Why the Government Shouldn’t Have Bailed Out Silicon Valley Bank’s Depositors
The Silicon Valley elites involved in SVB’s collapse should have been made to bear the costs of their own bad decisions.
The Silicon Valley elites involved in SVB’s collapse should have been made to bear the costs of their own bad decisions.
W ith fitting irony, Silicon Valley Bank (SVB) was founded about 40 years ago over a poker game. As it grew from those humble origins, SVB became a fixture in the Silicon Valley finance ecosystem, with loans extended to 44 percent of all venture-capital-backed tech and health-care companies.
Then, last Friday, SVB was shut down by the FDIC following an 87 percent crash in its stock. With tedious predictability, the immediate reaction of many of the world’s elites to SVB’s collapse was to call for a government bailout. Since then, we have been told that the government will not bail out stock- and bond-holders. Instead, the only bailout will be for SVB’s biggest depositors: those whose deposits exceed the $250,000 threshold covered by FDIC deposit insurance. Further, we have been assured, not a single penny of this bailout will be borne by taxpayers. Rather, the funds will come from the Deposit Insurance Fund (DIF), which is stocked by quarterly fees assessed on financial institutions.
There are several problems with this narrative. First, the biggest venture-capital depositors already took their money out of SVB during the run that caused the bank’s collapse. Second, the DIF fees the government levies on banks impose a cost that, ultimately, gets passed on to those banks’ customers. And finally, SVB’s depositors are mainly the portfolio companies of VC firms, meaning the main purpose of the bailout is to keep the VC firms whole.
To understand why the argument for the government’s bailout is dubious, one must first understand the bank’s history. SVB was initially successful in collecting deposits from VC-backed businesses, before later moving into growth-oriented services including commercial banking, venture investing, wealth planning, and investment banking. It has played a role in starting and growing many successful companies, and for many years, it appeared to be a classic example of realizing the American dream through hard work and free markets.
Yet, somewhere along the way and much to our detriment, SVB took its eyes off the basics — helping new, incredibly innovative firms to create massive value for shareholders — and instead started using its wealth and power to push a progressive political agenda through Environment, Social, and Governance (ESG) investing.
The fad of ESG investing has swept through the finance industry in recent years. The basic idea is that investors should sink their money into companies that score highly (according to a small number of scoring organizations) on criteria meant to reflect social responsibility — environmental impact, treatment of animals, corporate diversity, and the like. Critics of ESG point out that the scoring is politicized, the criteria distract managers from the main purpose of their businesses and are too subjective, and investing based on them ultimately harms shareholder returns.
With all the attention suddenly on the spectacular failure of SVB, it has largely escaped notice that SVB had fallen deep into the tendrils of ESG-think. For example, the 2022 SVB ESG report highlights the use of “several disclosure frameworks, including the Sustainability Accounting Standards Board (SASB) Commercial Bank Sector Standard and the World Economic Forum’s Stakeholder Capitalism Metrics (WEF), in addition to separately responding to the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and CDP. The environmental data in the report has been verified by Lloyd’s Register Quality Assurance (LRQA).” Needless to say, none of these ESG metrics indicated a looming, massive plummet in shareholder value.
In other words, SVB chose to focus on ESG bean-counting rather than its core business of managing risk and returns in accordance with prudential banking practices. It is easy to argue for a government bailout when the depositors being bailed out are everyday Americans who happened to suffer the effects of some exogenous, market-wide shock. It is much harder to make the same argument when the depositors in question are Silicon Valley elites who subscribe to the same faulty ESG philosophy.
Before the announcement that the government would bail out SVB, there had been a lot of public hand-wringing about losing “ten years’ worth of innovation” should the startups that stored their money at the bank be allowed to take a hit. Yet if a startup were worth investing in before losing its deposits, then that start-up would still be worth investing in after losing them. The loss would have been a sunk cost, and VC firms would have taken the hit and rebuilt, investing in the most promising startups that emerged from SVB’s wreckage. This would have been an especially appropriate outcome given that it was those same VC firms that forced their startups to concentrate deposits in a single, badly managed bank in the first place.
So, no, the government should not have bailed out SVB. It should have let the forces of creative destruction do their regenerative work by allowing all the people involved to bear the costs of their own bad decisions.
Professor Michael Ryall is the director of policy at the Madden Center for Value Creation at Florida Atlantic University College of Business. Associate Dean Siri Terjesen is the Madden Center’s executive director.