On the surface, there’s nothing very surprising about the Silicon Valley Bank debacle. A bank, located in America’s techno capital heart, has lots of money and nothing to do with it. Every business in Silicon Valley is stuffed with cash; the humdrum business model of making business loans at interest has no traction here.
Taking the least imaginative way out of this conundrum, the bank’s management dumped the lot into US government bonds, the safest investment on earth and, one guesses, headed for the golf course.
It turns out that the small print about investments going down as well as up is there for a reason. T-bills, as treasury bills are colloquially known, will not ever default, but their value does fluctuate. As interest rates climbed, so it fell. The bank’s customers got wind of this and asked for their money back; the bank announced its intention to raise $2.5bn to shore up its finances, precipitating an old-fashioned run on the bank, and the rest is last week’s history. SVB went bust and depositors were bailed out by the US government, while the UK subsidiary had to be rescued by HSBC, purchased for a token £1 after a weekend of furious government-level negotiations.
The inverse relationship between interest rates and bond values, while unfamiliar to the curious citizen, is hammered into the head of any banker in the opening weeks of their first internship. It was hardly news that central banks were raising interest rates and selling bonds. This had been a publicly stated policy since late 2021, even before inflation forced further rate rises. Central banks are not at all keen on surprises. How SVB’s executives found themselves in such a compromised position is a mystery.
More interesting is the vast concentration of tech company accounts in this one institution, as if the likes of were just not futuristic enough. Perhaps the density of dollars in Santa Clara, a city of palm trees and glass in the urban sprawl of the San Francisco Bay, is a side effect of something else, a particular kind of shared belief in a future that is bright, technological and above all wealthy.
All that money with nowhere to go – a problem unique to this particular time and place in the world, the tail of a period when money from shareholders has been pouring into the bank accounts of technology entrepreneurs. The sums involved are staggering. In 2021 technology firms raised $345bn from venture capital firms and much of it went into accounts at SVB. Deposits rose to $189bn. Before the collapse, businesses still held $174.5bn on deposit. In the UK, tech aspirants crowded into SVB’s UK subsidiary, hoping perhaps for a little West Coast sparkle.
The money comes from venture capital funds, specialist investors in early-stage technology. The last decade has been good for the ‘VCs’. These too are located in the Bay area, in Palo Alto, especially along Sandhill Road. Such firms and the opportunities they represent are inaccessible to the general public. They are conduits for high-end wealth, closely tied by geography, education and social caste, the Valley accumulating capital all the while.
Although it is built around myths of a utopian future transformed by technology, the Valley’s financial ecosystem is held in place by something much more concrete: the initial public offering (IPO). This is the moment when the firm finally becomes a publicly traded corporation, its extraordinary value made concrete by the subscriptions of pension funds and private investors, all eager to get a share of the future magic. But the real gains have already been made, and in the current climate there is not much magic left. One US tracker fund focused on technology IPOs fell 50 per cent in the first nine months of 2022 as big-name technology firms struggled in the stock market.
All these investments require faith: in the technological utopia, in the coming IPO, in the creditworthiness of the bank. In March, that faith seemed to fail.
A bank run is the perfect illustration of what the sociologist Robert Merton called a self-fulfilling prophecy. Banks never hold enough liquid cash to cover their liabilities, and a flurry of panicked depositors trying to get their cash will bring any bank to its knees. It takes collective action to save a bank and here, at least, Silicon Valley’s entrepreneurs acted in character, seeking self-preservation at the expense of the collective. Their meritocratic utopia is a dog-eat-dog world.
We have since seen a bailout takeover of the New York-based Signature Bank, which somehow combined a close relationship with the Trump dynasty and a public association with the cryptocurrency world, and the eventual demise of Credit Suisse, rescued by UBS in a 3 billion Swiss franc deal. Panic spreads, and there are times when it is the duty of the regulator to step in and demonstrate that the system is solid, if only because the government says so. The modern financial system exists, at least in part, only because the government decrees it, whether through the upholding of contracts, the granting of the corporate body, the insistence on taxes paid in a state currency, or the political will needed to encourage a banking giant to envelop a struggling peer.
Silicon Valley’s utopian myth, cloned in the UK and elsewhere, has been built around the idea that clever coding and benevolent tech geniuses would somehow free us from the clutches of the state. SVB itself had lobbied for lighter regulation, claiming that it was too small to pose a systemic risk to the economy. What SVB shows is that the Valley’s myth is far more cynical. Its freedom is not a techno-utopia for all, but a licence to skim benefits from society even as that society underwrites their existence. And, as Washington hurries to ‘backstop’ the deposits, we can see that it believes the same.
Philip Roscoe is Reader in Management at the University of St Andrews.
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