While most of us were going about our normal business this weekend, wealthy venture capitalists were preparing for the imminent fall of the U.S. banking system.
"ON MONDAY 100,000 AMERICANS WILL BE LINED UP AT THEIR REGIONAL BANK DEMANDING THEIR MONEY—MOST WILL NOT GET IT," prominent tech investor Jason Calacanis tweeted on Saturday. "THIS WENT FROM SILICON VALLEY INSIDERS ON THURSDAY TO THE MIDDLE CLASS ON SATURDAY—MAIN STREET FINDS OUT MONDAY." The tweet earned a fact-check note explaining that Americans' bank deposits are federally insured up to $250,000.
"WHO ELSE IS GOING TO BUY SOME GUNS, PROVISIONS, AND GASOLINE TOMORROW?" Calacanis said in a since-deleted tweet containing a shot from Mad Max: Fury Road.
Calacanis then called for the U.S. government to bail out depositors in failed banks, mainly in the technology sector, a sentiment that was echoed by other investors. "If you’re a conservative who doesn’t believe that the Fed should act decisively to stop this banking crisis, you’re being played for a sucker or a fool," investor David Sacks, who recently described himself as a "populist" with "working class views," tweeted. "The result will be the further concentration of Big Finance in a small number of politically connected firms."
On Sunday, their wish came true. The Biden administration announced it would step in to bail out depositors in Silicon Valley Bank (SVB) and Signature Bank, two financial institutions that collapsed last week. Another bank, Silvergate, which focused on the cryptocurrency industry, collapsed last week but placed itself in voluntary liquidation. The administration's move meant that the numerous technology startups that banked with SVB, and crypto companies that deposited at Signature—both of which were placed under federal receivership and now are up for sale—would have access to their accounts on Monday.
The decision to backstop depositors—at no direct cost to the taxpayer, Biden emphasized in a speech, because the money would come from a pool of fees contributed by banks themselves—and undertake the sale of the collapsed banks is one of the most significant financial events since the 2008 banking crisis that kicked off the Great Recession. The idea of 2008 repeating itself appears to be what the technology investors with money caught in the system were fomenting panic over.
It's notable that many of these investors are part of a powerful group that has for years argued for less government intervention, and less regulation, in industries like cryptocurrency and the gig economy. But when faced with the possibility of a financial disruption, the government is the first entity they turn to for rescue. And even as they attempted to portray a depositor bailout as also rescuing every mid-sized bank in the U.S., it's mainly an industry bailout. Bank shareholders will not be made whole, and the banks' top management will be replaced. The main dish is rescuing tech and crypto companies' continued operations, with a side of calming general unease about the safety of firms’ large USD deposits in banks.
What was actually at risk with the failure of SVB and Signature Bank, besides pure panic, was liquidity being immediately available to the companies that banked there. That meant startups and other firms would not have access to funds for at least the short term, forcing them to miss payroll for example. The affected companies included biotech companies in the U.S. and in China, but also things like Strongsuit, which is a service that plans wealthy clients' lives for them for a nearly $6000 annual fee. As for crypto, the widely-used stablecoin Circle had funds tied up at SVB, leading to a trading frenzy that caused it to lose its dollar peg over the weekend. Crypto exchange Coinbase also had funds tied up at Signature.
As Motherboard wrote on Friday, the collapse of these banks is a symptom of multiple ongoing economic shocks, inflation, and measures to fight inflation by causing pain in overheated sectors of the economy. Silvergate and Signature both focused on serving the cryptocurrency economy, which has seen multiple cascading collapses over the past year. The technology sector as a whole has also taken a beating amid the new, more conservative financial regime. These banks—their core industries being uniquely fragile and skittish at the first signs of economic downturn, having ridden the loose money gravy train until now—ran up against the current financial landscape of rising interest rates, which had eroded the value of securities that they could sell, as depositors pulled out in a panic.
The main risk to other banks—potentially with more diversified client bases—appears to be panic at this point. Despite the administration's moves on Sunday, shares in U.S. banks fell across the board on Monday morning.
Whether or not more collapses occur in the banking sector, it is crystal clear now that fractures from years of diamond-hardening stress have spread across the U.S. economy, and it appears that more pain is on the way as firms in diverse industries—from tech to automaking—gear up for more severe staff reductions and other belt-tightening measures.