Silicon Valley Bank: Will Global Finance Finally Hit Bottom on Its Debt Addiction?
I had my last alcoholic drink on June 29th, 1999. I was in Munich, Germany, a stop on a European trip my grandparents gave me as a high school graduation gift. I had only been drinking hard for a couple years, but by that June, I was consuming around a liter of whiskey a day, resulting in wretched hangovers, a couple arrests, many unsavory relationships, and an existence dominated by alcohol. Though the trip was meant to connect me with my roots, it devolved into a debaucherous mess. After a particularly prodigious bender at the HofbrauHaus, I realized I had enough. The next day, I called home, revealed my situation, and within a week I was back in the States, neck deep in a recovery program.
My recovery program — whose name shall remain anonymous — put a strong emphasis on “hitting bottom,” the point at which alcoholics abandon all hope they can safely drink. Switching from whiskey to beer, drinking more water, getting therapy, and various other tweaks to the drinking formula would not make things better. Total abstinence, coupled with a pathway to recovery, is the only thing that will deliver alcoholics or other types of addicts from hell to heaven.
My anonymous recovery program was founded in the middle of the Great Depression, and I see parallels between the necessity for hitting personal and macroeconomic bottoms. The Depression was the aftermath of decades of reckless debt issuance, which climaxed in 1929. Yet as bleak as the Depression was, it may have been a necessary condition for economic recovery. From the despair of the Depression came FDR and the reforms he enacted in his “First 100 Days” and later New Deal programs.
SVB’s Debt Bender
The unfolding collapse of Silicon Valley Bank (SVB) is the aftermath of another debauch in global finance’s addiction to debt. I’ve witnessed several of these debauches as an adult, notably the dot-com bust of 1999–2000 and the Great Recession of 2008, though their history, as mentioned above, is far older.
Throughout history, the debt vessels have changed — from big industry to real estate to startups to crypto — but the underlying addiction remains constant. In pursuit of short term profits and recurring revenue, banks accumulate debt, generally via securities trading or lending money to borrowers. That debt is backed by cash balances, which come from customer deposits and other income streams (debt service fees, asset dividends, etc.). The bank buys and issues debt based on the speculative repayments in the future. When those speculative payments don’t happen for a variety of reasons, debt income dries up and bank balances dive. When this happens, banks can’t support deposit withdrawals and other capital outlays, which is why banks exist for their customers. When cash dries up, customers who are able to often attempt to withdraw their money before that insolvency becomes a bank closure (i.e. a “run” on the bank). This is what’s happening to SVB. Payouts on their debt balance sheet is not — and has not been — coming back as hoped, and they ran out of cash to give deposit holders their money. The bank was shut down to figure out how to deal with the situation, which will likely involve selling individual assets and possibly the entire bank (SVB UK was sold to HSBC for £1 the other day).
Thanks to FDR’s Emergency Banking Act, the FDIC exists, and SVB deposits up to $250,000 are insured, but “96 percent of its total $173 billion in deposits was uninsured,” according to Barrons.
SVB’s uninsured deposits include the coffers of some of the world’s buzziest companies. According to AP, “Nearly half of the U.S. technology and health care companies that went public [IPO’d] last year after getting early funding from venture capital firms were Silicon Valley Bank customers.”
The volume of IPO’d companies with SVB balances is almost certainly dwarfed by smaller startups, some of which were directly funded from SVB Capital, a SVB subsidiary — one that is currently for sale to cover losses.
Regarding those smaller startups, AP reports:
‘This is an extinction-level event for startups,’ said Garry Tan, CEO of Y Combinator [YC], a startup incubator that launched Airbnb, DoorDash and Dropbox and has referred hundreds of entrepreneurs to the bank…‘I literally have been hearing from hundreds of our founders asking for help on how they can get through this. They are asking, ‘Do I have to furlough my workers?’
Tan also told AP that “nearly one-third of Y-Combinator’s startups will not be able to make payroll at some point in the next month if they cannot access their money.”
Drunk Economic Drivers
Last year, I wrote about Garry Tan and YC in my piece, “Small Minds, Big Checks: Softbank, Y-Combinator, and the Attempted Murder of Real Estate Innovation.” Also last year, I wrote about another SVB-affiliated VC, Andreessen Horowitz (a16z), and their $350M investment in WeWork founder Adam Neumann’s residential startup, Flow.
My intention with both the YC/Softank and a16z/Flow pieces was to describe the scheme where incubators and VC’s promote and back startups specifically as hype-machines for attracting add-on investors. When the hype and add-on capital pool reaches a certain point, the initial VC’s — YC’s core investors, a16z, etc. — make lucrative exits. Even when these companies go to a Series D or an IPO, many of them end up not living up to their projections or failing outright. What’s not mentioned in the hype is that the companies would never be distributive without gobs of investment funds (debt), which pads their revenue and obscures their losses.
External venture and public investments also create an illusory market advantages over companies relying on revenue for growth. Two SVB-affiliated real estate startups (my area of expertise) are prime examples of this illusory advantage:
- Airbnb. Despite its 15 year existence and seeming market domination, Airbnb’s first profitable year was 2022, according to Skift. This profitability could easily disappear in the event of regulatory, economic, or lifestyle shifts.
- Opendoor. The much-hyped iBuyer’s stock is down about 90 percent from its IPO, and “the company doubled its losses from the previous year to $1.4 billion net loss for 2022,” according to The Real Deal.
SVB was the bank of choice for shady tech companies with venture-dependent revenue models. SVB’s collapse shocked me as much as the sun shocked me when it appeared from the east this morning.
While several articles I’ve read about the SVB collapse are emphatic about its limited impact, the unfolding collapse of First Republic Bank, Signature Bank, and a several others, suggests otherwise.
Government as Enabler
A big question is whether SVB’s collapse will mark a bottom for the venture industry’s debt addiction or will the government keep the bender going with a bailout?
There are already indications the FDIC will cover 100 percent of deposits, exceeding the $250,000 FDIC insurance cap. Billionaire hedge funder Bill Ackman tweeted the government should consider a bailout if private capital can’t save the day (I’m guessing private capital won’t).
The bailout would help avoid the destruction of “an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash,” according to Ackman. What Ackman fails to acknowledge is that the economic driving the venture industry does is usually drunk driving — careless, putting the public in grave danger, and destined to crash. To issue a bailout is to give bankers a fresh, new car to crash.
It’s worth noting that SVB’s collapse and any subsequent bailout will be unlike 2008, since trillions of federal stimulus funds have already been distributed in the last three years. In fact, Seeking Alpha attributes part of the collapse to the stimulus plans, stating:
SVB was a bank that catered to venture capitals, start-ups, and emerging technology companies, as well as mid-sized and publicly traded technology companies. The business and its deposits grew rapidly, amidst all of the money printing associated with Covid stimulus programs and the Federal Reserve’s big policy errors (keeping rates way too low, for way too long).
SVB took the trickle down stimulus funds (via deposits) and bought assets like Treasury securities and mortgage backed securities (MBS). Climbing interest rates reduced the value and yields on those securities, leaving SVB without debt income or cash to cover deposits.
Even if the government minimizes fiscal impacts with a bailout, the SVB et al’s collapse, combined with diminishing fortunes of so many tech giants — Meta, Twitter, Salesforce, etc. — might be enough to trigger a widespread economic collapse, or “correction” depending on your perspective, with dire consequences for all banks and markets.
One market that is especially vulnerable to a collapse/correction is real estate, which, like startup funding, has relied on the continual feed of low-interest debt and incomplete accounting to maintain growth and solvency.
From 2012–2022, low interest rates facilitated a boom in commercial and residential real estate development. Now, that development and its underlying securitized debt are at extreme risk of massive revaluations or devaluation due to rising interest rates, oversupply (especially commercial real estate), and market economics.
SVB, like many banks, held a large balance of MBS, which Seeking Alpha reported was a contributing factor for the bank’s downfall:
Remarkably, $86 billion of [SVB’s “Held-to-Maturity”] portfolio was invested in long duration securities, mostly Agency issued mortgage backed securities…[with a] weighted average yield of…1.63%!!!
As low as the 1.63 percent yield seems to the author, MBS yields could dip deep into negative territory. The mortgages backing these securities are connected to assets like empty, unrentable office towers, warehoused apartments in dying cities, and unsold/unrented homes in sub-markets like Arizona and Idaho.
The Fed and many large banks and investors have significant MBS positions. Should there be a realistic audit of MBS value inclusive of languishing and dead assets, it could trigger a crisis that will make SVB’s situation seem trivial.
The First Step to Recovery
Whether it’s recovery from alcoholism or debt, the good news is there’s life after addiction. My admission of addiction to alcohol proved an entry point to a new, healthy life. Similarly, when the global finance industry admits its addiction to debt, it can set the stage for new, healthy economic structures.
Will SVB’s collapse lead to financiers and regulators hitting bottom on their debt addiction? Or will they keep binging, reaching for more handouts, printing more money, concocting more elaborate ways to obscure the impact of their recklessness? The answer to these questions depend on how bad things get and how fast the badness happens. But as the intervals between debt benders contract, as the excuses for fiscal malfeasance become more implausible, the bottom will get closer and closer. At a certain point or ruin, willingness to change will cease to be a choice and become something imposed by angry, hungry mobs.