Is Silicon Valley Bank the turkey in the coal mine? Elon Musk and the short sellers think so
Did the VCs spark a run on the bank? Yes. As a founding member of the SVB team, do I blame them? No. SVB has become the symbol of the end of the banking system that no one trusts.
UPDATE 5/16/23 — SVB Greg Becker testified to the US Senate in first public remarks since the bank collapsed 10 weeks ago.
The Senate’s hearing was the first time lawmakers had the opportunity to grill Becker, who has been criticized for failing to address risk-management issues that regulators had flagged. Some lawmakers also rebuked Becker for dishing out bonuses and questioned whether he and other executives profited from stock sales (noted below) ahead of the bank’s collapse. Here are some key excerpts from the Senate hearing.
“I truly do believe that with the information we had at the time when we made our decisions, that we made the best decisions that we could have,” — SVB CEO Greg Becker
“Mr. Becker, why did you ignore admonitions from regulators? There is a simple answer, the same answer we find for most big bank failures — because the executives were getting rich. Your version of events blames SVB’s failure on too many interest-rate hikes, a social media-driven bank run, the closure of the much smaller Silvergate Bank, and the regulators for being slow to highlight its longstanding problems. It all sounds a lot like the dog ate my homework.” — Sherrod Brown, Senate Banking Committee Chairman, (D-Ohio)
“Mr. Becker, you made a really stupid bet that went bad, didn’t you? And the taxpayers of America had to pick up the tab for your stupidity.” — Sen. John Kennedy (R-Louisiana)
“So in 2022, in particular, you paid yourself a $1.5 million cash bonus even as the value of the company you were managing declined by two-thirds. That’s not bad work if you can get it.” — Sen. JD Vance (R-Ohio)
“I’m shocked at the complete negligence and disregard for the economic realities that this country was facing under your leadership.” — Sen. Tim Scott (R-SC)
Mr. Becker, who earned almost $10mn in 2022, stopped short of committing to returning any money but said he would “co-operate with the regulators as they go through the process to look at that specific area”.
Senators also blamed lax regulation and regulatory failures, as did the Federal Reserve, which issued a 114-page report blaming both SVB and lax regulation for the bank’s collapse in March.
One of the most thrilling events of my young career was driving over to a new startup, now a public company called Cadence Design Systems (CDNS NASDAQ), to pick up a $2 million check to deposit in the then 6-month-old Silicon Valley Bank. The $2 million represented a VC investment into the company by the late Don Lucus, famous for giving Oracle founder Larry Ellison his only VC money (which is why the boot-strapping Mr. Ellison remains one of the wealthiest people on the planet).
To be sure, my boss Roger Smith, the founding CEO of SVB, was just delighted. This single deposit bumped up the bank’s assets a whopping 10 percent to $20 million. Under Roger, the late great Ken Brenner and I were his early wide receivers of business development — the Jerry Rice and John Taylor of banking — and Roger was our Joe Montana. Under his tutelage and powered by his Rolodex, we and the growing team of cowboys that followed (shout-out to bank cofounder Old Lady Titus, Ms. Butler, The Log, Lambo, Correy, The Ped, Harvey, the illustrious Leslie Leonetti, who watched all our backs, and, of course, the late Bill Biggerstaff, another SVB founder who named the bank), created a culture that powered SVB for the next 40 years.
Roger’s formula for success was brilliant but not that complicated. Follow the top VCs, leverage their due diligence to identify the best startups, and accept that those companies were losing money — on purpose. The job of an early-stage startup is to invest their VC dollars into building their intellectual property and positioning themselves for explosive growth. Roger also taught us VC backed companies have a third source of repayment on their loans — more VC money. The rest of the banks of our time had signs in their windows saying, ‘Talk to us when you are profitable.’ It was like shooting fish in a barrel. For the five years, I was at SVB, we were on record as the fasted startup bank, and we never wrote off a loan to a VC-backed company.
Roger’s other genius was to get in on the upside of supporting these companies. While Glass-Stegall prohibited commercial banks from making equity investments with depositors’ money (a smart rule), there was nothing wrong with giving out cheaper loans with no fees in exchange for stock warrants. So, for example, I received loan committee approval for a prime rate, asset-backed, $1 million line of credit to Oracle competitor Sybase, with no fees and a stock warrant equivalent to a $300,000 equity investment. Five years later, when Sybase went public, that warrant was worth $15 million and helped maintain that bank’s record of quarterly profit growth through a Silicon Valley real estate downturn.
One of the hidden assets the regulators and new owners will find when they sort through Silicon Valley Bank’s wreckage is equity positions in over 5,000 VC-backed companies that resulted in the form of the initial warrants-for-fees program developed by Roger and the original team.
In return for our support for VC-backed companies, we built a loyal and symbiotic relationship with the top investors on Sand Hill Road. Sequoia Capital, Kleiner Perkins, IVP, Hummer Winblad, and Draper Associates were all part of the SVB family. As Mr. Lucas demonstrated, when they funded a startup, they would tell their company founders to go down to SVB and deposit the check. We could relate to entrepreneurial companies because we were a startup too.
In addition to minding your deposits, we connected our clients to a broad network of companies and investors they could learn from and partner with. As Michael Moritz of Sequoia Capital once observed, ‘Who you know, what you know, and when you know it is the currency of Silicon Valley.’ In retrospect, was it a startup’s most secure financial strategy to keep their money at a startup bank? Probably not. But if it were going to happen, it would happen in Silicon Valley, where sharing risk is the pathway to prosperity.
The once mighty Silicon Valley Bank was, poof…gone!
The impressive part of the story is SVB was able to create, maintain and prosper from its initial dominant market position for 40 years. Then, in just 72 hours, the SVB dream and all the hard work it took to make it come true evaporated.
The frantic 72 hours that crashed three banks
On Tuesday, March 7, SVB CEO Greg Becker gave a bullish report on SVB’s status to investors, Wall Street analysts, and technology executives at Morgan Stanley’s annual technology conference in San Francisco. ‘In the confident, almost bombastic, style that was his signature, Mr. Becker told the audience that the tech industry’s future was sparkling — and so was Silicon Valley Bank’s place within it,’ according to the New York Times.
On Wednesday, March 8, SVB announced that it had sold over $21 billion worth of securities at a $1.8 billion loss, borrowed $15 billion, and would hold an emergency $2.25 billion treasure stock equity sale to shore up its balance sheet. The plan was to sell $1.25 billion of its common stock to investors, $500 million in convertible preferred shares, and $500 million of its common stock in a separate transaction to the private equity firm General Atlantic. Despite this announcement by the bank, Moody’s Investors Service downgraded SVB’s credit rating on the bank’s long-term local currency bank deposit to Caa2 from A1 and issuer ratings to C from Baa1. Crypto-friendly Silvergate Bank also announced it was winding down its operations.
On Thursday, March 9, SVB’s stock plummeted 60 percent, raising a red flag that spurred several VCs — led by partners at Peter Thiel’s Founders Fund, Union Square Ventures, Y Combinator, and Coatue Management — to urge their portfolio companies to pull their SVB deposits. By the close of the day, SVB lost $42 billion in deposits, leaving the bank with a negative cash balance of almost $1 billion and an expectation that another $100 billion of deposits would be withdrawn the next day.
On Friday, March 10, the value of SVB’s shares plummeted until trading was halted. The 40-year-old, $209 billion bank abandoned efforts to raise capital or find a buyer. S&P Global slashed credit ratings on SVB to junk status and said it expects SVB to enter bankruptcy. The California Department of Financial Protection and Innovation seized SVB and placed it under the Federal Deposit Insurance Corporation (FDIC) receivership. The last US bank failure of this size was Washington Mutual in 2008, which had $307 billion in assets.
Banking regulators spent the weekend trying to sell SVB. The sales offer was acquiring SVB’s assets, business, franchise, etc., assuming its deposits, and zero-out the shareholders and bondholders. Still, the expected ‘white knight’ never materialized, as General Atlantic, JPMorgan Chase, and Bank of America, amongst others, all turned down the opportunity to acquire the bank.
On Sunday, the US authorities pledged to fully backstop SVB and protect insured and uninsured customer deposits to calm market jitters. In addition, the Treasury Department, Federal Reserve, and FDIC jointly announced that efforts to protect all depositors were aimed at assuring and strengthening confidence in the banking system.
On Monday, March 13, Signature Bank and Silvergate Capital became casualties of the SVB bank contagion and were shuttered by regulators. Both banks’ insured and uninsured customers were covered under the same ‘systemic risk exception’ enacted in 2000 that SVB’s customers benefited from. HSBC UK also announced that it had agreed to acquire Silicon Valley Bank UK for £1, at no cost to taxpayers and with depositors fully protected.
On March 26, 2023, the FDIC announced that First Citizens BancShares acquired SVB’s commercial banking business. First Citizens bought around $119 billion in deposits and $72 billion of SVB’s loans discounted by $16.5 billion, with approximately $90 billion of SVB’s securities remaining in receivership. SVB’s 17 branches reopened under the First Citizens brand the next day.
What the f*ck happened?
What happened is a testimony to the power and efficiency of the highly networked global Silicon Valley. In March, when SVB announced it was taking a $1.8 billion hit for mismanaging its investment portfolio, Founders Fund emailed their company founders saying, ‘There is no downside to moving your deposits out of SVB.’ After the email leak, social media blew up, word spread like a California wildfire, and within hours, the VCs and thousands of their portfolio companies made a run on the bank to the tune of $42 billion in cash. This asset meltdown prompted the Feds to take control of the bank.
The SVB clients that didn’t get their money out, such as Circle ($3.3 billion), Roku ($487 million), and now defunct crypto-lender BlockFi ($227 million), couldn’t imagine that the venerable SVB could ever disappear overnight. Even multi-billionaire Peter Thiel, the founder of the VC fund that was the first to spook the market and initiate the stampede, had a good hunk of personal cash ($50 million) ‘stuck’ in SVB.
‘The people whose calls to withdraw funds triggered the bank run are successful, wealthy, and careless. If leaders in Silicon Valley are unwilling to support SVB, one of their own and a uniquely valuable partner in their ecosystem, it is safe to assume their business goals would not consider, much less act for, the greater good.’
— Roger McNamee is a co-founder of Elevation Partners and author of Zucked: Waking Up to the Facebook Catastrophe
Many in Silicon Valley feel the VC community grossly betrayed the bank they depended on for many years. As much as it might pain me to say this as an SVB alumnus, as an entrepreneur, I disagree entirely. If you turn the tables for a moment, would SVB continue to lend money to a startup running on fumes just because you feel loyalty to their VCs? No. Entrepreneurs take enough risks investing cash in their core business proposition. Putting your company’s cash at unnecessary risk outside your core focus is not on the to-do list.
The buck, of course, always stops with the CEO. Greg Becker, the weakest of the three CEOs who followed Roger, was an irresponsible leader. Under his stewardship, he failed every SVB stakeholder — the clients, employees, stockholders, and the global tech community. It’s in much the same way that Sam Bankman-Fried failed the stakeholders of FTX. (Learn everything you need to know about why FTX failed in my last post.) Both companies had strong market positions and thriving businesses. Both should also still be standing today.
The following points summarize the significant management and communication mistakes that destroyed the SVB success culture established by its founders and led to the bank’s ultimate collapse.
A 2021 Fed report foretells SVB’s fatal cracks
SVB’s grossly misguided strategy, and increasing deposit risks, were being called out a good two years before the collapse. A 2021 Federal Reserve review of SVB found several deficiencies in the bank’s risk management procedures and, in retrospect, foretold the run on the bank. Fed officials determined the SVB officers were betting on flawed models based on the faith rising interest rates would increase the bank’s interest revenue enough to maintain the bank’s financial stability. After these warnings, SVB’s management failed to address and fix the six citations issued by the Fed, and by July 2022, the bank was placed under a full supervisory review.
In an autumn 2022 meeting, San Francisco Fed officials met with SVB senior leaders to discuss the bank’s ability to raise cash in a crisis and possible exposure to losses as interest rates rose. By early 2023, the Fed placed SVB in a ‘horizontal review’ of its risk management procedures. In other words, the Feds were circling the wagons.
Why SVB’s management didn’t make it Job #1 to raise additional capital as early as 2021 to hedge against rising rates they were warned about is baffling.
SVB was ‘Functionally bankrupt by July 31, 2022’
Banks make money bundling customers’ deposits they get for free and investing them into longer-term interest-paying assets, including personal and commercial loans and bonds that, on average, pay 2 percent interest in today’s market. After almost a doubling of deposits in 2021, SVB disproportionately poured $80 billion of its $175 billion (54 percent of deposits!) into safe but very long-term US Treasury bonds and agency mortgage-backed securities, accounting for them on a hold-to-maturity basis. SVB’s long-term securities shot up from $16.5 billion at year-end of 2021 to $98 billion at year-end of 2021. Shortly after that, with inflation fears brewing on March 17, 2022, the Federal Reserve announced the first of EIGHT interest rate hikes, sending the borrowing rate to 4.75 percent. This caused the market value of SVB’s bonds to decrease precipitously, along with the interest hikes in 2022 and 2023. Reuters reported the SVB portfolio yielded an average 1.79 percent return in its final week of life, far below the 10-year Treasury yield of around 3.9 percent. The result was SVB’s bonds lost over $15 billion in value in a year.
‘I identified six red flags in SVB’s public financial statements since 2021. SVB was functionally bankrupt by July 31, 2022. SVB’s second quarter of 2022 10-Q shows the cost of their ‘hold to maturity’ securities was $98.7 billion, whereas the fair value was $84.5 billion. Had these unrealized losses of $14.2 billion been charged to equity, SVB’s equity would have fallen from the reported $16.2 billion to $2 billion! Things predictably got worse when the 10-Q for the third quarter of 2022 was filed, showing unrealized losses on the HTM portfolio of $16 billion ($93.2 billion of cost minus $77.3 billion of fair value) relative to book equity of $15.8 billion. At this point, SVB had zero equity. This trend was not at a loss to short sellers. NASDAQ data reveals short-selling jumps by 55 percent to 638,000 shares on January 31, 2022, and again by 26 percent to 805,000 shares on February 15, 2022. Why did no monitor in SVB’s governance system — the management, the board, the auditor, the credit rating agency, sell-side analysts, proxy advisors, or rating agencies — call SVB’s woes out earlier? Only the short sellers got it right.’
— Shivaram Rajgopal, Professor @ Columbia Business School, with a focus on academic research of interest to CFOs and securities regulators
Adding to SVB’s perfect storm, after reaching peak funding in Q4 2021, VC began trending down in 2022, along with NASDAQ’s 30 percent dip. Less VC money means private company SVB clients’ withdrawals start exceeding their deposits. To correct this outflow, the bank tried to borrow from the Fed. Despite regulators’ assistance in transferring collateral from various sources, SVB did not meet its cash letter with the Federal Reserve. Out of options, the demand for deposits forced the bank to sell some of its bond investments at a whopping $1.8 billion loss. By this point, the bank was more or less insolvent, given that the bond losses had wiped out almost all of SVB’s equity capital.
“We do not believe a global banking crisis is on the horizon. It’s all about having a balanced risk appetite and return aspirations. Challenges emerge when one gets out of sync with the other and the pursuit of profit at the expense of a managed risk appetite gets too high. That’s the lesson on SVB.”
— Noel Quin, HSBC CEO
Concentration of deposits
A great irony of the SVB story is its competitive advantage of owning over 50 percent of the VC-backed company market has always represented one of its most significant risks. The global Silicon Valley market is a highly connected and deeply networked world that shares investors, lawyers, and accountants, attends the same events, and reads the same tweets and blogs. And like any highly incestuous markets, they often move in herds. The SVB deposit base, therefore, represents a high-risk concentration of assets, is more susceptible to wide swings in deposit totals, and, as we all just witnessed, a run on the bank.
Another dramatic anomaly of the SVB base is that over 90 percent of their deposit accounts exceeded the FDIC deposit insurance cap of $250,000. In comparison, 50 percent of First Republic Bank’s deposit base would be covered by FDIC insurance, representing a much less significant risk. These deposit risk factors are mentioned in the footnotes of SVB’s public financial statements and have always been the case since inception.
In the bank’s first five years, Roger would announce the bank’s deposit totals every morning in a company-wide conference call. In the old days, SVB took these deposit risks very seriously and was always on high alert. But, once again, the apparent lack of attention to the bank’s deposit risks is one more indicator that SVB’s management and board were just not keeping their eye on the ball.
“I think that if we’d been allowed to open tomorrow, that we could’ve continued — we have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit, and I think the bank could’ve been a going concern.” — Former Congressman Barney Frank and Signature Bank board member.
The Fall of the Crypto Banks — Signature Bank and Silvergate Capital
Signature and Silvergate were old-school banks that transformed into the two primary banks serving the fledgling crypto industries. SVB took a more cautious view of this sector, full of big dramatic highs and big crashes. Established in 2001, New York-based Signature had more than $110 billion in assets at its closure. Silvergate was founded in 1988, but in 2018 raised $214 million from high-rolling crypto-friendly VC funds such as Digital Capital Group and Galaxy Digital, and another $400 million in an IPO (2019) and secondary public offering in 2021. The two banks earned their reputation by offering crypto projects real-time, 24 hours a day, seven days a week instant settlement services, a key advantage for always-open crypto markets. As a result, the banks enjoyed impressive growth in crypto industry-related deposits by providing this service.
Signature represented some exposure to crypto companies, most significantly, a $240 million corporate cash balance from the leading crypto exchange Coinbase (NASDAQ, COIN). Signature also suffered from the same 90 percent-plus concentration of uninsured deposits risk as SVB and was swept up in their own run on the bank. This led regulators to seize the bank out of fear of broader contagion.
Signature executives believed they had enough capital to meet all withdrawal requests. The decision to close Signature surprised its managers, who found out shortly before the public announcement. The bank faced a torrent of deposit outflows on Friday, but the situation had stabilized by Sunday.
Some crypto skeptics argue this banking crisis was kicked off by contagion from crypto. The logic: Crypto exchanges banked with Silvergate, the crypto exchanges lost money, and their bank deposits plummeted, which sparked a run, and it spread from there.
Poor communications strategy and people noticed
It appears that Mr. Becker planned enough ahead of the bank’s collapse to sell his $3.5 million of bank stock while it was still worth something. One would think Mr. Becker would have also spent equal time righting the bank’s course to maintain SVB’s stock value for all stockholders. The minute the Feds are all over you like they have been all over SVB since 2021, with red flags flying out of their pockets, it’s time to raise some cash. A strong balance sheet is the only thing that matters when navigating the headwinds of a recession and transitioning industry and economy. Of all institutions, SVB should know better than any that the tech biz gets hit extra hard in downtimes, especially with its newfound dependence on consumer spending and advertising. It’s a total mystery why SVB’s management failed to act much sooner.
Still, even assuming that SVB invested too much short-term money into long-term investments and failed to raise the additional capital needed, a reasonable case could be made that SVB could have avoided the bank run and still be standing. With a carefully constructed, properly timed, and well-executed communication plan, SVB could have avoided the all-out panic that ensued.
Instead, SVB’s decided to make two financially significant announcements on the same day that crypto-friendly Silvergate Bank announced it was winding down its operations. This misstep was likely not intended, but it illustrates how disconnected SVB became from the market it was founded to serve. Silvergate’s run on deposits was driven by crypto industry fears after the FTX crash, and SVB’s issue was a wrong bet on where interest rates were going. But the struggles of both banks became conflated. When the news broke, it signaled that all banks focusing on startups and venture capitalists were taking big hits because of the down VC market and some high-profile crypto flame-outs.
Of all the three banks that died, Signature was probably the most innocent of the three and got unnecessarily caught up in the contagion that unnecessarily took them down.
The second stumble was the convoluted press release SVB put out, which was so completely tone-deaf that it was tragically comical. It basically said: ‘Hey, we want you to know that we are about to try to raise $2.250 billion, blah, blah, blah. ¶Oh, and, umm……BTW, we just took a $1.8 billion hit for selling some bonds for a loss. Have a great day!’
‘My ask is just to stay calm because that’s what’s important. Silicon Valley Bank has been a longtime supporter of you, the venture capital community companies, so the last thing we need you to do is panic.’
— Greg Becker, former CEO of Silicon Valley Bank
It was so not assuring that even the remarkably detached SVB managers could feel the market vibe. In a last-ditch effort, as Tech Crunch’s Connie Loizos observed on the day this was all coming down, CEO Greg Becker hopped on a Zoom call to utter words clients, employees, and stockholders never want to hear from their bank president, ‘The last thing we need you to do is panic,’ he told thousands of viewers, none of whom were allowed to ask questions. One can easily imagine how any VC on the call with a portfolio company with over $250,000 in the bank put the call on mute and sent an email blast with the subject line: ‘Get your money out of Silicon Valley Bank NOW!’
It’s like Mr. Becker was trying out for the George Baily role in the Christmas fantasy It’s a Wonderful Life, only to forget that was seventy years ago, and Jimmy Stewart got the part. Today, when you’re the president of a bank with the smell of a deposit run in the air, it’s not so wonderful. First, you must contend with a relentless stream of 24/7 Tweets, blog comments, podcasts, and sensationalized news. This requires sitting up straight, shoulders back, and fending off the skeptics by putting your best numbers and assumptions on the table and making your case. You also must have the courage to be interactive and take questions; otherwise, you come across as weak and afraid.
It’s your time to get on CNBC to articulate your conservative yet confident path to better times. If not, there is a thing called mobile banking where clients worldwide can transfer as much money out of your bank in split seconds with a few taps of their fingers — which is precisely what happened.
A board chosen based on ‘diversity’ rather than qualifications led to a lack of expertise in governance skills
Before the bank’s collapse, SVB SEC filings touted its board was ’45 percent women’ including ‘1 black,’ ‘1 LGBTQ+,’ and ‘2 veterans.’ However, while the make-up of SVB’s board was ‘diverse’ regarding gender, sexual preference, and having one person of color, politically and ideologically, the board represents only one voice. The outside board members primarily consist of prominent Democratic Party donors and political operatives.
Of the nine outside board members, only one, Tom King, has any significant banking experience. And sadly, Mr. King’s background was never fully utilized. Rather than serving on the audit and risk management committees, where he could better review the risks that led to the bank’s undoing, Mr. King was relegated to the board’s compensation and human capital committees.
A ‘diverse’ board with an identical political activist agenda:
Kay Matthews, the board of directors chair, has been on the SVB board since 2010.
Greg Becker, the CEO, has been on SVB’s board since 2011. He was also a Class A director, representing district bank members for the Federal Reserve Bank of San Francisco. So being on the regulator’s board must have given him access to macro information and some sense of where interest rates are headed.
Tom King, Barclay Banks’s former CEO of investment banking, was the only member of the SVB board from the financial industry, despite this history of relevant experience.
Phil Cox, who sits on the governing board for NextGen Cyber Talent, a nonprofit that ‘provides a platform to increase diversity and inclusion in the cybersecurity sector.’
Kate Mitchell is the ex-COO of EY Assurance and Advisory Service, who also cofounded the National Venture Capitalist Association initiative, Venture Forward, which ‘focuses on advancing opportunities for women and underrepresented minorities in the venture ecosystem.’
Mary Miller, a former Under Secretary of Domestic Finance for the U.S. Department of Treasury who ran in the 2020 Baltimore mayoral race as a Democrat, also served on the board. In her position at Treasury, Ms. Miller helped implement the Dodd-Frank financial reform legislation that set bank regulations, which SVB is now being accused of skirting.
Garen Staglin, a board member since 2012, is a prolific Democratic donor and founder and winemaker at the Staglin Family Vineyard situated 15 minutes from former House Speaker Nancy Pelosi’s Napa Valley estate.
Eric Benhamou, the founder of an investment firm focused on high-tech companies, has been on the board since 2005
Richard Daniels, on the board since 2020, is the ex-CIO at Kaiser Permanente.
Joel Friedman is the ex-President of Business Process Outsourcing at Accenture and has been on the board since 2004.
Despite the Federal reprimands and red flags, SVB auditor, KPMG, gave the bank a clean bill of health in their 10-K for the year ended December 31, 2022. KPMG will invariably argue that they checked for compliance with GAAP and justify giving SVB a clean audit opinion; it still represents yet another check in the system that appears to have failed the stakeholders. Notes astonishingly, two weeks after their audit, SVB was also deemed in ‘sound financial condition,’ according to the California Department of Financial Protection and Innovation, even though a growing number of short sellers began to target SVB earlier in 2022.
Separation of political activism and the Workplace
If you want to succeed at your position in a Silicon Valley company, it’s helpful to think like a professional athlete. You need to stay on top of your game and focus on what needs to get done to help your team win, and excellence and competence are what wins. That is what you are paid to do and nothing else. When you walk in your company’s door, you deserve to be treated with dignity and respect. When you walk out that door, whether to pray at your local mosque, take a road trip to a gay pride parade, or sit ringside at a UFC fighting match — it’s nobody’s business. There’s work time and personal time, and we should honor both.
These bedrock principles are the foundation of a positive and successful company operation. You can only show love to your customers by first showing love and respect to each other. Unfortunately, there was a growing trend in Silicon Valley of managers creating workplace ‘mission statements’ with non-business related company advocacy initiatives based upon their own social ideologies and political agendas with no consideration that other team members might not share the same worldview. Such political impositions by managers are deeply harmful because they cause anxiety and conflict within the workplace. People who do not embrace their boss’s zeitgeist become afraid to speak up because they do not want to risk being alienated or fired. This trend led to a huge spike in mistrust of several technology companies and grossly underperforming operations.
A Verge Tech Survey in 2021 showed a mere 28 percent of Twitter’s users said they would be disappointed if the company disappeared, down from 33 percent in 2020. More ominously, until Elon’s buyout rumors started spreading on April Fools Day, 2022, Twitter’s stock price was trading below its 2013 IPO price. It had become the definition of a failed business. Ironically, Twitter was forced to sell the company, and the only willing buyer of substance was their free-speech-driven nemesis. It’s been no better at Facebook. The trust in their brand is in the gutter; their stock is down at its 2015 valuation, they have laid off 21,000 (25 percent) of their employees since last November, and they have a business model like they are still playing ball in the 00s.
‘We have cut our staff by 80 percent. It turns out you don’t need that many people to run Twitter if you are not trying to run some glorified activist organization and don’t care much about censorship. If you think about it, Twitter is a group text that scales. You really do not need that many people to run it. It was insane.’
— Elon Musk, Chief Twit, Twitter
Of SVB’s five stated ‘values’ on their website, the first is ‘We start with empathy for others,’ and the second is ‘We embrace diverse perspectives.’ Some might observe that principle number one is not true because it’s harmful to stifle people’s voices who disagree with the management’s social initiatives. The second principle was clearly not practiced. All this contradiction and hypocrisy led to a dysfunctional and distracted workplace.
As an example, SVB’s head of risk management, Jay Ersapah, reportedly spent a good amount of her time spearheading internal LGBTQIA+ bank initiatives, such as a month-long Pride campaign, maintaining a blog on mental health awareness for LGBTQIA+ youth, and instituting a ‘safe space’ for employees to share their coming-out stories. She also participated in panels worldwide on subjects that had nothing to do with her role or expertise as SVB’s risk manager. And all these initiatives and time commitments were made as the bank spiraled toward collapse.
Let’s be clear: Ms. Ersapah has a perfect right to position herself as a queer professional woman born into an immigrant family, speak on her experiences, and mentor like-minded people. But her number one job at the bank was as head of risk management. Therefore, these independent advocacy activities should neither be underwritten by the bank nor imposed on SVB’s employees and customers.
Apple CEO Tim Cook joined the company in 1998 and kept his sexual preferences and the rest of his private life to himself ‘to ensure it would not distract from business interest.’ In June 2014, Mr. Cook chose to discuss his sexual preference in an editorial for Bloomberg Business, saying, ‘I consider being gay among the greatest gifts God has given me,’ as a personal statement. Apple cofounder Steve Jobs was equally careful to protect his private life fearlessly and never conflate his prominence as a consumer technology leader with his political views.
My impression has been that both Mr. Cook and Mr. Jobs were born out of the old liberal mold that held that individual free speech and privacy as sacred. Tim Cook has lambasted Google, Facebook, and the old Twitter for invading individual privacy. ‘We could make a ton of money trading our customers’ personal data, but everyone has a fundamental right to privacy. The American people demand it, the Constitution demands it, and morality demands it,’ Cook proclaimed back in 2015.
It is not a coincidence that Apple remains one of the most trusted brands in the world, in contrast to the ideologically driven, universally mistrusted Facebook, Google, and old Twitter brands.
We are now getting to an inflection point where stockholders are demanding public companies stay in their lane, focus on their core businesses, and leave their political agendas at the door. Historically, democratic capitalism has been a great system because it creates a safe space for people of all backgrounds and persuasions to join together to deliver on their company’s promises to customers and achieve the optimum ROI for stockholders. Whether it has been at Twitter, Anheuser-Busch, or SVB, incorporating political activism into the workplace has led to failed businesses.
On an even higher level, the historian Alexis de Tocqueville in his book Democracy in America, observed that we are a diverse and divided country. If we hope to last, we must hold onto ‘intermediary institutions,’ our apolitical sanctuaries that bring us all together. The free market is the biggest of those institutions. One finds a sense of togetherness, as an example, at a Las Vegas Raider football game when chest bumping the person next to you after a touchdown without caring if they are on the blue team or red team because you know you are both rooting for the silver and black. The imposition of ideology on your employees is the behavioral practice of a cult, not a thriving enterprise.
Take the money and run
Less than two weeks before SVB became the largest bank failure since the 2008 financial crisis, top executives at the company sold stock totaling several million dollars, according to federal disclosures. Mr.Becker sold 12,451 shares of company stock worth $3.6 million. SVB Chief Financial Officer Daniel Beck also sold $575,180 in company common stocks on February 27. While both executives sold through an executive trading plan they filed with the SEC under Rule 10b5–1 last January 26, both knew then that the Feds were all over the bank like white on rice.
Furthermore, shortly after Mr. Becker’s sale, the then-CEO appeared bullish during remarks to an audience of investors, Wall Street analysts, and technology executives attending the 2023 Morgan Stanley Technology in San Francisco’s Palace Hotel. Shockingly, one day after Mr. Becker’s remarks, SVB announced a $1.8 billion loss on the sale of securities.
The insider rule that Mr. Becker and Mr. Beck sold under has been criticized as an unfair loophole. Beginning April 1, the SEC has started requiring a minimum 90-day cooling period for most executive trading plans.
In another development reported by ABC, the Justice Department and Securities and Exchange Commission are probing the collapse of Silicon Valley Bank, and part of the focus will be to examine whether any of SVB executives got unusual bonuses or sold stocks in the days leading up to the bank’s collapse and whether there is evidence of insider trading. ‘The probes are in the preliminary stages, and it is unclear whether any wrongdoing has been committed,’ reported ABC.
While the timing of Mr. Becker’s stock sale and the misleading nature of his remarks at Morgan Stanely’s conference is dubious enough, as a former team member, it’s his remarks to the SVB employees on the Monday after the seizure of the bank that is perhaps his most disingenuous act. In a video message sent to employees, he said, ‘I can’t imagine what was going through your head and wondering, you know, about your job, your future.’ He then asked employees to “hang around, try to support each other, try to support our clients, work together to get a better outcome for the company.’ He then jetted to his safe space in a gated community in Hawaii and left his employees and the Feds to clean up his mess, and he has not been heard from since.
Mr. Becker’s lack of humility, responsibility, and hypocrisy goes beyond words. So much for the first of SVB’s stated values: ‘We start with empathy for others.’
Elon Musk sees Silicon Valley Bank as the turkey in the coal mine
Zooming up 30 thousand feet to the banking industry at large for a moment, Elon Musk went on record in an interview with Tucker Carlson that he has ‘dire’ concerns about the global banking system worth sharing.
‘Silicon Valley Bank’s overnight collapse represents one hell of a big canary that has died in the coal mine. It’s more like a turkey. We now have more than a regional bank problem; there is a serious global banking problem. If you look at the true mark-to-market value of the banks’ loan and asset portfolios over the entire banking industry, there is a strong argument that it has negative equity. If you were to look at commercial real estate, for example, the whole work-from-home trend has substantially reduced office usage around the world. San Francisco has a 40 percent office vacancy rate, and New York is also at its highest vacancy rate, as in most major cities. Commercial real estate was a Grade A asset — the highest and safest security. Today, one company after another is canceling its leases or not renewing them, so we haven’t seen the commercial real estate shoe drop, and it’s going to be more like an anvil than a shoe. We are also likely to see a major drop in housing prices because the interest rates are too high. When people buy a house with a fixed monthly loan payment, for example, and the Fed starts raising rates, people are now paying more interest on their loans, which can lead to negative home equity. And this kind of thing tends to accelerate. So banks haven’t yet accounted for the full degradation of their real estate portfolios in the commercial area for sure, and possibly in their home mortgages as well. In my view, this is a very dire situation and will become a serious issue later this year unless the Feds start lowering rates. I recollect that the last time the Feds raised rates going into a recession was in 1929, and we all know what that led to — the Great Depression of the 1930s.’ — Elon Musk
Epilogue: Here comes The New New one more time
In Silicon Valley, it’s been evident since the COVID outbreak that a positive result of the lockdown is that bosses can no longer argue that their laptop workers are more productive in the office than they are working remotely. This change has liberated and delighted millions of workers who no longer face commuter traffic jams and can spend more time with their loved ones. The negative impact is the inevitable collapse of the value of commercial office space and the tremendous pressure it will put on the banking system, as Elon references above.
`It is clear from the analysis of SVB’s collapse we have shared above that at this moment in history, the real estate risks were not at the heart of the bank’s problems, at least yet. The real story is that SVB’s board and management were astonishingly late in addressing its risks red-flagged by the Feds in 2021. The bank’s board has been selected more by ideological compatibility than financial industry experience and governance expertise. And, of course, the California Department of Financial Protection and Innovation’s ‘clean bill of health’ for SVB back in 2022 was yet another appalling sign of incompetence, which has infected the entire California State government for years.
‘Management screwed up interest rates, underestimated customer withdrawals, hired the wrong people, and failed to sell equity. You’re really only allowed one mistake; more proved fatal. Was management hubristic, delusional, or incompetent? Sometimes there’s no difference.’
— Andy Kessler, former Morgan Stanely tech analyst, and current Wall Street Journal columnist
It is also clear that spending stakeholder resources on partisan political activism distracted managers and other team members away from the bank’s core business. Much like Twitter and other enterprises that put political ideology first, it resulted in an unnecessarily bloated employee base and corporate culture of fear and loathing for those whose opinions differed from the powers at be.
When I heard the news of SVBs collapse, I felt a sense of loss. I have always been proud of being part of the small, earnest, founding SVB team dedicated to serving the entrepreneurs and investors that change the world and watching this daring mission spread from serving a local clientele to the entire global Silicon Valley. But, over the years, I have learned that it’s never a good idea to become too attached to the enterprises you help create or anything for that matter.
As the founder of Red Herring magazine, I marshaled a brand that the Wall Street Journal described as the ‘Bible of the Internet’ only to witness it blow up after 10 years along with the Internet Bubble. More recently, I was equally saddened to see the nonprofit Churchill Club I founded during my first year at SVB cease operations during COVID. The tragedy here is that both Red Herring and the Club were taken down over macroeconomic issues neither organization controlled. The tragedy with SVB’s demise is it was taken down by incompetence and should still be up and running and thriving today.
Steve Jobs once said, ‘The journey is the reward.’ He was right. The journey of all three brands I helped create was worth it for all involved. No one can ever take that away from us. Silicon Valley is about creative destruction, and sometimes you find it’s your creation being destroyed. So out of SVB’s ashes, something new and amazing will be created.
It is my observation that the cures for the many ills of our current financial system are brewing in the laboratories of thousands of new companies throughout the global Silicon Valley ecosystem SVB helped create and foster. The next wave promises to be the most fun — and lucrative — we’ve seen. So much so, I’m dedicating the rest of my career to highlighting the Web3 companies and entrepreneurs making it happen. If you are curious about what is yet to come, try to read between the lines of the words of a former SVB client and the post-bank crash New World market update below.
‘It’s ironic that there has been a lot of talk of protecting the banking system from crypto when we are now in a situation where we are trying to protect our digital dollars from the banking system.’
— Jeremy Allaire, CEO of Circle, which had $3.3 billion of reserves for its stablecoin, USDC, stuck in Silicon Valley Bank that day after the seizure
Crypto market aftershocks to failure of the banking trifecta
Cryptocurrency prices rallied Sunday night after the federal government stepped in to provide a backstop for the depositors of the three banks they seized. After spiking down under $20,000 after the SVB, Signature and Silvergate implosions, Bitcoin is trading back up to over $30,000. As one analyst put it to Bloomberg: ‘While dark clouds sit over Silicon Valley, Bitcoin is booming.’
Bitcoin’s resilience amid banking industry fears is yet one more affirmation of its creators’ original thesis that a decentralized digital currency is a hedge, or store of value, against an increasingly unstable fiat controlled by centralized institutions. As the tech’s leading futurist and author George Gilder observes, ‘The creativity in crypto is preparing a new financial system for the moment when the fiat currency pinata bursts at last.’
Hey Silicon Valley, it’s time to turn the world around one more time for the better. Let’s fucking go!
Further recommended reading
//OUR COMMUNITIES
Sign-up for the Cryptonite Weekly Rap
YouTube Channel — Cryptonite Live!
