ICYMI, Silicon Valley’s number one banker collapsed within 36 hours—crushed by a stampede by panicked tech customers. But who is to blame for this debacle? Silicon Valley Bank, the government or an incestuous tech culture?
Editor’s note: If you missed the meltdown, check out part one which charts the collapse of Silicon Valley Bank.
Explanation #1: It’s SVB, stupid!
This is the easiest and most comforting explanation. Silicon Valley Bank foolishly invested most of its money in long-term bonds—with a fixed interest rate. This was an exceptionally terrible idea for a bank that served tech companies, and here’s why:
One: Customers deposit their money in bank accounts so they can earn interest—but most importantly, draw on that money at will. But SVB invested all that customer cash in long-term bonds—worth $128 billion by the end of 2021. Securities were a whopping 56% of SVB’s assets—compared to 28% of Bank of America. So when its customers wanted their money, there wasn’t enough cash lying around. SVB was far more vulnerable to a bank run than others:
It grew too fast using borrowed short-term money from depositors who could ask to be repaid at any time, and invested it in long-term assets that it was unable, or unwilling, to sell.
Translation: SVB was just bad at diversifying its asset portfolio.
Two: As the tech industry’s banker, SVB had cash-rich customers. Less than 3% of its deposits were under $250,000. Sounds fabulous except these companies were also more likely to pull their cash at the first sign of trouble. As one top banking regulator bluntly puts it:
A $200 billion bank should not fail because of liquidity. They should have known their portfolio was heavily weighted toward venture capital, and venture-capital firms don’t want to be taking risk with their deposits. So there was a good chance if venture-capital portfolio companies started pulling out funds, they’d do it en masse.
Translation: SVB was just as bad at diversifying its customer base.
Three: All this leads back to SVB’s original sin—choosing to be the ‘Bank of Startups’. As Matt Levine brilliantly explains it, a typical bank takes money from its customers and then lends that cash right back to them—in the form of loans. When interest owed goes up on deposits, it is balanced by increased interest earned on loans. So rising rates can be a good thing for a bank.
But SVB was saddled with customers who didn’t need loans—because they were drowning in investor funds. So where would the bank put all that customer cash? In long-term bonds, of course. That brings us full circle to that pesky problem of owning way too many securities.
Explanation #2: It’s the tech industry, stupid!
There are three iterations of this argument—all of which boil down to a serious flaw in Silicon Valley culture.
One: Silicon Valley Bank soared precisely because the Valley is a small place. Back in 2003, it was the first banker willing to bet on risky tech startups—which spawned an entire generation of wealthy founders. And later, when many of them became investors or venture capitalists, they herded new batches of startups into SVB’s loving embrace.
All of which was fine and dandy until that cosy network of connections spawned the problem of ‘communication interconnectedness’:
[T]he tech startup world is tightly plugged into itself, with founders and executives constantly trading information and boasting on Twitter or text chains or Signal chats. One tech company pulling its money out of a bank is a story that quickly cascades to the leaders of other companies, who then tell leaders of other companies. “[SVB was] uniquely susceptible given the communication interconnectedness,” says Charlie O’Donnell, a partner at VC firm Brooklyn Bridge Ventures.
Translation: Tech bros are worse gossips than Indian aunties—and can destroy any company’s reputation within hours.
Two: The hard truth is that SVB was a perfectly viable business until VCs like Peter Thiel started telling their companies to pull their funds:
[N]obody on Earth is more of a herd animal than Silicon Valley venture capitalists… [I]f all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say “hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,” then all of your depositors will take their money out at the same time.
Translation: Venture capitalists are just bad for the banking business—which needs a stable base of customers who don’t get spooked by the first bit of Valley goss.
Three: Ben Thompson in Stratechery offers a darker variation on the theme—arguing that this kind of VC behaviour represents a new and nastier kind of tech ethos. Back in 2012, this is how Victor Hwang described Silicon Valley:
Silicon Valley has created a culture that encourages people with diverse talents and backgrounds to meet, to trust each other and to take a chance together. That culture is firmly in place because crucial keystone institutions, from venture capital firms to attorneys to entrepreneurs, treat the broader community as more important than the “winning” of any individual transaction.
Thompson argues that this Valley culture no longer exists—especially among venture capitalists looking to maximise individual gain. Fellow investors like Brad Svrluga were more direct:
SVB made some big mistakes… However, the ultimate failure was from the hysterical urging on social media of VCs who undermined our shared ecosystem. It has been a stunning failure of leadership. And I won't even get started on the fact that some of these VCs had neobank portfolio companies that stood to benefit directly from SVB's failure.
Or to put it even more harshly:
If you are in a movie theatre and it's not on fire and you yell fire, and then you congratulate yourself for being out first while other people are laying on the floor, do you sleep well tonight?
Translation: Many VCs are just short-sighted, selfish ‘bustards’—as those Indian aunties would put it:)
Explanation #3: It’s the government, stupid!
Uncle Sam makes an unlikely scapegoat in this case. But here are two of the more persuasive arguments:
One: Some are blaming a lack of oversight. Silicon Valley companies—including SVB—lobbied hard to loosen the strict regulations that were put in place after the Wall Street meltdown in 2008. Specifically this: how much funds a regional bank needs to hold for its books to come under tougher scrutiny. As a result:
SVB could operate with relatively little oversight thanks to its status as a “regional bank.” It was thus able to get away with holding a ton of government-issued mortgage bonds, even while it was losing money on those bonds in the short term thanks to higher interest rates
Hence, regulators should have been paying more attention when those interest rates started to go up—especially to companies like SVB that grew disproportionately fast.
Counterpoint to note: The crypto companies have almost been wiped out by rising interest rates. Unsurprisingly, they argue that the collapse of SVB points to the failure of traditional banking:
Centralised banking was to blame, the crypto advocates said. Their vision of an alternate financial system, unmoored from big banks and other gatekeepers, was better. They argued that the government regulators that recently cracked down on crypto firms had sown the seeds of the bank’s implosion.
Then again, other investors point out that if SVB was a crypto bank, its depositors would have lost all their money.
Two: Those goddamn interest rates. As Levine points out, the latest tech boom was built on low interest rates—fuelling the gold rush of VC money. But when they suddenly and repeatedly went up, it proved lethal for startups—and their premier banker:
When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your [SVB’s] customers is suddenly cut off. Your clients who were “obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities” stop doing that. Your customers keep taking money out of the bank to pay rent and salaries, but they stop depositing new money.
Investors complain that the Fed gave little notice of its rate hikes—which caught the entire industry unprepared: “When you go this aggressively into a hiking manoeuvre after creating so much inflation you're going to break something.”
The bottomline: After SVB’s collapse, the founder of a venture capital fund asked: “If SVB, which for 40 years has been a pillar of the startup ecosystem, can disappear in 36 hours, what else is going to drop?” That’s a very good question indeed.
Reading list
There’s a lot of analysis of the SVB meltdown. We highly recommend Matt Levine in Bloomberg, Ben Thompson’s Stratechery and—for a shorter take—Annie Lowry in The Atlantic. For an overview of the lineup of suspects, read Fair Observer or Slate. New York Times (splainer gift link) has the intense blame-mongering between crypto advocates and their critics. For more on the role of VCs, see Business Insider. Reuters via Economic Times has more on the role of interest rates—and Wall Street Journal (splainer gift link) looks at regulators.
