When Biden’s Treasury Secretary, Janet Yellen, announced that all tech companies who deposited funds at SVB, even those who recklessly parked obscene amounts of money there without diversifying, would be made whole, the federal government sent a clear message to the American people: There are alternative rules if you are part of the favored class.
It’s not as complicated as they want you to believe. Silicon Valley Bank (SVB) is a bank for a bunch of tech companies in Silicon Valley. The bank invested deposits in mortgage-backed securities that go down in value when interest rates go up. When the Federal Reserve raised interest rates, SVB ran into trouble.
It turns out that many of the tech companies who parked money at SVB did so without thinking too much about it—and made some horrendous decisions. For example, the tech company Roku deposited a staggering $487 million at SVB.
The normal rules of the road are clear: The first $250,000 is insured by FDIC. After that, the customer is liable for loss. But Silicon Valley wanted a different set of rules for itself.
So on Sunday, Silicon Valley threw every argument in the book against the wall to see what stuck: Venture capitalists and startup executives who stood to lose their deposits at SVB screamed “bank run” from the rooftops. They said it was about supporting the “most innovative entrepreneurs” who helped “America compete against China.” They even turned “workers” into pawns to argue for bailouts for the venture capitalist class.
It was all bogus.
Raw self-interest masquerading as altruistic concern for the country.
A worker (C) tells people that the Silicon Valley Bank (SVB) headquarters is closed on March 10, 2023 in Santa Clara, California. Silicon Valley Bank was shut down on Friday morning by California regulators and was put in control of the U.S. Federal Deposit Insurance Corporation. Justin Sullivan/Getty Images
Silicon Valley’s dirty little secret? Venture investors could easily infuse fresh equity capital to make up for any balance-sheet losses. Yes, that involves painful equity dilution for founders and VCs, which means the CEOs and other VCs don’t make as much money when the company becomes wildly successful. And yes, capitalism includes accountability for poor financial decisions. But that’s how these losses should be recuperated, not at the taxpayer’s expense.
Moreover, many of those founders and venture-backed companies even received private benefits—such as non-dilutive venture debt—from Silicon Valley Bank itself, as an implicit condition for depositing their money with SVB. Ordinary Americans would have never enjoyed the upside of those special arrangements.
But facts be damned: Their gambit worked.
Behold this pure display of cronyism. The tech companies that petitioned President Biden to protect their assets are now changing the rules after the fact to help a select few who are favored by political actors.
It’s wildly unfair. But it’s worse than that, too: By selectively changing the rules after the fact for SVB, the U.S. government is now incentivizing greater risk-taking by corporations in the future, teaching large depositors at smaller banks that they can simply throw money at risky banks without diversifying or conducting diligence, just like many tech startups did here.
It’s a bailout, pure and simple—and not strictly of SVB, but of all of Silicon Valley.
For years, SVB and its cronies lobbied for looser risk limits by arguing that its failure wouldn’t create “systemic risk” and wouldn’t need special intervention by the U.S. government. Yet now the same cronies claim SVB was “systemically important.”
Yellen’s announcement exposes that as the farce it is.
Would Biden have bailed out the uninsured depositors of a no-name oil-and-gas bank in Oklahoma? Almost surely not. They would have made predictable arguments about the greed and recklessness of profiteering oil companies.
Don’t buy the argument that taxpayers aren’t funding this bailout, either. Recall that everyday customers will have to shoulder the burden of this bailout through higher charges as they top up the FDIC.
The lesson of the Biden bailout of SVB is clear: Bailouts for me, but not for thee.
Kudos to Silicon Valley for winning this edition of cronyism in America.
Vivek Ramaswamy is a candidate for the 2024 Republican presidential nomination and co-founder of Strive Asset Management.
The views expressed in this article are the writer’s own.