Silicon Valley Bank: Lessons From Cocaine Bear
“Based on a true story”. Well. Not really. In reality, a bear was found dead after having consumed cocaine thrown from a plane by a drug smuggler. But that would make for a pretty boring film. So how about the bear gets high on the cocaine and kills a bunch of people? Yeah, that’s better. And it’s set in the 80s. Hilarious. And truly a fitting memorial to Ray Liotta.
No less bowel-loosening than a wilderness confrontation with a stimulant-crazed predator for Venture Capitalists and Tech Founders was last week’s collapse of Silicon Valley Bank. Over 50% of them used SVB and 97% of these deposits were not covered by FDIC insurance. For a couple of days it looked like they could lose the lot. This led to a bunch of tech bros claiming that the US banking system was about to collapse. This claim bears (ha ha!) as much resemblance to reality as the Elizabeth Banks movie does to the true story of Pablo Escobear.
SVB was a very weird bank. In terms of its concentration in one particular industry, the high level of deposits it took on, the low level of loans it originated, the way it completely failed to hedge the interest rate risk on government debt that it invested its deposits in, its lack of a Chief Risk Officer for 9 months, etc. SVB does appear to have been run incompetently. It rampaged high on deposited VC funds - its deposits 4 times as high as in 2016.
Mahatma Gandhi Robin Williams used to say that “Cocaine is God’s way of telling you that you had too much money”. Having $3bn sitting in an SVB current account is perhaps another divine sign that you have too much cash, that investment quality may have taken a back seat to investment quantity. Who can possibly say. The Lord moves in mysterious ways.
Almost as mysterious as the Lord, the Fed has moved to ensure that all depositors get their money back so the immediate crisis has abated. The bear suddenly feels very tired and cranky, very much in comedown mode. The US banking shares will take a pounding in the short term but will likely recover soon when 2008 fails to repeat. Regulation of “small” banks will be reviewed - if only because everyone has noticed that $250bn only counts as a small amount of money in the arithmetically psychedelic world of global finance.
What this means for the tech sector is less clear. Have the participants learnt anything about concentration risk, systemic risk, how easily groups of people can fall prey to blind panics, the importance of coordinated and collective action? Who knows. But I’m sure that there will be similar tests in the near future that will show us the answers to these questions.
“YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW — THAT IS THE PROPER REACTION TO A BANK RUN & CONTAGION @POTUS & @SecYellen MUST GET ON TV TOMORROW AND GUARANTEE ALL DEPOSITS UP TO $10M OR THIS WILL SPIRAL INTO CHAOS”