Nothing like elite entitlement on display. Having just had a very large bank failure outside a general financial crisis, which means said bank was particularly badly managed, Silicon Valley elites demand a reboot of sorts…..except for the risk part. They want a reincarnated Silicon Valley Bank to take on even more.
To give the high level story of Silicon Valley Bank, it served a particularly important role to venture capitalists by virtue of them requiring investee companies to keep all their accounts there. That allowed the moneybag to inspect what was going on at a granular level all the time. The founders and key executives were also pressured to have substantial banking relations with Silicon Valley Bank (I have no idea how successful these efforts were).
In addition (and the reasons save inertia are opaque to me) a lot of Silicon Valley tech titans also held large balances at Silicon Valley Bank, way way way beyond the $250,000 guarantee limit.
By contrast, even pretty small businesses typically have more than one bank relationship.
Admittedly, corporations bigger than postage stamp size can’t avoid having more than $250,000 in their bank accounts pretty much all the time. They get payments from customers and those are lumpy. They have to have enough cash on hand to make big payments. In particular, they have to have big enough balances to make payroll.
Silicon Valley Bank was hit with a classic bank run because it had many very large deposits that could be easily withdrawn and were. And in contrast to the earlier IndyMac failure the uninsured depositors were bailed out. The Wall Street Journal pointed out that there have been 37 bank collapses since the crisis in which uninsured deposits were wiped out.
Mind you, they could have been excluded save payroll or even all bona fide corporate accounts, if the intent were (as it could legitimately have been) to preserve companies who had large balances at Silicon Valley Bank, and not the stupid rich who didn’t bother managing their risks.
To underscore the notion that Silicon Valley Bank (and other banks who unduly sought or depended on supersized deposits from the well off) were run like candy stores, let us turn the mike over to former FDIC chairman William Issac in American Banker:
The failures of Silicon Valley Bank, Signature Bank and First Republic Bank sent shock waves through the financial world last year, prompting the Federal Deposit Insurance Corporation board, by a 3-2 vote, to recently propose further restrictions on brokered deposits. Unfortunately, the proposal overlooks clear facts: These bank failures resulted not from brokered deposits but from very large uninsured deposits; risky and unsound bank business strategies; and sorely lacking regulatory oversight…
The failures of these regional banks were clearly due to their excessive concentrations of volatile, short-term uninsured deposits, which were primarily invested by the banks in illiquid long-term fixed-rate assets. These strategic decisions by the banks’ management and their boards were palpably deficient, as was prudential oversight by federal and state regulators. When panic set in after the Fed belatedly raised interest rates to combat inflation, these large depositors quickly withdrew their funds, precipitating liquidity crises. So, the runs on the banks were not caused by brokered deposits but by the sheer volume and concentrations of uninsured deposits that were vulnerable to sudden withdrawal.
So regulators punted on addressing the real problem. One option would have been to better protect the critical payroll accounts by having the Fed provide accounts for that purpose. But oh noes, can’t have the government do nice things for workers and companies!
Now to the Financial Times account of how Silicon Valley intends to double down on financial failure. The article title even says as much: Peter Thiel joins tech billionaires backing new lender Erebor to rival Silicon Valley Bank. From the story:
A group of tech billionaires led by Palmer Luckey, co-founder of military contractor Anduril, is preparing to launch a US bank intended to fill the gap left by Silicon Valley Bank serving start-ups, including cryptocurrency businesses.
To be named Erebor, the bank would be backed by high-profile tech investors including Joe Lonsdale, the founder of venture capital firm 8VC and a co-founder of Peter Thiel’s defence group Palantir…
Thiel’s venture capital fund, Founders Fund, would also be among the investors…
Luckey and Lonsdale — who were big donors to Donald Trump in the 2024 US presidential election — want the bank to take over the niche once occupied by SVB as the go-to lender for riskier companies and cryptocurrency players that traditional banks might reject.
Erebor has applied for a national bank charter in the US, a licence that allows a financial institution to operate as a bank…
Its target market would be businesses that were part of the US “innovation economy”, in particular tech companies focused on virtual currencies, artificial intelligence, defence and manufacturing, the filing said. It would also serve individuals who work for or invest in these companies.
It also planned to work with non-US companies “seeking access to the US banking system”….
Erebor said in the filing it would “differentiate itself” by working with customers that “are not well served by traditional or disruptive financial institutions, in particular with respect to insufficient access to credit”.
Cryptocurrencies known as “stablecoins”, which are pegged to real-life assets such as the dollar, are expected to be a significant part of the bank’s operations. The application states Erebor aims to be “the most regulated entity conducting and facilitating stablecoin transactions”.
Aside from the fact that there’s not an iota of intent stated above about correcting any of the risk deficiencies that led to Silicon Valley Bank’s demise, the stablecoin claims are another big red flag. Stablecoins are not an attractive business if the coins are properly collateralized (as in what exactly is the point?). Experts tell me that industry leader Tether would have to greatly change its current operations to comply with pending rules.
The Financial Times comments were wonderfully derisive, as fun as the ones at NC on a good day. A sampling:
Manzikert
Erebor Mountain was filled with treasure stolen by a murderous dragon, was itself robbed by a bunch of short people and caused a war involving Five Armies. I don’t think that the branding guys were involved in this.Panthomatos
With that name, are we supposed to raid the bank?Argus
Why not call the bank „Cringe“ to create a sense of belonging?CCAR_go
Literally the “poster child Billionaire” that screamed panic to his Silicon Valley pundits to create a bank run on SVB deposits now starts a similar bank. “You cannot be serious!”Suidas
Fabulous. A great way to turn several billion dollars into a couple of million, before taxes….Justthefacts
I don’t know much about Peter Thiel but the essay he posted on FT a while ago was completely bonkers.https://www.ft.com/content/a46cb128-1f74-4621-ab0b-242a76583105
Unless you really know what you are doing in this area of finance, stay away. Run away if close to it.
Progressive Patriot
What could possibly go wrong ?Bet with Thiel’s connections, his “bank” will magically pass any and all stress tests going forward. Just that amazing and not a hint of impropriety.
Any international money laundering comes with a Trumpian Insta-Pardon delivered in milliseconds by AG Pam Bondi herself. Nothing to see here, folks !
It’s worse – they want it to be regulated (meaning support by FDIC guarantee). SVB depositors were bailed out by “fiat” money underwritten by the taxpayer.Manzikert
SVB’s depositors were bailed out with old fashioned “fiat” money by the central government. Do they expect the FDIC to insure the stablecoins?Lindesfarne
This will follow the time tested strategy employed in the case of svb– privatize the gains, socialize the losses
The one possible bright spot is Silicon Valley Bank assets were sold to another bank, so the established banking relationships, as in the presumed better, bigger customers are in new hands. Nevertheless the rich men are whinging:
Its [Silicon Valley Bank’s] assets were sold to First Citizens, which has since relaunched SVB, and a number of its bankers moved to HSBC in the US. But investors and executives complain about a gap in banking services for fledgling tech companies since SVB’s demise — with some start-ups struggling to get the same access to capital.
One has to wonder about this special pleading. Is the market really all that more difficult due to the bank environment, as opposed to tech wobbles, like AI doubts and Trump making life very hard for companies that depend on imports from China?
The plan for yet more looting of the public purse is clear. How far these broligarchs get is not yet clear, if only because the economic cycle may become more hostile to tech companies, a state few can even recall. When I was a young thing at Goldman, venture-capital backed companies could float an IPO only about two years out of five. So if these big boys don’t realize their scheme, it may be because even bigger forces, as in a systemic shift in investor appetite, has gotten in their way.
“Fools and their money are soon parted.”
The question here is; Who are the biggest fools?
We citizens of the US are parting with dollars at an increasing rate. What does that make us?
It makes you part of the problem.
The problem with that formulation is that “Average Americans” are a particularly weak group. Thus, they could be viewed as ‘victims’ of this process. The “energetic” removal of the captured officials enabling this involuntary transfer of wealth upwards needs to become a viable proposition.
One general weakness of revolutionary movements is their lack of proper “focus” on those persons and organizations that should be ‘targeted’ to promote the ‘desired’ ends.
We live in interesting times.
Stay safe.
SillyCon Tech…Has there ever been another industry so coddled in the history of the world?
I suspect some linkage to this and the “helicopter parenting” phenomenon.
“But investors and executives complain about a gap in banking services for fledgling tech companies since SVB’s demise — with some start-ups struggling to get the same access to capital.”
This says to me that the problem is not access to ‘basic’ banking services, e.g., ‘checking’ accounts that handle cash flows due to payroll, A/P, A/R, etc., but that startups with un- or nominally- viable business plans are finding it hard to get their banks to provide credit – either direct or syndicated loans. Additionally, VC funds have lost a panoptic view of their investments, since they can’t to go SVB to see the actual cash flows of their funded startups (this is only a compensating control, not a primary control, ergo: a weaker control).
Any well-run company will have a treasury manager whose job is to manage the operating (A/P, A/R, Payroll, etc.) and special cash (acquisitions, foreign exchange) needs, and the locations of all cash, subject to local regulation and tax considerations, as well as counterparty risk management principles. It is a failure of the startup’s risk management (or their VC’s risk management) to permit single-bank concentration, and more of them should be vaporized, rather than bailed out. Perhaps then VCs and the tech bros will get some common sense.
Remember the “risk management principles” of SBF? With these types, the lack of such principles is not a bug, but a feature.
When “Move Fast and Break Things” became an accepted business strategy, I knew that the end result would be systemic collapse.
“Robbery” spelled creatively and backwards as ‘Erebor?’ And I thought the GOP was working on undoing the FDIC guarantees? So how would this work? I am not a fan of these vulture capitalists. Guarantees for VCs, but not for we the people.
Well if these techbros really want a Silicon Valley Bank 2.0, the solution is easy. Let them create one and they can call it Erebor or Lucky Dip or whatever they want. But there would be a kicker. All Silicon Valley tech firms worth $1 billion or more would be responsible for underwriting it. That means Google, Facebook, Palantir, Apple. Amazon. etc. That way if it goes belly up then they are on the hook for all the financial fallout and they have the money for it. This being so, it might mean that that bank would be run through some very prudential principles indeed.
I thank Yves for this post, the American Banker and FT excerpts and links. Thiel’s FT opinion piece linked above is the first time I’ve read anything by this guy. I’m surprised FT printed it. Here Thiel appears to be trying very hard to appear erudite (hopscotching from COVID to IRS leaks to identity politics and synthesizing them all to a grand cobble) but having great difficulty masking his paranoia and narcissism. It’s not that everything he spouts is BS — there are granular truths — but he avoids the hard work of true and novel synthesis. I also see the affection for Trump, not that Trump really tries to mask anything. Thiel strikes me as a dilettante who got lucky, bright — but not bright enough to recognize his limitations. A social and political threat as a billionaire.
Thiel is an example of Hannah Arendt’s concept of the “Banality of Evil.”