This can't just be explained away as a big, "Whoops! Turns out we didn't know how banks work!" Although Dayen does at least entertain that possibility here. I guess you kind of have to given how stupid everything does feel these days. But still, no. It can't just be that.
Contrary to their belief, Silicon Valley big brains are not the first ones to figure out that deposit insurance doesn’t protect their payroll accounts. Companies manage this small risk of bank failure through recognized insurance strategies. There are private-sector solutions like Intrafi’s Insured Cash Sweep, which essentially cuts up large accounts into $250,000 pieces and splits them across the banks participating in its network. CDARS, another Intrafi product, is a less liquid option that segments cash into CDs. Some prior FDIC officials have expressed anger at these schemes, but there also are cash management accounts with a “sweep” feature, or additional insurance to take out (this Forbes story has several examples).
Any risk manager worth their salt at a company knows of a panoply of ways to avoid the threat of bank failure on deposits. “The pain of having to explain this,” Porter said to me.
Importantly, SVB was part of the network of cash sweep banks; it had an offer on its website about it. But according to Adam Levitin, there were only $469 million in reciprocal deposits, which is where cash sweep would show up. In other words, almost nobody banking at SVB used them.
Why not? There are a couple of options. One, Silicon Valley startups are so bad with money that they never thought of this. (It’s incredible that Roku, which has been around for a while, had nearly half a billion dollars on hand at SVB, without hedging that risk at all.) The fact that VC big brains were toying with new types of deposit insurance this weekend that already exist (it’s like Uber reinventing the bus) raises that possibility.
The other possibility is that SVB wanted that money kept with them. There are very strange stories coming out about how SVB required companies to hold their money with them in exchange for venture debt agreements, and then gave cheap “white glove” service to founders: low-interest mortgages, lines of credit, and the like. SVB might have had a reason to want their hands on that money exclusively.
Is that sort of "white glove" service not precisely the reason FNBC executive Ashton Ryan was found guilty on 46 counts of fraud? Remember that? It just happened last month.
Prosecutors convinced the jury that Ryan was the "quarterback" of a team of conspirators, as Assistant U.S. Attorney Ryan McLaren put it in closing arguments.
The list of "scoundrels" he said conspired with Ryan included Mississippi developer Gary Gibbs, who testified that he was essentially bankrupt as far back as 2013. For years, Ryan kept lending him $1 million each month to cover up his insolvency, documents showed, as he spent the proceeds on a private jet, luxury cars and top-of-the-line fishing boats. Gibbs owed the bank $123 million by the time it collapsed.
There were similar stories for other borrowers like Kenneth Charity, a transplant from Washington D.C. who had plans to get rich in the post-Hurricane Katrina real estate market, but who could never file his taxes or other documents on time — or make meetings — as his projects floundered. Ryan kept lending to Charity until his debt reached $18 million.
Ryan's defense during his trial was laughable. In so many words, he said that he was just trying to help some guys out. Maybe the loans were reckless or outside the bounds of what was usual, but he was being "altruistic." He literally used this term. It's a popular one among financial criminals these days. What it amounts to, in Ryan's case, is an explicit admission of guilt. He knew the law and broke it anyway for... reasons.
It's that what's going on at SVB? Because, as Dayen explains, any CFO at any of the firms banking there had to have known how to responsibly insure themselves against risk. But they just... opted not to. Dayen also suggests the same firms still could have dug themselves out of the mess their own mess. (A mess they created and then triggered as if on purpose, it seems.)
SVB’s losses aren’t really that major in the grand scheme; the haircut that depositors would take under normal rules would be minimal. It might take a minute, which with payroll being due was a risk startups didn’t want to take. But they have well-heeled benefactors—the VCs shouting about the end of the world—who could have supplied whatever bridge support was needed for companies they still profess to believe in.
But they chose not to do that either. Why? So far the only answer seems to be, to see if they could. But what else?