Tag: Libertarianism

Over the weekend, Silicon Valley Bank collapsed, putting billions of dollars in customer deposits at risk. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000. This means that deposits over $250,000 could be lost, causing harm to depositors. All of a sudden, libertarian venture capitalists and entrepreneurs — people who despise regulation and handouts/bailouts — are pleading for the Biden Administration to come to the rescue and bail out SVB.

Derek Thompson, a writer for Current Affairs, had this to say:

Silicon Valley Bank was widely used, as you might expect, by tech industry startups (as well as a bunch of California winegrowers), and startup types are not generally known for their belief in generous government handouts to those screwed by the free market. But libertarians quickly become socialists when they’re the ones who end up on the losing end of one of capitalism’s frequent crises. Billionaire Mark Cuban swiftly went from denouncing regulators to asking “Where were the regulators?” Tech industry leaders immediately started calling for the FDIC to ditch its $250,000 cap on guaranteed deposits and guarantee everything including the nearly $500 million that Roku held at SVB. Venture capitalist David Sacks said it was unfair for depositors to be punished for opening a bank account at an institution that failed, and that he wasn’t asking for a bailout but merely for the government to “ensure the integrity of the system.” CNBC reported on those noting “the irony as some VCs with notoriously libertarian free-market attitudes are now calling for a bailout.” (At Slate, Edward Ongweso Jr. has more on the “tantrum” thrown by venture capitalists who demanded that the government step in when SVB went under.) 

One of those notorious for his “free-market attitudes” is Larry Summers, the former Clinton treasury secretary and Jeffrey Epstein associate. Summers has previously had harsh words for those advocating a bailout for underwater student loan debtors. But when it came to Silicon Valley Bank, Summers said that the government should step in and “this is not the time for moral hazard lectures or for lesson administering or for alarm about the political consequences of ‘bailouts.’”

At Slate, Edward Ongweso Jr, opined:

If the technological innovation coming out of Silicon Valley is as important as venture capitalists insist, the past few days suggest they haven’t been very responsible stewards of it. The collapse of Silicon Valley Bank late last week may have resulted from a perfect storm of ugly events. But it was also emblematic of a startup ecosystem and venture-capital apparatus that are too unstable, too risky, and too unmoored from reality to be left in charge of something as important as the direction of our technological development.

As the startups that make up Silicon Valley Bank’s customer base scrambled to figure out whether they would be able to make payroll, a group of extremely online venture capitalists spent four days emoting on Twitter, ginning up confusion and hysteria about the threat of a systemic risk if depositors didn’t get all their money back, pronto. All weekend, they screamed that there would be an economic collapse, that they were concerned about the workers, that the Federal Reserve was responsible, that-that-that … until finally, on Sunday evening, they got what they wanted: the government promising full account access to all Silicon Valley Bank depositors.

By now, it is relatively clear what happened at Silicon Valley Bank. A pandemic bull run inflated the value of tech startups and the funds of investors, resulting in a tripling of deposits at the regional bank that specializes in the industry’s fledgling companies, from $62 billion at the end of 2019 to $189 billion at the end of 2021. SVB wanted to put that money to work, so it bought up U.S. Treasury and mortgage bonds that would take years to mature but serve as a relatively safe place to park its cash—as long as interest rates didn’t rise. They did rise, however, multiple times.

For over a decade, low interest rates have allowed venture capitalists to accumulate huge funds to give increasingly unprofitable firms with unrealistic business models increasingly larger valuations—one 2021 analysis found that not only were 90 percent of U.S. startups that were valued over $1 billion unprofitable, but that most would remain so. Give me tens of billions of dollars and a $120 billion valuation and someday, somehow, I will replace every taxi driver with gig workers paid subminimum wages—or robot taxis paid no wages—while charging exorbitant fares for rides, increasing pollution, and adding to traffic. Or not, and I will sell off all the science-fiction projects I’ve promised, but still fail to make a profit.

Over the last year, rising interest rates to combat inflation have meant less free money for science-fiction projects, pressuring investors to change their entire approach and actually fund realistic ventures at realistic valuations with realistically sized funds and deals. Drops in valuations meant smaller checks, which meant smaller deposits at Silicon Valley Bank, and more and more withdrawals as startups ran out of cash themselves. It also meant the bonds SVB bought were now worth less than when purchased, so they’d have to be sold at a loss to generate some liquidity, so that clients could withdraw their deposits.

….

This was dramatic, but in fact it should have calmed down everyone who had money there—SVB serviced every level of the tech ecosystem, from venture capitalists who stashed their Smaugian hoards there to startups that kept operational cash or payroll or reserves there. The FDIC, after all, has a clear protocol for this that it reiterated in a statement Friday morning: Get all the federally insured depositors their money by Monday, search for a buyer of the bank over the weekend, and if none was found, then auction off the bank’s assets and segments of operation.

And yet what followed were increasingly baffling online tantrums from prominent investors who either didn’t seem to understand the well-established process or were trying to shift blame for the momentary crisis onto anyone they could.

Early Saturday morning, the famous activist investor Bill Ackman used his Twitter Blue subscription to pen a 649-word rant predicting an economic apocalypse if every single depositor was not made completely whole. Mark Cuban expressed frustration with the FDIC insurance cap that guarantees up to $250,000 in a bank account as being “too low”; he also insisted the Federal Reserve buy up all of SVB’s assets and liabilities. Rep. Eric Swalwell, a California Democrat, joined the chorus, tweeting that “We must make sure all deposits exceeding the FDIC $250k limit are honored.”

That’s what federal regulators spent the weekend doing, invoking something called the “systemic risk exception” in order to get every depositor their money. (Stockholders in SVB will take a bath, and the institution’s leadership were all fired.)

And yet you still saw famous venture capitalists like PayPal co-founder and Elon Musk buddy David Sacks begging the Federal Reserve to force a merger or a bailout, then insisting he was not asking for a bailout while again asking for a bailout. This may have seemed a bit strange considering Sacks’ previous disparaging of handouts (specifically to Ukraine) and reactionary vitriol for liberalism itself. But then again, Sacks is a longtime associate of investor Peter Thiel, who believes in free markets but not in competition—in capitalism so long as the rules are attuned to satisfy his own interests first and foremost. It was Thiel’s Founders Fund, by the way, that helped kick off the bank run that sank SVB in the first place.

….

Venture capitalists tout themselves as investors who take on big risks by finding value—they provide capital to entrepreneurs lacking the revenue or credit to get traditional financing, but whose big ideas promise to change the world (and make some money along the way). In their self-conception, they would be entitled to white-glove service from the federal government in the wake of this massively inconveniencing event.

The reality, however, is that VCs are herd animals. The industry is overconcetrated—enmeshed, as Geri Kirilova at venture capital firm Laconia Group puts it—and structurally drives capital into a few well-connected hands who pile it into larger funds, cut it into larger checks, and hand it off to a tightly knit network of entrepreneurs and startups. This overreliance on established actors or social networks may seem like a shortcut when you’re risk-averse or unable (and unwilling) to vet every single prospective investment, but it has at times left venture capitalists unable to weed out well-connected or charismatic charlatans.

In a comprehensive case study of the VC industry, UC Davis law professor Peter Lee argues that these are structural deficits that fundamentally undercut venture capital’s ability to actually provide social utility. But venture capital isn’t just wearing blinders. It uses capital as a weapon to crush the competition and corner a market. It works to rewrite laws and regulations, as VC-backed firms tried to do for the gig economy and the crypto industry. Sometimes that means lobbying, as the industry did in the 1970s and 1980s to achieve reforms that cut capital gains taxes, made stock-based compensation attractive, and loosened pension regulations that give VCs access to new funds (and secure a massive subsidy from the government). Being loud and emphasizing their role in creating value has worked for VCs in the past. This past weekend was another example.

What does all of this have to do with SVB? By all accounts, SVB was the beating heart of the valley. In 2015, the New York Times reported that it serviced 65 percent of “all existing start-ups and many of the most prominent venture capital firms.” The bank’s collapse came out of a panic and a bad bet on interest rates, but it got into this situation because everyone involved seems to have helped build a risky system. VCs required portfolio companies to bank with SVB, SVB offered mortgages and wealth management services to VCs, and if SVB offered services similar to other banks serving Silicon Valley, then it likely made the terms of those deals incredibly attractive. First Republic Bank, for example, gave Mark Zuckerberg a mortgage at an interest rate that was below inflation—essentially offering a loan for free.

The risk introduced to SVB by overreliance on low interest rates in both its depositor base and portfolio investments is the same risk embedded in the core of the venture capital model. Profligate fundraising and investment have operated on the assumption that money would be cheap, allowing it to make increasingly exotic bets. Venture capitalists have had a decade of negative to zero real interest rates to build the future through their intrepid noses for value, so what did they give us? We got benefits largely limited to the realm of consumer goods and services, like cheap on-demand delivery and ride-hail (so long as you ignored the exploitation that powered them) and cheap streaming services (until they began hiking prices), namely. But what were the costs? Startups that revolutionized the militarization of our border and our migrant deportation operations, helped weaponize robots, offered A.I. services that exploit invisible underpaid workers in the Global South, and roiled urban transit, rental, and restaurant markets. These projects and others generated billions for investors who got in on an early fundraising round, but they also degraded the quality of life for people across the world.

Here’s the title for the Current Affairs article: Every Libertarian Becomes a Socialist The Moment The Free Market Screws Them. Ain’t that the truth?

Biden, of course, plans to make SVC whole, adamant that it is not a bailout. Sure, Joe, sure. And when more banks fail, as they most certainly will, their bailouts will deplete the FDIC fund. Then what? Biden will be forced to use taxpayer money to rescue failed banks.

Perhaps, we should be asking why SVB failed to start with. The very libertarians demanding socialistic remedies for SVB’s failure are the very same people who promoted and facilitated the repeal of the Glass-Steagall Act and the gutting of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Both Republicans and Democrats are complicit in the current spate of bank failures. They removed the regulatory guardrails meant to keep banks from failing. Will capitalists and the political class learn anything from SVB’s failure? Of course not. Regulation is the only solution to financial mismanagement. Congress should immediately restore the Glass-Steagall Act and restore Dodd-Frank to health. They won’t, because way too many of them are suckling on the corporate teat.

In the real world, libertarianism is a failed political philosophy. It fails the moment corporations fuck up and need taxpayers to bail them out. SVB will be made whole because not doing so would harm far more people than rich venture capitalists, bankers, stock brokers, and entrepreneurs. That’s what happened in 2008, and will continue to happen until we realize the financial sector will only do what they are made to do.

Bruce Gerencser, 67, lives in rural Northwest Ohio with his wife of 46 years. He and his wife have six grown children and thirteen grandchildren. Bruce pastored Evangelical churches for twenty-five years in Ohio, Texas, and Michigan. Bruce left the ministry in 2005, and in 2008 he left Christianity. Bruce is now a humanist and an atheist.

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