Unless you happened to take a digital detox this weekend, you probably witnessed a lot of online commotion regarding tech startups, the banking system, and the institution formerly known as Silicon Valley Bank. It all got heated on Friday morning, when the regional bank, a fixture of the Silicon Valley startup ecosystem, was taken over by the federal government after weeklong money jitters spurred a crippling bank run. The fall of SVB, the largest bank failure in the U.S. since Washington Mutual in 2008—and the second-largest bank rout in all of U.S. history—held the tech and finance sectors by the throat from Friday morning until Sunday evening, when the feds announced they would fulfill customer obligations on its behalf. According to a joint statement from the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation, all depositors’ funds will be recovered and “no losses will be borne by the taxpayer.”
What’s been happening here, exactly? Well, nothing less than a confounding, still-ongoing tale of investment hubris packed with drama, big-name tech figures, stock plunges, an alphabet soup of agencies, Twitter threads, and real risk (or at least some inconvenience) to American livelihoods. In other words, a classic fable of American capitalism.
Silicon Valley Bank was a 40-year-old financial institution based in Santa Clara, California. It was established by former Bank of America staffers to “provid[e] diversified financial services to companies in the technology, life science and premium wine industries.” The federally chartered California bank held on to cash deposits from businesses and startup founders primarily concentrated within the tech industry; popular apps like Roku and Lemonade and Etsy and Vox Media had either a little or a lot of money in SVB. By the end of 2022, it was the 16th-largest bank in the U.S., with $209 billion in assets.
Why was Silicon Valley Bank so important and trusted? To hear it from industry players, it was a lone source of support before the West Coast tech industry grew into the world-shaking behemoth you know it as today. “For those of us who have worked in Silicon Valley for the past forty years, SVB has been our most important business partner,” wrote Michael Moritz, chair of the highly influential venture firm Sequoia Capital, in a recent Financial Times op-ed. “Before SVB sprang to life, it was difficult, if not impossible, for a start-up to secure a relationship with a large, established bank. Small west coast technology companies were incomprehensible or insignificant to the large east coast banks.” Even as Silicon Valley exploded, its namesake bank remained a steady hand; as Moritz highlighted, “almost all of its 40,000 customers were technology companies.”
SVB didn’t just hold on to money from these VC-backed startups—it lent early-stage money to them as well, during times when such young companies’ profitability and stability were uncertain. When some of those tech brands became juggernauts of their own, they often retained services with SVB, which allowed them to remain clients no matter their level of success. The financiers were long on belief and loyalty.
Run Run Run
So, how did that all come crashing down? Different commentators will name different culprits: government regulators, queasy VCs, ill-prepped founders and executives, interest rates, the U.S. Treasury, Donald Trump, Joe Biden, Jerome Powell. Yet it’s simplistic and inaccurate to narrow the blame game to one person or catalyst. There are a lot of factors, going back years, that play into this.
First, let’s revisit the everlasting trauma of the financial crisis. After big-bank speculation threw the global economy into chaos, the U.S. government made two particularly important moves: imposing new financial regulations through the Dodd-Frank Act, and flattening interest rates in order to rejuvenate economic activity. The former granted beefed-up powers to oversight agencies like the Fed and the Federal Deposit Insurance Corporation, while the latter allowed for a boom in business investment and innovation that helped to repair the battered U.S. economy over the course of the Obama presidency. While both the bill and the rate drops were necessary boons, they became more controversial as the Great Recession faded: Executives of regional banks—including, funny enough, Silicon Valley Bank CEO Greg Becker—decried the burdens of certain Dodd-Frank restrictions, and economists warned that persistently low interest rates would overheat the economy to detrimental effect. In 2018, a bipartisan group of lawmakers passed a new bill that curbed some of Dodd-Frank’s measures, like the financial threshold for how many funds a region-focused bank would need to hold in order to come under harsher regulatory scrutiny—and in fact, Silicon Valley Bank lobbied for this change. Four years later, as pandemic recovery and war in Europe spurred global inflation, the Fed began to ramp up rates in order to press the brakes on the economy, reduce spending, and drive down prices for consumer goods.
The interest-rate surges really walloped the tech industry, which dominated the 2010s thanks in large part to free money supply and plentiful loans. Every relevant sector—from digital media to cryptocurrency to e-payment services to solar energy—shed stock values and employees, dragging down Silicon Valley Bank’s portfolio in the process. The hiked interest rates also affected SVB’s outward investments: As the Wall Street Journal pointed out in November, plenty of big banks like SVB and Wells Fargo had used client money to invest in 10-year Treasury bonds, mainly mortgage-backed securities. Higher rates depress the value of non-fixed-rate bonds, which are worth more when interest rates are low.
So, going into the new year, 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. On top of that, the industry SVB was most tied up with happened to be one of the most vulnerable to the new Fed stance, suffering far more than the rest of the economy as monetary policy tightened. And most SVB customers had more than the $250,000 that the FDIC covers in case of a bank failure.
Silicon Valley Bank was already in a dangerous spot by the end of 2022. It would take a few more actors to sign off on its death warrant, however.
Let’s round up the culprits.
• Greg Becker: In February, Silicon Valley Bank’s CEO sold off 12,451 shares of his firm’s parent company, SVB Financial Group, for about $3.6 million, netting himself a $2.27 million personal profit. Given that this transaction occurred not even two weeks before the bank failure, and given that the disaster has zeroed out the value of SVB stock—with no hope of recovery for shareholders, per the government—investors are pissed. Becker hasn’t commented on his stock sale, which was planned in January and filed with the SEC; he did resign from the board of San Francisco’s Federal Reserve branch on Friday as SVB went under. As the Financial Times reported in late February, the stock sale did attract short sellers, and also raised suspicions that SVB wasn’t doing so hot thanks to its ample Treasury holdings.
• SBF: Ha, of course! But seriously: Crypto boy wonder Sam Bankman-Fried’s exchange firm, FTX, was linked to several players in the digital-asset economy, including the California financial institution Silvergate—which was the most-crypto-involved “traditional” bank in the U.S. After FTX declared bankruptcy last year, Silvergate took consistent financial blows, with several of its clients shifting their money to the elitist East Coast bank Signature. (More on this later.) The string of withdrawals plunged Silvergate’s stock, forcing the bank to close—and causing tech funders to worry about the Golden State’s banks.
• SVB Itself: Obviously, the company’s bond-buying strategy proved to be ruinous. On Wednesday, the bank calculated a $2 billion loss on a $21 billion sale of its fixed-income portfolio. As financial writer Ming Zhao noted on Twitter, that loss just about equates to SVB’s yearly revenue, which meant that the bank was forced into making up the gap through more stock offerings. A rapid sequence of sales like that doesn’t allow an investor too much confidence, which leads to customers withdrawing their accounts, which leads to SVB selling more shares in order to earn back the capital needed to pay off the accounts, which leads to …
• Peter Thiel: The tech kingmaker’s venture firm, Founders Fund, took steps on Wednesday to withdraw its money from SVB and suggest to clients that they also move their deposits away from that particular bank. The bank run arguably started here.
• Other Customers: You need a lot of customers to have a bank run, don’t you?
Pain, No Gain
To recap: A bank with lots of tech investment loses value when those companies get shellacked by high interest rates, and both the bank’s executives and some of its outside lenders are very literally hedging their bets in response. Responding in a reasonable manner, depositors ring up to cash out—and find they can’t get their money back, because the bank lost it in some investments that were similarly vulnerable to high interest rates. The bank then owes a lot of angry people a lot of money it doesn’t have, and in swoops a guarantor: the United States government, which tenderly swallowed it up on Friday.
Now, everyone with anything to do with SVB was left wondering what was about to go down. Other banks that had overlapping investments with or exposure to SVB saw their own values plunge, sparking concern that still more big banks will take a hit. Some of these institutions, like First Republic and Western Alliance, immediately tried to quell those fears, and even Treasury Secretary Janet Yellen stepped in to declare her confidence in the U.S. banking system (while working with government officials to pick up SVB’s remains).
Yet Silicon Valley kept freaking out, especially when companies that lost control of their SVB-held funds wondered whether they’d be able to access cash to pay employee salaries. Some insiders predicted nationwide bank runs as well as a wipeout of numerous startups, and they begged for government bailouts of SVB in turn (a prospect Yellen appeared to reject just earlier today). To hear from several panicked moguls, at least, there appeared to be nothing less at stake than the entire financial system—perhaps a repeat of 2008 was in the cards.
It wasn’t, of course. The government passed down its final decision by Sunday evening: that it would completely absorb SVB and make all its customers whole—not just the ones who already qualified for FDIC insurance. Financial regulators had sought a potential buyer of SVB altogether, and big banks bid thusly over the weekend, but Sunday came and went without a sale; rather, the government just gave its guarantee, as well as “additional funding to eligible depository institutions,” offering reason to believe that there maybe are other banks with problems akin to SVB’s, and a “similar systemic risk exception for Signature Bank,” which also closed down Sunday. Signature, you’ll recall, is the bank that absorbed the bulk of the depositors who fled Silvergate. Like Silvergate, Signature was a fiat-money bank that had opened itself to crypto investments in recent years, and that didn’t turn out great. So it also faced an influx of anxious customers wishing to pull out their money.
The government stepping in to preserve the deposits of SVB and Signature customers seems to be a signal for investors to calm down and not pull out their money from other banks. That will probably depend on how SVB depositors feel after this week, as they hopefully regain their missing cash. Now at stake is the question of whether this is a “bailout” of a bunch of rich, reckless banks, or a necessary, system-preserving backstop. Don’t worry, the VCs and finance geeks of Twitter will continue to hash it out.