executive of SVB, was one of the many high-powered executives who lobbied Congress to weaken the law. In 2018, the big banks won. With support from both parties, regulators, including the Federal Reserve Chair Jerome Powell, then made a bad situation worse, letting financial institutions load up on risk.
Senator Warren adds that SVB, then the 16th largest bank in the US got relief from stringent requirements, basing their claim on the laughable assertion that banks like them weren’t actually “big”, and therefore, didn’t need strong oversight.
Meanwhile, David McIntosh, president of the right-wing Club for Growth, saw it differently. “Changing the rules after the crash to prop-up liberal investors at the expense of taxpayers is pure crony capitalism,” a sentence that conveniently mixes a bunch of different concepts together in Cognitive Dissonance at its best.
Edward Ongweso Jr., a journalist based in New York City and dealing with technology says: “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.”
With Switzerland’s Credit Suisse also asking for a bail out amid the collapse of the SVB and its impact on the stock market over the week, fears of a contagion from the collapse of two US banks and its annual report citing “material weaknesses” in internal controls, have raised fears of the Global Financial Crisis of 2007-2008, the most serious financial crisis since the Great Depression.
—The writer has worked in senior positions at The Washington Post, NBC, ABC and CNN and also consults for several Indian channels
Name Blame
A little-known Indian bank moved to assure depositors their money is safe after the collapse of the Silicon Valley Bank (SVB) in California caused confusion and concern due to a similarity in names.
Over the weekend following the SVB collapse, India’s Shamrao Vithal Co-operative Bank (SVC Bank), issued a statement and sent text messages in English and Marathi to its customers in Mumbai, saying it has no relation to the US lender. “We request our members, customers and other stakeholders not to pay attention to baseless rumours and mischief-mongering…insinuating similarities in brand names,” the SVC Bank said in the statement.
SVC, which has 198 branches across India, held total deposits of $2.23 billion in 2021-22. The statement said SVC has “robust and strong fundamentals”.