The collapse of Silicon Valley Bank has put a target on the community's back
The recent bailout of Silicon Valley Bank (SVB) depositors could prove highly controversial. That is, unless policymakers are convinced that it was necessary and the public are convinced that it is perfectly normal. But it was and is neither.
SVB went bust because of its investments. These were not particularly exotic — mostly Treasury bonds and mortgage-backed securities. Many banks carry similar investments today, but what was unusual were SVB’s depositors.
These were not people squirrelling away a few quid for their nest egg; nor were they Main Street mom and pop stores. Rather, they were some of the wealthiest people and most vibrant start-up investments in Silicon Valley.
These people held deposits at SVB far in excess of the $250,000 underwritten by the Federal Reserve. When SVB went under, the Fed had no obligation to bail these depositors out. They had responsibility for their deposits. They should have bought extra insurance or turned them over to a boring fund to manage them. But they did not. And when SVB collapsed, rather than realise their investment, they tapped the Fed to bail them out.
For days now, many have questioned why this was a reasonable thing to do. Some, like tech investor David Sacks speaking to UnHerd‘s Freddie Sayers, argue that if the bailout had not happened there would have been a wider bank run. But this is hard to prove: most people’s deposits are covered by the deposit insurance scheme.
No matter how powerful Silicon Valley’s media machine is, however, they are not fooling the finance community or the regulators. Veteran Wall Streeter Ken Griffin of Citadel gave an interview recently pointing out that the bailout meant that Silicon Valley was not playing by the rules of the capitalist game. He went so far as to say that the bailout was such a violation of those rules that capitalism is “breaking down before our eyes”.
He was not the only one. Sheila Bair, one of the former chairs of the very deposit insurance organisation — the FDIC — which bailed out Silicon Valley, wrote an op-ed for the Financial Times in which she argues that while the authorities claimed that without bailouts the failure of SVB posed a ‘systemic risk’, in fact it posed no such thing.
According to Bair, “the uninsured depositors are not a needy group. They are a ‘who’s who’ of leading venture capitalists and their portfolio companies”. She then expresses incredulity that their purported ignorance about the deposit insurance system should be seen as shocking. Personally, I think that anyone who does not understand how deposit insurance works should not be running a business.
It seems unlikely that the techies are going to get away with this one. After the bailouts during the 2008 financial crisis, investment bankers became public enemy number one. It struck people as massively unfair that some of the wealthiest in our society had their nests feathered by the Government when the average person had to confront recession, foreclosure, low wage growth and unemployment. This time, it may well be the techies who occupy this unenviable position.