The general crisis and that of technology companies in particular affect other sectors of the United States economy: the recent collapse of Silicon Valley Bank (SVB)the 16th largest bank in the country and the largest to fall since 2008, is a sample of the recent instability of the sector, due to the little support of some of its investments.
As already written in these pages, the crisis of technology companies has multiple causes, including the end of “cheap” money that allowed to inflate expectations of questionable businessespecially from the crypto-financial world that was the first to collapse last year.
However, not all companies will be affected in the same way: the largest ones with reserves and concrete businesses only had to readjust to the reality of their income.
In between were numerous startups, a broad ecosystem of companies, some of which were still looking for sustainable business models and which the SVB supported more generously than other competitors. Now these startups suffer from the strangulation of a flow of money that seemed infinite and that had been maintained even during the pandemic. The SVB, with many clients in that category, could not resist a run against them.
Feet of clay?
The SVB, founded in 1982, quadrupled its deposits between 2018 and 2021: in January of this year it reached 190,000 million dollars. He made it up to tech boom. The bank, accustomed to clients who got money easily, not only lent to companies but to businessmen eager to show off their fortunes.
Last year startups suffered particularly: Sam’s FTX exchange crash Bankman-Fried, until then a darling of the establishment and used as a sign of the ethical solidity of the crypto world, general distrust increased. When FTX’s Pandora’s box, based on chaotic and discretionary accounting, was opened, it became clear that pundits, media, and others were gleefully buying (and selling) little colored mirrors.
Specifically, what happened with the SVB is that this endogamic link with the startups that allowed it to share its accelerated rise also affected its fall. When startups began to have problems repaying the loans, the SVB came out to sell at some loss the government bonds he had bought before the interest rate increase.
The situation at the moment was not serious, but when he informed investors of the news, some firms recommended to their clients that they withdraw the funds from the bank, which generated a run rapid that ended on March 10 with the landing of the Federal Deposit Insurance Corporation.
In an obscene gesture, bank employees received their annual bonuses just hours before the auditors arrived.
At first, the withdrawal of funds was only guaranteed for those who had up to 250,000 dollars. The startups assured that they would not be able to pay the salaries with their already damaged economies. One fintech, Circle, stated that close to 7 percent of its reserves were in the SVB, sending a chill down the spine of investors. USDCa “stablecoin”, that is, a cryptocurrency that, in principle, is stable thanks to the fact that it is backed in current currency, fell from 1 to 1 to 86 cents. coinbase it stopped allowing conversions of the cryptocurrency to dollars on the same Friday.
So things, regulators closed early the SignatureBank, with similar problems, to use it as a firewall. The following Monday calm came: as an “exception” and to avoid a bigger run, the regulators guaranteed that all the deposited funds would be recovered.
What is meritocracy?
As explained by US Senator Elizabeth WarrenWhat happened is a repeated story. In 2010, after the 2008 crisis (also paid for by the State), the Dodd-Frank Act was approved, which established greater controls so that a major financial crisis did not occur. In 2018, during the government of Donald Trump, the financial lobby again reduced these controls as a way to overcome the crisis. The SVB itself had contributed half a million dollars to finance the campaign.
Once again, the same banks that inoculate the system with instability are bailed out with promises of laws so that it does not happen again. Meanwhile the workers they observe that public money does not go to the most needy. Not even the beneficiaries of the system believe too much in it and flee at the first sign of alarm, generating self-fulfilling bankruptcy prophecies.
The discourses on meritocracy and individual responsibility for one’s own decisions are not credible if they are always the same ones rescued from their own “mistakes” which, while they worked, allowed accumulate riches. And if they are “wrong” they have the peace of mind that the State will pay for the party. The SVB is another sample and surely not the last.
