Silicon Valley Bank and Signature Bank Reignite ‘Moral Hazard’ Dilemma Bitcoin Was Designed to End

Join the most important conversation in crypto and web3! Secure your seat today

The events of the past 72 hours should reignite the same intense debates about the U.S. banking system that fed into Bitcoin’s growth after the global financial crisis of 2008. After the closure of three banks that suffered from a combination of mismanagement and bad market conditions, depositors in two of them got what looks an awful lot like a bailout.

It’s actually not a 2008-style bailout, as no taxpayer money is involved (at least not directly). Instead, the Federal Deposit Insurance Corporation (FDIC) – which is funded by banks themselves rather than taxpayers – chose to designate both Silicon Valley Bank and Signature Bank, which followed SVB into receivership on Sunday, as systemic risks.

Read more: George Kaloudis - The Banking Crisis Is Not Crypto’s Fault

That debatable classification conjures another charged term from the mists of crises past: “Too big to fail.”

The designation cleared the way for the Federal Reserve and Treasury Department to backstop all deposits at those banks, instead of limiting protection to the FDIC standard $250,000 per account. Stockholders in the failed banks, on the other hand, will see their equity go to zero, which the Treasury Department points to as another reason this isn’t a “bailout” per se.

The FDIC also announced it will make the backstop mechanism seemingly permanent, with the creation of the new Bank Term Funding Program. The program will offer loans for collateral, including Treasurys. This seems both practical and reasonable because the forced sale of underwater Treasury instruments played a starring role in the collapses of not only SVB and Signature, but also crypto-focused Silvergate Bank, which went under last Wednesday. As many have pointed out, the Federal Reserve’s own aggressive movement on interest rates contributed to the duration mismatch that forced those sales.

In the short term this all adds up to a reasonable-ish middle path between the horns of U.S. banking’s eternal dilemma. On the one hand, we don’t want the kind of emotional and fiscal damage that would result from big losses on boring checking account deposits. On the other hand, backstopping banks too aggressively creates a perverse incentive for them to take big risks, potentially feeding longer-term and more serious instability.

Viewed through a broader and longer-term lens, the balance of the weekend’s events would seem to affirm and even amplify the deeply held anxieties of Bitcoiners: that political influence helps determine who does and doesn’t get help from the Federal Reserve, and that a more neutral monetary system would be better for everyone in the long term.

the United States government just implicitly agreed to backstop more than 17 trillion dollars I feel like I’m taking crazy pills here because there’s surprisingly little discussion of the implications of the Fed put pic.twitter.com/ujDphBN7Ki

— Matthew Graham (@mattysino) March 13, 2023

My upside, your risk

A few details about the backstopping of SVB and Signature deposits could be lost in the coming debate about deposit risk. Perhaps the most important is that Silicon Valley Bank had not only been taking on excess risk with its deposit funds, but had actively angled to avoid rules limiting that exposure. (SVB also made arguably massive errors in strategic communication, but we’ll set that to one side for now.)

Specifically, Silicon Valley Bank was massively overexposed to interest rate risk. A good analysis of this is here from Forbes, but the essence is that SVB was betting against the Fed raising interest rates from their near-zero level early in the COVID-19 crisis. In retrospect, that seems like obviously poor judgment, not just because rate hikes were bound to follow COVID inflation, but because rate hikes had been a looming possibility for years.

The consensus among banking experts seems to lay considerable blame for this and other poor choices at the feet of SVB management. As Andy Kessler made the case in the Wall Street Journal, “The bear market started in January 2022, 14 months ago. Surely it shouldn’t have taken more than a year for management at SVB to figure out that credit would tighten and the [initial public offering] market would dry up.”

But there’s an even stronger case for that responsibility than 20/20 hindsight: Silicon Valley Bank also took proactive steps to avoid or rescind rules that would have forced it to take fewer risks. As detailed by the New York Times, Silicon Valley Bank CEO Greg Becker was an advocate for Trump administration rollbacks of certain stress-test and liquidity requirements for mid-sized banks like his.

When things turn, the same big players use their influence to get others to absorb the damage.

While it’s unclear whether this was a direct factor in SVB’s unwind, it reinforces the perception that this is a replay of the same risk socialization that, in various forms, continues to feed American inequality. Rich, powerful people and institutions love to push back against government controls that prevent them from taking profitable risks when times are good. Then, when things turn, the same big players use their influence to get others to absorb the damage – influence often supported by the very same funds accumulated during high-risk periods.

The other thing almost certain to be lost in the shuffle is that even without the new backstop, SVB and Signature depositors would likely have been largely OK. In a normal bank failure, the FDIC oversees the sale of the illiquid bank. Depositors in this scenario can take a haircut, perhaps losing 10%-15% of their deposit value over the $250,000 FDIC insurance threshold. On Sunday morning before the backstop announcement, Bloomberg sources said 30%-50% of uninsured SVB deposits would be available Monday, with the rest available over time. (SVB was CoinDesk's bank.)

It’s possible, though, that the FDIC couldn’t find a buyer for SVB, and/or didn’t see one on the horizon for Signature. The auction for SVB started Saturday night and was expected to resolve by Sunday, but instead we got the backstop announcement. If it’s true that nobody wanted to buy SVB at any price, there might be even more reason to worry about the next few weeks – but also that much less justification for backstopping the bad decisions that left it worthless as an enterprise.

All in the panic room

Finally, any moral assessment of this moment must reckon with the panicky and arguably malevolent behavior of some of Silicon Valley’s biggest names.

As soon as Silicon Valley Bank was shuttered Friday, prominent voices in the venture capital world began explicitly demanding that all uninsured deposits be guaranteed by the government. If SVB wasn’t “bailed out,” these figures warned in dire, panicky terms, there would be a nationwide bank run, decimating mid-sized and community banks across the U.S.

Notably, these commenters largely ignored the existence of a receivership process, and went straight to demanding a “bailout” that would make all uninsured deposits whole. This included David Sacks and Jason Calacanis, prominent tech investors and co-hosts of the “All In” podcast. Some of Sacks’ foreboding tweets were so unconsidered that Twitter users flagged them with fact checks.

Calacanis’ behavior was even more deranged. On Twitter he posted images from the film “Mad Max: Fury Road,” while exhorting his more than 690,000 followers to stock up on food and fuel. By early Monday, Calacanis had deleted many of these tweets.

Internet never forgets pic.twitter.com/75zl6JDa7o

— Cas Piancey (@CasPiancey) March 13, 2023

This theatrical tearing of hair arguably fueled the very panic Calacanis and Sacks were warning of – and did so by design. At worst, these inverse Cassandras were little more than rhetorical terrorists, using their massive platforms and the trust placed in them by still all-too-credulous Americans to stoke fear. At the very least, their behavior increased pressure on the Fed to quiet the fears they were feeding as much as warning about.

And they got what they wanted! So hooray for them, I guess. Now it’s an even more embedded doctrine of U.S. banking policy that you can deposit your funds with a bank with bad risk management, but if you have enough Twitter followers or other influence you’ll get it back no matter what.

Surely, that can’t lead to anything bad. Right?

This is very exciting! Unlimited FDIC insurance! So stop moving your money out of 0.5% banks and into 5% money market funds! Who’s with me?!?! pic.twitter.com/Xvy5QzTh3f

— Michael Green (@profplum99) March 12, 2023