We should have let Silicon Valley Bank fail and let these tech bros feel the pain

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Gus Carlson is a US-based columnist.

In an increasingly consequences-free culture, where poor planning, shoddy decision-making and bad behavior go unchecked and unreported, it should surprise no one that the US government backstopped a Silicon Valley bank like a frantic helicopter parent. stepped in and agreed to cover deposits in excess of this. Federal Deposit Insurance Corporation US$250,000 limit.

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While the politically expedient intervention may have appeared angelic in calming nerves and allaying early concerns about SVB being the canary in the coal mine in 2008, it changed the banking game – and not necessarily it better be

With the subsequent failure of Signature Bank, which relied heavily on cryptocurrency deposits, and First Republic Bank hinging on a similar tech-dependent delinquency to SVB, the bending of FDIC guidelines is generating even more heat and begging questions. Been: Where will the government draw the line on its mandated leniency that rewards bad business?

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As the SVB infection spread, many influential voices in the banking community weighed in to call for a jail-free quasi-bailout of a bank with questionable management competence, not to mention a questionable business model that relied almost entirely on risky Was. Tech startups were the wrong thing to do and set a dangerous new precedent that’s asking for more trouble. They are correct.

The move by the US government runs contrary to the capitalist mantra that only the strong and the wise survive, fails to punish bad management and poor financial discipline, and creates a moral hazard by stating that when risk management fails, So it’s okay to look the other way. Institutional Depositors.

The best thing to do would have been to let SVB’s institutional depositors feel the pain, then use the fallout to send a strong and clear message to the industry: Bad things happen to those who play fast and loose with risk.

Instead, the tendency now will be to take away risk discipline, knowing that if things go sideways, Big Brother will step in to bail you out.

Among the most forceful critics of the rescue is bastion hedge fund guru Ken Griffin, who told the Financial Times that the capitalist economy “is crumbling before our eyes. The government’s blanket bailout of depositors has led to a loss of financial discipline.”

A similar sense of risk has emerged with the Signature Bank failure, although the target problem is slightly different.

Economist Nouriel Roubini tweeted that protecting depositors in Signature is the “mother” of all moral hazards, because of its multibillion-dollar deposits in cryptocurrencies, which he calls a “purely speculative asset bubble”. ,

There’s an interesting nuance here that puts a sharp point on concerns about SVB in particular.

SVB’s deposit mix was heavily weighted towards corporate customers. This means that the expansion of the safety net beyond the US$250,000 federally insured cap has captured a higher percentage than corporate deposits captured at other banks. Some say, it sends a very dangerous signal.

“Giving relief to uninsured depositors in SVBs, who are mostly corporate, makes markets more infantile by sending the message that this kind of risk management is anachronistic,” said Carson Black, founder of Muddy Waters Capital.

As usual with any business issue these days, there is a partisan subplot here. This shows that SVB’s Achilles heel was the heavy focus of the management on a conscious agenda rather than on the difficult business of running the bank responsibly. As a result, backstopping the institution in its time of need was entirely in line with the progressive agenda of the Biden administration, even if it ran counter to the dynamism and sensibility of a free market.

Political show? Perhaps. The government would like everyone to believe that the system will absorb its generosity. But lets not kid ourselves. The pain of bank levies imposed to pay for the rescue will be passed on to regular bank customers in the form of higher fees, in a “there’s no such thing as a free lunch” tradition, no matter what the Biden administration spins. Tries to apply to the story.