So here’s what happened.
Silicon Valley Bank was where all the fanciest new tech companies dumped all their Venture Capital money. Multiple founders have come forward with stories about how they were “the place” for them to go with their huge deposits, often millions of dollars in start-up money. Companies like AirBnB, Uber, Postmates, all the newest “services” that have been disrupting older industries for a decade now were expected to stroll on down to their local branch and drop off the two ton check into an account. I forget exactly which ghoul said it, but the place was considered a local business where “we could always get a fair shake.” Kind of like if your local coffee stand had the GDP of several European countries floating around.
This bank was just awash in money; they were Scrooge McDucking it. But the reason banks exist is because they take the money they are given and then invest it in other places to grow it. That way they can pay their costs and interest on the deposits (you know that fraction of a percent you get a statement about every month?) One of the most reliable ways to make a profit is to buy Treasury Bonds. These are little loans to the US Treasury that pay a few percent interest but are guaranteed to payout once they mature. Thanks to some deregulation, these can be used as assets to leverage in trading and loaning money. They’re linked to the Federal Reserve’s interest rate and thus are bulletproof as long as nothing wild happens.
Unfortunately, wild things happened.
When the Fed announced last year that they were gonna jack interest rates into the sky because they were scared of “inflation,” (that’s a whole other story) that changed the value of treasury bonds. Now new bonds were going to be paying out much higher rewards and the ones that SVB was holding onto were going to be paying way less. Their assets were now worth much less than their projections had anticipated. But again, nothing too crazy, as long as no one panicked, the bank could quietly absorb the losses and return to normal while selling their bonds at a loss.
Unfortunately, someone noticed and panicked.
I don’t want to get into a discussion about Peter Thiel, the mysterious Waluigi to Elon Musk’s Wario. Another “founder” of PayPal, he’s been quietly working hard to be the next Koch Brothers for decades. Almost every new rising star of American Conservativism has been involved with him directly or funded by one of his operations. He has his fingers in a lot of pies. The week before the collapse happened, he withdrew all his money from SVB, sold his stock in it, and recommended others do the same. Turns out, when you pull a lot of fingers out of pies, they get a little messy.
Standard bank policy, for all banks, is to only maintain enough cash to cover normal expenses and not the entire sum that their depositors are owed. (this is called fractional reserve banking, but that’s another rabbit hole, this entire topic is a damn warren) So SVB raised the white flag.
According to accounts from depositors of the SVB, the news that Thiel thought they wouldn’t have enough money to cover their deposits made everyone scramble. Friday was the scene in Mary Poppins where a swarm of people in business suits all demanded their deposits back to move somewhere else. Except it all happened over phones and the swarm happened on Twitter. Instead of severe black suits they were wearing athleisure pants, puffy vests, and probably on the toilet.
The weekend after the collapse was filled with tech millionaire after millionaire wailing in despair that they couldn’t get their money out of SVB. It was the end of the tech industry as we know it! All salaries were gonna get frozen! No one cared! Why do they all hate us??
When a bank collapses and the FDIC comes in to clean up, the rule is that depositors are insured up to 250k. All SVB’s customers had waaaaay more than that. So by the normal rules, they should have been up shit creek, probably without a canoe much less a paddle. Until POTUS Biden came out and said “Nah we got you fam” and suddenly 300 billion dollars were freed up to replace what SVB had lost. And that was the end of that.
So now what?
It’s been weeks since that happened and the news cycle has briskly moved past it, and I’m aware that me writing this is more about my unresolved anger than any sort of real attempt at relevance. It’s not even the first time anyone who’s able to conceive of what happened has seen something like this. The usual pithy “why can’t we spend a fraction of that incomprehensible amount of money on healthcare/VA/infrastructure/education/anti-corruption/etc.” doesn’t have the same kick these days. As early as the Friday it actually happened, people had already called the end result. The backlash to the backlash started before there was even a response warrented.
The most popular chill-out line is “this isn’t a bailout, this is just replacing funds that the bank lost.” In a way that’s true, because the SVB execs are still gonna lose their jobs (to be scooped up elsewhere,) the name’s going to change, and supposedly the US taxpayer isn’t going to be charged a dime. But this just shows how illusory the whole shenanigan is.
Treasury bonds are the safest investment there is. The low yield savings account of the banking world. Sure de-regulation meant something here, but SVB was doing the same thing other banks do, just without the ability of a monstrocity like Wells Fargo to absorb steep losses and still keep their reserves up. The two crucial incidents were the interest rate hike, and the silicon Valley group think that caused every dill weed with an Executive in their job title to panic. Since the second is just an effect of concentrating an enormous amount of wealth in the pockets of a bunch of MBMs in one suburb, the first is a more real problem.
SVB wasn’t the only bank that had to have its deposits saved. Several other mid sized regional banks were in the same situation, and the much hyped “contagion” effects of the collapse could theoretically have led to a much larger banking crisis. A weakness of the system was exposed: the Fed’s attempt to restrict the money supply had succeeded, and a side effect was a liquidity crisis. This has happened in the 90s with the Dot Com boom before the bust in 2001 caused rates to fall back to 1s and 2s, and then in the mid 2000s along with the housing market boom and then the big 2008 bust. The Fed is trying to put the breaks on an economy that is “booming.”
Do you feel like the economy is booming?
There’s an old anecdote that gets reattributed to someone else every time I hear it that loosely works out to “if an economist woke up from a coma, they wouldn’t ask about the GDP, they’d ask about the price of a loaf of bread.” The health of an economy can’t be determined by numbers that get spit out at the end like GDP or interest rates, the health of an economy is determined by the effect it has on the average citizen. I spent $30 on a takeout hamburger last week, I don’t think the average citizen is doing too well.
The news story is that the Fed has been spooked by inflation, because there’s too much money floating around. Unemployment is so low that labor is slowly getting more expensive but companies are still posting record profits. That’s not a super reliable number because it is subject to a long list of conditions and exceptions but it’s the number everyone throws around. We should all be partying like it’s 1999 but instead we’re dealing with a housing crisis, a transportation crisis, and so many others it’s a pick-your-own-crisis.
I don’t mean to be doom and gloom, but we’re in a position where basically no one below a 200k annual income can look forward to improving their material conditions, while the Fed is warning that we’re all doing too well. The disconnect is what worries me. Our best guesses about how rich the 1% and the .1% are show us that in a big way, the health of the entire lower and “middle” classes are insignificant to the lager economy. When 60% of Americans can’t handle a $400 emergency, when used cars are going for what they were when they were bought new, when some of us are buying multiple houses while most shiver in the streets, I question if there’s any point in this system other than domination.
Stay safe out there, bring a neighbor some food, look kindly on a stranger, consider investing in a gas mask.
Play me out
It’s not the best version, but it felt right