The SVB debacle exposed the hypocrisy of Silicon Valley | John Naughton
So One day Silicon Valley Bank (SVB) was a bank, then the next it was a smoldering mass that looked like it was about to bring down an entire segment of the American banking industry. The US government, which is widely regarded by Silicon Valley residents as a cumbersome and outdated colossus, then magically activated a penny, ensuring that no depositor would lose even a penny. And on this side of the pond, regulators arranged for HSBC, another heavyweight colossus, to buy SVB’s UK subsidiary for the princely sum of £1.
The panic is over, then? We will see. In the meantime, it’s worth taking a more sardonic look at what happened.
The first thing to understand is that “Silicon Valley” is actually a reality-distorting field inhabited by people who inhale their own vapors and believe they are living in Renaissance 2.0, with Palo Alto as the new Florence. The dominant religion is the founders’ cult, and its elders live on Sand Hill Road in San Francisco and are called venture capitalists. These elders decide who should be elevated to the privileged “founder” caste.
To obtain this status, one must a) be a man; b) having a great idea to disrupt something; and c) never knowingly wearing a suit and tie. Once admitted to the priesthood, the elders arrange for a large dump truck loaded with $100 bills to arrive at the new member’s doorstep and line his driveway with cash.
But that poses a problem for the new founder: where to store the loot while he deals with the disruption? Enter the scene on the left Gregory Becker, CEO of SVB and famous in the valley for being an adorer of the founders and slavishly attentive to their needs. His company would keep their money safe, help them manage their personal wealth, borrow against their private equity, and sometimes even give them mortgages for those $15 million dream homes they had placed what you might call their heart.
So SVB were flooded with money. But, as the programmers say, it was a bug, not a feature. Traditionally, as Bloomberg’s Matt Levine points out, “the way a bank works is that it takes deposits from people who have money and makes loans to people who need money.” SVB’s problem was that most of its customers did not need loans. The bank therefore had all of its customers’ money and had to do something with it. His solution was not to lend to risky corporate borrowers, but to buy long-term, seemingly safe securities like Treasury bills. So 75% of SVB’s debt portfolio – with a face value of $95bn (£80bn) – was in those ‘held-to-maturity’ assets. On average, other banks with at least $1 billion in assets classified only 6% of their debt in this category at the end of 2022.
There was, however, a fly in this ointment. As every schoolboy (and girl) knows, when interest rates go up, the market value of long-term bonds goes down. And the US Federal Reserve had raised interest rates to fight inflation. Suddenly, SVB’s long-term cover started to look like a grindstone. Moody’s, the rating agency, noticed this and Mr. Becker frantically started looking for a solution. The news got out – as always – and the Sand Hill Road alumni began whispering to their esteemed founding proteges that they should withdraw their deposits, and the next day they obediently withdrew $42 billion. The rest, as they say, is recent history.
What can we infer from this mess about Silicon Valley culture? Well, first of all is his pervasive hypocrisy. Palo Alto is the center of a microculture that sees the state as a nuisance blocking innovation. But the minute the safety of bank deposits above the $250,000 limit was in doubt, the cries for state protection were deafening. (In the end, the deposits were protected – by a state agency.) And when people began to wonder why the SVB had not been subjected to the “stress tests” imposed on the big banks after the crash of 2008, we discovered that some of the most prominent lobbyists against applying such measures to SVB-sized institutions included that company’s own executives. What came to mind at that time was Samuel Johnson’s observation that “the loudest cries for freedom” were invariably heard from slave drivers.
But the most striking result of all was the evidence produced by the crisis of the arrogant stupidity of some of those involved. The venture capitalists whose whispered advice to their proteges sparked the fatal race had to know what the consequences would be. And how could a bank whose solvency depended on assumptions about the value of long-term bonds be surprised by the impact of interest rate hikes? All that was needed to model the risk was an intern with a spreadsheet. But apparently no trainees were available. Maybe he was at Stanford doing a thesis on the Renaissance.
what i read
The Death of Cryptocurrency is a fascinating — and astute — white paper from Nicholas Weaver’s Yale Law School.
THE New Yorker has a nice review by Brian Christian on the Spike Jonze movie Her – a film with ChatGPT resonances. It’s called The Samantha Test.
Reuters article “Dow said it recycles our shoes. We found them at an Indonesian flea market” is a great example of good investigative reporting.