Fear-mongering and other bad actions

OBSERVATIONS FROM THE FINTECH SNARK TANK

Wall Street veterans and politicians have offered quite a few unsupported—and in at least one case offensive—explanations for why Silicon Valley Bank collapsed and what should be done to remedy the situation.

What Caused Silicon Valley Bank Collapse?

Referring to the bank’s proxy statement — which noted that nearly half of its board is made up of women and has “1 black, 1 LGBTQ+ and 2 veterans” — Wall Street Journal columnist Andy Kessler wrote: “I’m not saying 12 white men would have avoided this messed up, but the company may have been distracted by diversity demands.”

Distracted by diversity requirements? Nonsense. This statement was nothing more than a cheap shot at DEI – and a very offensive one at that. SVB critics may not like who the bank donated to or lent money to, but there is no connection between the bank’s DEI efforts and its deposit management policy.

Who gets the rescue?

Presidential candidate Vivek Ramaswamy wrote a WSJ OpEd titled SVB does not deserve a taxpayer bailout, a bad headline since SVB did not receive a bailout, and that was never the plan either. The bailout is for SVB depositors, many of whom are start-up technology companies.

Ramaswamy does not think they deserve a bailout either, and exhorted start-up managers to better manage financial risk and diversify across counterparties.

A former tech executive himself, the Republican presidential candidate went on to say that because SVB “specialized in providing non-dilutive venture debt to risky early-stage companies,” startup founders were able to keep greater equity ownership in their companies for themselves.

According to Ramaswamy, “Taxpayers were never going to participate in this equity upside, so they shouldn’t be asked to foot the bill when downside risks materialize.”

There are two problems with Ramaswamy’s logic:

• If the failing bank was a community bank serving mom-and-pop businesses on Main Street USA, would Ramaswamy argue that mom-and-pops “need to do better at managing financial risk and diversifying across counterparties”? Questionable. So why are “startup founders” held to a different standard?
• Taxpayers foot the bill for many things they do not benefit from or participate in. Bringing up this example is a weak argument.

Another misinterpretation of the bailout came from Representative Thomas Massie, the U.S. representative for Kentucky’s 4th congressional district, who claimed in a tweet that the FDIC used deposit bonuses to “cover deposits for the very rich.”

Not completely. True, SVB had deposits from some “very rich” people, but the bank’s customer base included technology start-ups that employ many people who would not be considered “very rich”. Protecting these depositors – i.e. the tech startups – enables them to pay salaries, pay the bills and stay in business.

When confronted about this oversight, Massie responded: “We are told that the SVB uninsured accounts of concern are largely those of startups that have received venture capital money. These venture capital funds have institutional investors as well as individual investors who, by law, must be wealthy for to qualify to invest.”

Wrong again. Two problems here as well:

• A company’s source of funds has no bearing on the right to receive deposit insurance. Deposit insurance does not benefit the investors in a company.
• SVB’s clients include public technology companies, which are likely to be owned by many types of people — including the “not very rich” — who may own stock indirectly through 401(k) plans and mutual funds. While the bailout does not protect their equity investments, covering the uninsured deposits of these companies helps ensure their solvency and ability to remain in business – protecting the interests of far more people than just the “very rich”.

How did social media help fuel the crisis?

Congressman Patrick McHenry, chairman of the US House Financial Services Committee, referred to the turmoil as “the first Twitter-driven bank run.”

Jason Calacanis, an angel investor and co-host of a popular podcast called the All-In Podcast, warned his Twitter followers that the situation was at “DEFCON1” and that they should steer clear of SVB if a white knight was not found. In another tweet, he asked “Who else is going to buy guns, provisions and gas tomorrow?”

After the government stepped in and announced it would freeze uninsured as well as FDIC-insured deposits, Calacanis announced that his “work here is done.”

Calacanis was not alone. Other well-known investors also played a role:

• Mark Tluszcz, CEO of Mangrove Capital, tweeted: “If you’re not advising your companies to cash out, you’re not doing your job as a board member or as a shareholder.”
• Michael Burry, the hedge fund manager who famously bet on the subprime mortgage meltdown that led to the 2008 financial crisis, may have caused some concern when he tweeted, “It is possible today that we found our Enron.”
• Investor Bill Ackman warned that if federal regulators did not quickly step in and guarantee all deposits, there would be a run on other banks.

Twitter’s role in the SVB collapse was significant and predictable

The bad views on social media regarding the SVB collapse are too numerous to mention. But predictable.

As Frank Rotman, Chief Investment Officer at QED Investors tweeted, “When things go wrong at a bank, it seems every Tom, Dick and Harry on social media knows how to reinvent banking.”

According to a study by Cornerstone Advisors, the typical mid-sized bank has less than 5% of its customers following it on Twitter, which can lead bank management to ignore the social media channel in difficult times.

It is a risk bank managers should not ignore.

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