The Silicon Valley Bank Story, But With Jokes

Arguably funnier than Krugman!

Photo by SOPA Images courtesy of Getty Images.

***NOTE: This is one of those articles where I read a bunch of stuff that other people wrote, summarize what they said, and add jokes. My primary sources are Noah Smith, the New York Times, The Economist, and Paul Krugman. I encourage you read their work, subscribe to their publications, and buy their books, except for Krugman, who surely has enough money by now.***

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We all know how banks work: You give them money, and they pretend to have it. “Oh sure,” they say, “we'll keep your money right here.” And then they make a big show of putting your cash into a safe with one of those big, metal wheels on it. But the safe has a back door, and the bank sneaks your money out and does all sorts of nefarious stuff with it. Your money funds dogecoin-backed securities and mafia-run frozen yogurt shops and a counterfeit girl scout cookie ring. The five dollars your grandma gave you for your birthday is used to place a bet on a monkey kickboxing match in Indonesia. We agree to this in exchange for checks with our favorite sports team on them and a sweet .000002% interest rate.

The problems start when you go to the bank and ask if you can have your money back. At least, it’s a problem if everyone does that all at once. In the 1930s, bank runs were a big problem, and we all know why: notorious financial predator George Bailey of the Bedford Falls Building and Loan. This sociopath spent the decade rampaging across the country bilking gullible hayseeds out of every last swill-soaked dollar they had. Bailey's crime spree led the federal government to create the FDIC — pronounced “f-dick” (I hope) — and develop rules to increase bank solvency. Bailey himself was eventually brought to justice and given the electric chair.

Bailey’s last words were “Rot in hell, pigs.”

What happened last Thursday to Silicon Valley Bank was a bank run of the sort that has become rare in the years since Bailey's smoldering corpse was sent to hell. “Well I'll be!” exclaimed an old man sitting on a bench across the street from Silicon Valley Bank feeding ducks. “It's an old-fashioned Diamond-Dybvig bank run! I ain't seen one of those since aught-eight!”, the man said, referring to 2008. And that old man wasn't the only one drawing comparisons to 2008; CNN — very much the old-man-sitting-on-a-bench-feeding-ducks of the cable news world — ran a piece stating that the SVB collapse “has echoes” of 2008.

So: Is this 2008 all over again? Should you frost your tips and put on some low-rise jeans? Is it okay to listen to R. Kelly? The answer to all of those questions is a resounding “no". One major difference between 2008 and what just happened to SVB is that the financial institutions in the 2008 crash had woven an interdependent web of securities and loans backed by real estate, so when the real estate bubble popped, they were all in trouble at the same time. It’s not immediately clear how SVB’s troubles might be relevant to other banks, or if they are at all. And for the record: R. Kelly was a known predator as far back as the ‘90s — it’s just that we started caring about it in the 2010s.

One big difference between SVB and most banks is that SVB had a lot of deposits that weren’t FDIC insured. That’s because many of SVB’s deposits came from tech startups. If you walk into most banks and say “I need a three million dollar loan to build a prototype ‘smart spatula’ that uses machine learning to flip pancakes at exactly the right moment,” they will have a security guard politely throw you out of a window. But SVB became the go-to bank for tech startups for both loans and deposits. And because startups hold more cash than most individuals, a huge percentage of SVB deposits exceeded the $250,000 limit for FDIC insurance: 89 percent of its deposits were uninsured, while at a normal bank, about 50 percent of deposits are uninsured.

This made SVB particularly vulnerable to a bank run. Insured deposits make banks less susceptible to runs because people know they’re covered. If you’ve got $250,000 or less in the bank — and keep in mind that the average American savings account contains 28 cents and a coupon for half off a can of tomato paste — you’re fine. If your neighbor runs out of his house screaming “THE BANK IS FAILING!!!”, there’s no reason for you to even pause your episode of Project Runway; your savings are guaranteed. But if that happens and your deposit is not insured, then you’d better get in your car and speed to the bank, and try to run over your neighbor on the way there, because the last person to get there loses all their money. SVB’s depositors were basically involved in a high-stakes game of chicken, and the situation was not helped by the fact that they were also super-connected Silicon Valley types who were all in the same Slack channel and/or polycule.

Incredibly, SVB’s financial troubles were not the result of loans to businesses that make Theranos look like a blue chip stock. The culprit was boring, white bread, missionary-position fixed-rate bonds. SVB invested heavily in those bonds, and when interest rates rose, their value fell, which created big problems for SVB’s balance sheet. Interestingly, those problems do not seem to have been so enormous that the bank was clearly doomed; insiders say that the way the bank announced their losses is part of what sparked the run. I confess that I don’t totally know what this means — did the CEO attend a shareholder meeting wearing nothing but a barrel with straps? Did he yell “RUN FOR YOUR LIVES — WE’RE WRITING OFF 11 PERCENT OF OUR BOOK VALUE!!!”? I’m not sure, but obviously whatever he did was enough to spark a run.

As I publish this, the government is trying to find a buyer for SVB; Janet Yellen is presently next to the on-ramp for I-395 with a cardboard sign that says: “Bank 4 sale, parts still good”. If a buyer is found soon, then depositors will get most or all of their money, which would go a long way to concluding this episode with minimal damage. And, because I love America, I am willing to make this commitment: I will buy Silicon Valley Bank if I get 33 billion paid subscribers in the next 24 hours. That would give me enough money to buy the company. So, do your part and subscribe!

If a buyer isn’t found, things get tricky. The government could say: “Welp, depositors: You made a financial decision and it didn’t work out. Guess you weren’t a bunch of far-sighted visionaries after all!” There would be a certain brutal logic behind this choice; depositors could have chosen a safer bank, but they did what they did in exchange for — one assumes — better interest rates, more access to credit, and checks with anime characters on them (because, again: Silicon Valley).

But the government almost certainly won’t do this. And, in fact, on Sunday night several agencies issued a joint statement saying that they have taken actions that “fully protect all depositors”. To be clear: To the extent that this is a bailout, it bails out people who deposited money at the bank, not the people who ran the bank into the ground. The statement also says no losses will be born by the taxpayer, which I’m guessing means that they have some sort of stepped-up-FDIC-fees thing in mind. Not that any of this will stop people from yelling “BAILOUT!” — Trump will probably tweet “BAILOUT!” 50 to 100 times between when I hit “publish” on Sunday night and when this goes up Monday morning.

There are two big reasons to guarantee depositors' money. The first is that roughly $200 billion going up in smoke would be a hit to the tech sector. There are (likely overblown) concerns that some tech companies might miss payroll this week; panicked CEOs may be typing “How do I mollify 100 unpaid nerds?” into ChatGPT at this very moment. We all hate the tech sector — bashing tech is one of the few things Republicans and Democrats have in common — but a bunch of people having their savings wiped out is probably not what the economy needs right now.

The second and probably much bigger concern is that if people see SVB’s customers lose their money, they might start to wonder if their bank is safe. If they conclude that it isn’t, they could withdraw their cash — that’s how bank runs get started. And that’s why the government just issued a very authoritative-sounding statement that was probably issued on impressive-looking letterhead with a seal and everything: They want to tell people “You’re covered, nobody’s getting wiped out.” Of course, this was already true if your money is at a large, systemically important financial institution like First Bank of Evil or Goebbels/GreedCorp Financial. The government is trying to signal that your money is also safe at a medium-sized bank, like Billy Bob’s Down Home BBQ Pit & Financial Trust, which was popular where I grew up in Virginia.

Time will tell if SVB is a contained failure or the first movement in an avalanche. The government seems to be moving fast in an effort to — in the words of The Simpsons — “turn a potential Chernobyl into a mere Three Mile Island.” I have no thoughts on where this is headed; I am, after all, a humble Joke Elf who has learned how to barely understand stuff that other people write. But please: Mash that subscribe button, because once I get to 33 billion, I’m gonna solve this thing once and for all!