annnddd it’s gone
Don’t worry, smlXL is OK! But I participated in a bank run. I lost. Now I have some feelings…
What happened?
(If you actually don’t yet know what happened to SVB, read Matt Levine’s piece.)
Driving down to SVB’s headquarters in Santa Clara on Friday morning, I couldn’t rid my mind of that South Park meme. Our CEO, Dor, had asked me to go to a branch to see if they were able to write cashier’s checks or had info on our pending transfers. We’re a small startup. A big chunk of our operating capital was in SVB. Dor had already tried at a branch in New York, to little avail.
We both knew the trip was futile. The California Department of Financial Protection and Innovation had already closed SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC’s press release had plenty of ambiguity, but it was clear that the bank was closed.
I wanted to try for three reasons: I like my job and my colleagues, and I wanted to do something. I don’t trust America: it wouldn’t really have surprised me if there was some special back door for well connected depositors to get their funds out of a closed bank. What better place to find it than at the HQ, in Silicon Valley? And I went out of morbid curiosity–what would it look like?
The answer: not much. When I arrived, there were about a dozen customers like myself, hoping, against their better judgment, that they might find some assistance. There were a few photographers and journalists. The lights were on inside but the doors were locked, a lone person at the front desk mostly avoiding eye contact. The FDIC press release was taped to the door.
The absurdist highlight was the arrival of the Brink’s truck. We all took photos, media and customers alike. As the driver went in, someone asked him if he was bringing money in or taking it out.
I chatted with a few friendly founders. We exchanged commiserations. But that was about the extent of it. And, yes, Justin Sullivan of Getty Images took a photo of me, shown above, that ended up in stories for NPR and CNBC. I was initially mortified by this — I never consented! — but it is pretty funny, and I presume he’s not required to get consent, was just doing his job. My mom said I look like SBF — that’s the worst part.
What is to be done?
The section title is an intentional albeit imprecise (perhaps asinine) literary reference. I’ll lay out my utopian ideas à la Chernyshevsky, although you’ll see my mood is better represented by Doestoevsky’s Underground Man’s sense of disaffection and futility.
FDIC insurance should be uncapped
Let’s start with the basics of banking: Stan had it coming. Stan didn’t object when the banker put the $100 check his grandmother had given him into a money market mutual fund. He didn’t even object when the banker reinvested the earnings into foreign currency accounts with compounding interest! Stan pursued a risky investment strategy and it didn’t work. It’s gone! If we gave Stan his $100 back, he’d be incentivized to pursue risky strategies in the future, pocketing the rewards when it goes well and getting bailed out when it doesn’t. That’s moral hazard!
But Stan’s experiences are meaningfully different than those of SVB depositors. SVB depositors have lost access to funds sitting in checking accounts designated for operational purposes like payroll. These were deposits, not investments. (Ironically, one founder I met at SVB said he believed customers with money in SVB money market funds would be fine because SVB was only facilitating those products and the money was held by other banks.) Why must depositors be exposed to this risk?
Let’s try the moral hazard argument: uninsured depositors must face losses when a bank fails because this incentivizes depositors to use healthier banks that are less likely to fail, thereby reducing systemic risk. As Bill Ackman points out, this puts the onus of evaluating banks’ creditworthiness on each individual depositor. The best demonstration that this doesn’t work is what’s just happened with SVB. We had a lot of money there because we perceived it as safe relative to alternatives. Apparently Roku, Roblox, and many others felt similarly.
You could argue depositors were careless for concentrating funds in few accounts and in sizes beyond the FDIC insurance cap of $250K. Fortunately for us, Dor spread out smlXL’s operational funding enough that we have no immediate operational concerns. But Garry Tan estimates that 30% of SVB depositors will fail to make payroll in the next 30 days. I suspect that’s inflated, and it’s easy to laugh at silly startups suffering from irresponsible financial management (see below), but were they crazy to consider their deposits safe? When was the last time uninsured depositors actually lost funds? No, genuinely, I’m asking you. I spent 30 minutes Googling it. ChatGPT tells me it was when depositors of Guaranty Bank in Wisconsin lost about a million in 2017, but the FDIC says those were converted into deposits at First-Citizens. In this disorienting week, the only solace I take is that ChatGPT is still lying confidently to me.
To the point: remove the $250K limit on FDIC insurance. It’s actually free to do this in two important ways:
First, we’re going to commit to regulating banks in the future properly such that these failures never happen. Right?
Second, I’m here to announce that I’m partnering with my technical cofounder Giannis Antetokounmpo to launch a new startup focused on checking account abstraction–you thought this only mattered for Ethereum?! You’ll log in to Giannis Bank and see a checking account with millions in funding. Underneath the hood we’ll have that parceled up into as many FDIC-insured $250K chunks held at actual banks as required. We’ll do it. We’ll build a fully FDIC-insured synthetic checking account with no limits. If you don’t want me extracting rent from this nonsense, and I swear on my tech worker identity that I will find ways to unreasonably enrich myself, let’s just acknowledge that the $250K limit applied on an account level is arbitrary and capricious. That’s legalese for dumb.
Once we’re not holding depositors responsible for bank creditworthiness, who should take that responsibility? I don’t know… Maybe the OCC or the FDIC? What’s Gary Gensler up to nowadays? Is he busy?
No bailouts, unless *I* really need one
We’ll never have this problem again now that we fixed the FDIC. But what about the bailout that Tan, Ackman, and others are advocating? More precisely, they want SVB depositors to be made whole, quickly, and they’re quite pointedly arguing this would be the government acting on behalf of depositors to make them whole and avoid contagion, not a bank bailout. Rough day for SVB equity holders — nobody’s standing up for them!
You have to be really careful with positionality when making appeals to “fairness.” Sure, I agree on the surface with Tan that it’s unfair that some startups will fail based solely on the bank in which they deposited their capital, a random cull imposed on a generation of innovators. But, and I’m sorry in advance for being flippant, there’s part of me that responds as follows:
Boohoo for them. Silicon Valley is already random. What’s a little more? Who’s to say whether this is actually good or bad for overall innovation? Isn’t it also true that making depositors whole would constitute a massive transfer to the same VCs that contributed to the bank run by telling their portfolio companies to get out early? Was that fair? To what degree is this profiteering via scaremongering?
This is my visceral response even though I would benefit from depositors being made whole. I am them. Boohoo for me. I can’t imagine how the rest of America must feel about this prospect of the FDIC going out of its way to serve the generally very privileged customers of Silicon Valley Bank.
I am sincerely sorry if you’re reading this and you’re worried about whether you’ll make payroll or receive your paycheck next cycle. I don’t mean to trivialize or mock the very real consequences — I’m trying to reflect on perceptions.
However you may feel about what constitutes fair in this context, the bottom line is that as uninsured depositors, we’re not legally entitled to much at all beyond relatively preferred status in the long line of SVB’s creditors.
So what should happen now?
Let’s see if the FDIC can work out how to make depositors materially whole, preferably soon, without too much special treatment. Unlike Stan’s case, it’s not actually gone. We presume it’s not all gone. Right?
First, end the bank run, as they did overnight Thu/Fri. Perhaps they should’ve acted more quickly — $42 billion escaped amid rumors on Thursday — but that also may be more the discretion of the California Department of Financial Protection and Innovation than the FDIC. It’s also an incredibly important decision and one that you’d want to analyze very carefully. I find it hard to fault the timing. I presume they can’t claw back withdrawals made on Thursday? If they can, they should — those withdrawals are precisely as legitimate as those that failed to go through on Friday.
Next, fulfill your obligations to insured depositors. If the FDIC loses credibility, ruh roh. The FDIC promised in the press release that “all insured depositors will have full access to their insured deposits no later than Monday morning.” Thinking about the logistics of this, I find it remarkable.
Finally, how can they do right by uninsured depositors and other creditors? Their toll-free hotline is active right now, over the weekend, and those damn bureaucrats are diligently working away at making sure they have correct records for uninsured depositors. The obvious next step is as follows: “Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds.” But the more important part is in the preceding sentence: “The FDIC will pay uninsured depositors an advance dividend within the next week.” They know depositors need to access these funds in the near term and they’re issuing an advance to try to accommodate. Depending on the details, it’s this advance, presumably but not necessarily calculated as a percentage of the uninsured deposit, that will mitigate fears about startups not making payroll.
Three things I’ll be looking out for in the weeks and months ahead, assuming no buyer is found over the weekend:
- To what degree will next week’s advance make uninsured depositors whole? 80% would have drastically different outcomes than 20%.
- To what degree and on what timeline will uninsured depositors be made whole eventually, via the receivership certificates?
- How will the private sector accommodate startups with liquidity problems, perhaps by allowing them to trade or borrow against receivership certificates?
And, yeah, if smlXL’s operations ever come under immediate threat because of this nonsense, you’d better believe I’ll be crying to anybody who will listen for a rescue. I like my job. IT’S NOT FAIR!
Stuff you put at the bottom of a blog post
These are my own views, not those of my employer, smlXL. I didn’t want to comment too specifically about what this means for smlXL. Our CEO, Dor, has been transparent throughout. You can read more about how he experienced this (it’s pretty funny!) and what it means for us in his LinkedIn post. I also appreciate that he’s cool with me posting this — he even helped me by sharing some links.
I didn’t really edit this. I’m tired. If you see errors or have advice on how to make the post better, please email me at shaneauerbach@gmail.com. I’ll even acknowledge you here if you want.
I’m not sure if I’m allowed to use that image of me, taken by Justin/Getty, at the top. I’m going to ask for forgiveness rather than permission here. It is my likeness, right? At the very least it’d be a hilarious lawsuit! Anyway, Justin/Getty, if you want me to take it down, please pop me a cease and desist. I’ll chuck that in my “Fond Memories of the End Times” scrapbook and take the photo off this post. 🙂
Updates
- 3/12 #1: Astute readers have pointed out that removing the FDIC cap would not be free because the two reasons I gave for why it would be free above are counterfactual. Good point! And it’s also true that you, noble depositor, would likely have to pay for the removal of the cap in some form, given that FDIC insurance is funded by the banks whose depositors are protected. Anybody have any idea how much it would cost and how it would be passed through? In any case, depositors perceive the checking account as a risk-free store of value. If providing said product is a little more costly than a store of value that’s risk-free almost all of the time, so be it. Let’s surface that cost. If that drives consumers away from banks to stablecoins and mattresses, then I’d argue that’s a reflection on banking as a modern technology.
- 3/12 #2: Guys in my fantasy football league have pointed out that Giannis Bank already exists in some form, with examples like IntraFi and Max. I’m very disappointed by this — Giannis promised to do the due diligence on this one.
- 3/13: We were bailed out, but don’t call it a bailout! But, shit, yeah, it’s a relief to hear that Dor has access to all the funds once more.
