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Government to the Rescue of Free-Market Adventurers

As we saw when coronavirus broke out, and as we see now when banks collapse, everyone’s a capitalist until things go wrong:

The Biden administration has announced that customers of Silicon Valley Bank will have full access to their deposits, an extraordinary move by federal officials to backstop billions of dollars in uninsured money amid fears that the bank’s collapse could lead to greater panic.

Federal regulators said Sunday that it was taking the emergency measures to prevent contagion at other small and regional banks in the wake of Silicon Valley Bank’s sudden implosion.

In the United Kingdom, meanwhile, the British Treasury and the Bank of England announced early Monday that they had facilitated the sale of Silicon Valley Bank UK to HSBC, Europe’s biggest bank, The Associated Press reported. The move ensured the security of an estimated $8.1 billion of deposits. British officials worked throughout the weekend to find a buyer for the UK subsidiary of the California-based bank. Its collapse was the second-largest bank failure in history.

The U.S. rescue plan involves tapping a deep reserve of bank-funded federal insurance money, not taxpayer dollars, according to officials.

Deposits at Signature Bank, which was shut by New York regulators on Sunday, would also be backstopped.

The closure of Signature represents the third U.S. bank to topple in just one week, after California-based Silvergate, a top lender in the crypto market, decided to wind down its operations and pay back depositors [Bobby Allyn and David Gura, “The U.S. Takes Emergency Measures to Protect All Deposits at Silicon Valley Bank,” NPR, updated 2023.03.13].

Silicon Valley Bank collapsed primarily because government stepped away from the scene, letting venture capitalism go adventuring:

A chief culprit, economists say, is legislation President Donald Trump signed into law in 2018, which rolled back key parts of the Dodd-Frank banking regulations passed in the wake of the 2008 financial crisis. That 2018 legislation, called the Economic Growth, Regulatory Relief, and Consumer Protection Act, passed with strong support from the Republican Party and critical support from some Democrats. Among those leading the charge was McCarthy, then House majority leader.

…“This was a 100 percent avoidable problem,” economist Dean Baker told The Intercept in an email, pointing to the Dodd-Frank repeal bill. “That bill raised the asset threshold above which banks have to undergo stress tests from $50 billion to $250 billion. SVB would have been required to undergo regular stress tests before the revision; among the stresses you look at are sharp rises in interest rates, which is apparently what did in SVB. Presumably, if its books had been subject to this test, the risk would have been detected and they would have been required to raise more capital and/or shed deposits” [Ken Klippenstein, “Silicon Valley Bank Used Former McCarthy Staffers to Weaken Regulations, Lobby FDIC,” The Intercept, 2023.03.11].

Gamblers don’t want government checking their cards when they are winning, but when their risky gambles don’t pay off…

“If the government doesn’t step in, I think a whole generation of startups will be wiped off the planet,” Garry Tan, president and CEO of the startup incubator Y Combinator, said in an interview.

…Founded over a poker game in 1983, Silicon Valley Bank became the go-to lender for tech startups that appeared too risky in the eyes of larger, more traditional banks. Eventually, Silicon Valley Bank would come to do business with nearly half of all U.S. tech startups backed by venture capitalists.

“If you’re a high-growth startup, you can’t get a credit card from a normal credit card provider, you can’t get a loan from a big bank, but Silicon Valley Bank would give you that,” Shelf Engine’s Kalb said. “It’s these services that startups couldn’t get elsewhere.”

…”Founders are texting me now and saying they don’t know how to make payroll next week. Will they have to take out personal loans to keep the business running? Do they have to furlough workers?” Tan said. “This can be an existential risk to competition and innovation in the American economy for the next decade” [Bobby Allyn, “Silicon Valley Bank Failure Could Wipe Out ‘A Whole Generation of Startups’,” NPR, 2023.03.11].

What happened to No risk, no reward? If your business model turns shaky, and your investors all decide to run for the exits on Thursday, well, aren’t you getting exactly what the free market says you deserve?

David Trainer, CEO of equity research firm New Constructs believes that Silicon Valley Bank’s problems serve as a cautionary tale. “The bank’s issues show that companies, including banks, need to be much more discerning about whom they do business with,” he said, in a statement emailed to MarketWatch. “The market has been punishing companies since the bear market began in January 2022 and SVB’s woes are the latest frontier in the market’s reckoning.”

“The market is tired of companies that do business with unprofitable companies or that are unprofitable themselves,” he added.

Specifically, Trainer pointed to the risks posed by some tech startups. “Many tech startups are actually zombie companies with no business models and aren’t worthy of receiving any kind of loan,” he said. “SVB is now learning this the hard way” [James Rogers, “Silicon Valley Bank Collapse a Cautionary Tale, Says New Constructs,” MarketWatch, updated 2023.03.11].

But capitalists don’t want their lessons to be too hard. They say they want government out of the way, but they won’t play hard unless they know that government will lay out all sorts of cushions so they can walk away from their hardest falls.


  1. sx123 2023-03-13 07:49

    Per my wholestone farms post: what a joke.

  2. sx123 2023-03-13 07:59

    On the surface, backing depositors seems like the right thing to do, but too early for me to tell. This ain’t over.

  3. Richard Schriever 2023-03-13 09:17

    Back in the early 2000’s, I was part of a tech start-up company, that actually had a positive cash flow – for a couple years and growing – albeit slowly. We were working toward taking the business to the public market. But then investors (“the market” cited in Cory’s article) also “got tired” of funding the 100’s of “zombie” tech start-up companies and it was time for “the internet bubble” to burst. Result for us – the end. No interest in funding ANY internet tech companies AT ALL – regardless of what the business’ books said.

    It was then, like now, not so much the “fault” of the actual innovative techies, but of reckless “investors”. I both cases, it is innovation that suffers, while the “traditional capitalist” gambler gets bailed out. We’ve been here before – several times.

  4. Guy 2023-03-13 09:24

    Cory: “As we saw when coronavirus broke out, and as we see now when banks collapse, everyone’s a capitalist until things go wrong.” But, of course and now these venture capitalists want the “big, evil ‘Socialist’ government” to bail them out. Right on cue as usual. Deep down many of these business people do not have the courage to admit they are truly Socialists. Really, aren’t we all Socialists to some degree?

  5. e platypus onion 2023-03-13 10:02

    The only thing missing here is the magats claiming Biden’s kids were actively involved in the banks and were given a golden parachute, like Hitler Weasel Bush’s kid Neal.

  6. Jake 2023-03-13 10:38

    e platypus; don’t hold your breath, that’s coming right around the corner!

  7. CK 2023-03-13 13:48

    The fact that the SVB failure most likely would have been prevented if Trump had not rolled back Dodd-Frank regulations makes me angry.

    Couple that with the Norfolk train derailment, and it’s pretty darn obvious that regulations help Americans, regardless of what the GOP says.

    Do they understand anything at all, other than culture war issues?

  8. O 2023-03-13 13:59

    My thoughts and prayers are with the investors who lost money in these dealings. It is too soon, too close to the tragedy to be talking about government involvement in acting on these tragedies. We need a cooling off period to let tempers cool.

  9. Arlo Blundt 2023-03-13 17:16

    The Big Casino is cracking down on the profligate players. “Investment Banks” are like the players of slot machines…they know the “market” is stacked against them, but there is always that big jackpot looming. Trick is not to run out of quarters before the bells start ringing.

  10. grudznick 2023-03-13 18:16

    The Big Casino is cracking down, indeed.

    grudznick has my money buried in mason jars where none of you could find it, and it is safe.

  11. Kristi 2023-03-13 19:02

    Privatize the profits and socialize the losses. It’s the capitalist way!

  12. larry kurtz 2023-03-13 19:18

    Yes, tornadoes, flooding, habitat destruction, drought, wildfire potential and now another eight month winter will soon descend on the red moocher state. According to WalletHub, South Dakota is tied for first place with three other horrible red states where the loss amounts from climate disasters caused a billion+ dollars in damage per capita since 1980. North Dakota has had 45 billion-dollar climate disasters since 1980 and my home state has suffered 38.

    South Dakota’s current Republican governor isn’t about self-reliance because she’s wedded to moral hazard. Recall US Representative Kristi Noem voted against federal disaster assistance when acts of god ravaged blue states. A tornado hit her home town of Castlewood and Noem praised her god for sparing her campaign war chest because science karma chickens come home to roost where the governor is a climate change denier. In 2019 she was quick to ask the Trump Organization for disaster cash but when she asks a Democratic president for help, especially after blaming him for an infant formula shortage, she’s admitting she’s dependent on federal aid. And if she doesn’t she risks looking like a miserable partisan so she caved and will cave again this Spring when the James and Big Sioux Rivers wash out roads and bridges again.

  13. grudznick 2023-03-13 19:24

    We need to dam up those Big Sioux and James rivers, so they can’t wash out roads and bridges.

  14. Mark Anderson 2023-03-13 22:25

    Well gosh Cory, our governor, you know the shortstop who wants to be centerfielder, blames wokeness as the problem. Anybody know what’s woke?

  15. John 2023-03-14 08:49

    “American exceptionalism” – more malarkey. American “capitalism” – subsidize the well-off, privatize the profits, socialize the risk, socialize the loses.
    What a horrible bankster system that allowed a discredited bankster from the Lehman crisis to become a leading executive at the Silicon Valley Bank. Might as well hand the safe combination to Al Capone.

    Meanwhile in “socialist” Canada there were 2 bank failures in 100 years. Two.
    Socialist North Dakota avoided the nations mortgage crisis in 2008-2009 BECAUSE the have a state bank.

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