In 2015, Greg Becker, then president of Silicon Valley Bank (SVB), lobbied Congress to exempt his institution from what he saw as onerous and unnecessary regulations imposed on the banking industry after the 2008 financial meltdown. Not adverse to self-praise, Becker claimed that oversight into the bank’s lending practices wasn’t necessary because of “SVB’s deep understanding of the markets it serves, our strong risk management practices.” Three years later, to cheers from SVB, President Donald Trump signed an “Economic Growth” act rolling back Obama-era banking regulations.
Over the last few days, the many critics of SVB have been vindicated. It turned out that SVB’s “strong risk management practices” were nonexistent. In fact, the bank was carrying out an extremely risky strategy that ended with its collapse on Friday, making it the second-biggest banking failure in American history.
The root problem with SVB was that the bank specialized in serving the “start-up” community in Silicon Valley. These were companies that flourished in the era of low interest rates that lasted from roughly 2008 (when rates were lowered to combat the onset of the Great Recession) until 2022 (when inflation worries sparked a rise in rates). In that time of cheap money, tech start-ups found it easy to get venture capitalist funding, which they needed more as they grew. As new and often gimmicky ventures, the start-ups weren’t expected to make money immediately—but instead to burn through it. SBV emerged as the bank of choice, since it followed a strategy of keeping money in long-term bonds. As the Financial Times reported in February, this supposedly conservative strategy of investing in bonds was tied to the bank’s role as a safety-deposit box for start-ups. The bonds, the FT noted, were “part of a plan to shore up the bank’s balance sheet in case venture funding of start-ups went into freefall.”
SBV’s strategy of putting all its eggs in the basket of long-term bonds itself made sense only as long as interest rates remained low, and as long as the start-ups were flush with enough cash that they continued to pump money into the bank. The rise of interest rates changed both dynamics, creating a situation where depositors were pulling out more cash—which the bank didn’t have on hand, because its investments were tied up in long-term bonds. What made SVB’s situation even more precarious was that it didn’t hedge its bet on long-term bonds by making other investments that were less subject to interest rate fluctuation.
As Columbia University economic historian Adam Tooze noted in a Substack post, “bond prices go down as prevailing interest rates go up. At a rough guess SVB suffered at least a $1bn loss on its books every time interest rates went up by 25 basis points and the Fed has hiked by 450. So if they had to sell their ‘safe’ portfolio of bonds they would actually suffer a huge loss.”
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Rumors of SBV’s weaknesses have been rife for months. Last week, those rumors reached a critical mass, leading to a bank run. By Friday, the bank was taken over by the Federal Deposit Insurance Corporation (FDIC). This meant not only the end of the bank but also a possible crisis for the many Silicon Valley start-ups that had deposited in the bank, since many of these depositors had put in more than the $250,000 covered by federal insurance. By common estimates, less than 10 percent of the money in SVB was covered by insurance. According to Tooze, the average bank in the United States has 50 percent of its deposits covered, so SVB has an unusually vulnerable base of depositors.
One SVB depositor, the streaming service Roku, has $487 million housed in the bank—only a small fraction of which seems to be insured. As David Dayen, executive editor of The American Prospect snorted, “Having half a billion dollars in one bank is the dumbest thing I’ve ever heard.” While Roku was one of the larger depositors, many other Silicon Valley firms were facing an economic apocalypse.
SVB had a reckless investment strategy. The depositors who parked vast sums of uninsured money in SVB might have been seen as equally reckless—if not for the fact that they had a good reason to believe the government would rescue them from their folly. Some observers predicted this very outcome. On February 23, the financial journalist Bryne Hobart posted a prescient analysis highlighting SVB’s precarious finances but also noting that “even if the company did run into trouble there are good political reasons to think that depositors wouldn’t be harmed: the people who donate the legal maximum to political campaigns are disproportionately likely to bank with Silicon Valley or work for companies that do.”
Hobart’s cynical analysis proved all too accurate. What happened next is a fine illustration of the enduring truth of Martin Luther King Jr.’s observation from 1968: “So often in America, we have socialism for the rich, and rugged, free enterprise capitalism for the poor.”
As SVB circled the drain, Silicon Valley plutocrats and their political allies started agitating for a bailout of depositors. Very quickly the very free-market absolutists who love agitating for austerity and a pull-up-by-your-bootstraps ethos for the poor suddenly discovered the value of collective action and government intervention in the economy.
The odious Lawrence Summers, former US Treasury secretary and majordomo in the administrations of Bill Clinton and Barack Obama, opined, “What is absolutely imperative is that, however this gets resolved, depositors be paid back, and paid back in full.” When challenged on this, Summers insisted, “This is not the time for moral hazard lecture.” As Forbes noted, Summers had no difficulty discerning moral hazard in student debt relief.
Billionaire tech guru David Sacks, a major contributor to right-wing causes, underwent an equally complete conversion. On October 14, 2022, Sacks tweeted, “The idea that the American government, the American taxpayer, or any American company is obligated to provide support is pre entitlement.” That was before the SVB collapse. On March 10, 2023, Sacks sang a different tune: “Where is Powell? Where is Yellen? Stop the crisis NOW. Announce that all depositors will be safe.”
Sam Altman, CEO of OpenAI, blamed bigotry against tech bros. He tweeted, “I believe that if Silicon Valley Bank were instead called Farmers Bank Of Santa Clara (they bank a lot of winegrowers!) we would have had this easily resolved. Unfortunately it became somewhat political.” As journalist John Ganz pointed out, this is the opposite of the truth. In fact, in the 1980s and ’90s the government let many regional banks serving farmers go under, with disastrous results for farmers.
The sad truth is that Silicon Valley won by complaining loudly—and by having well-connected depositors. By Sunday, the FDIC announced that it was using its insurance fund to fully compensate depositors. Technically, taxpayer money isn’t being used, but make no mistake: The coercive power of the state is being deployed to rescue the financially irresponsible from the consequences of their own actions. Summers might not realize it, but this intervention creates a huge moral hazard.
Back in 2018, Senator Bernie Sanders correctly warned that eviscerating banking regulations would lead to bank failures. This has now come to pass. The Biden administration is opening itself up to immense political attack by its covert bailout.
It’s easy enough to imagine a Donald Trump or even a Ron DeSantis making hay out of how Joe Biden’s administration bailed out the venture capitalists of Silicon Valley. Already, there is an attempt on the right to scapegoat wokeness for SVB’s failure: The New York Post is highlighting a pro-LGBTQ employee at a London branch of SVB. Factually, this is thin fare, but it’s in keeping with the hard right’s history of exploiting turmoil as an excuse for bigotry. A reprise of the Tea Party backlash that started in 2009 might be in the cards.
Given the potential for demagogic abuse, it’s imperative that the Biden White House develop a counternarrative—one that emphasizes the role of Trump’s deregulation. There needs to be an active push to restore and enhance regulations, not just because it is good economic policy but also as a way to counter demagoguery. If Democrats don’t offer more than bailouts for rich investors, then they’ll face the wrath of a righteously—and rightly—angry citizenry.
Correction: A previous version of this article stated Roku has $487 billion held in Silicon Valley Bank; it has $487 million.
