When news of the Silicon Valley Bank crash broke, I sighed deeply. Because sighing deeply is the age-appropriate version of a toddler pounding their fists on the floor screaming “I don’ wanna, I don’ wanna, I DON’ WANNA!” That’s always how I feel when I have to understand some complicated new brouhaha caused by oligarchs’ greed, when all I truly need in this life is more naptime.
Guys, don’t worry. Because I am a grown-up woman with finely tuned coping mechanisms, I worked through my tantrum and I did it! I understand what the hell happened to Silicon Valley Bank.
Paragon of intellectual generosity that I am, I’m going to explain it back to you.
If you want an in-depth, technical breakdown, this ain’t gonna be it. I’m going to focus on what this means for us plebs. That means skipping all the boring parts, creatively employing childish metaphors, recklessly speculating about its impact on the future of the economy, and oversimplifying absolutely everything.
Complex, dense financial topics explained by babies, for babies. That’s the Bitches Get Riches brand promise!
The learn to code VC genius types wiped out their own troubled but probably ultimately solid bank because they were all in a group chat together and panicked. https://t.co/QimOqdlrQT— Evan Hill (@evanhill) March 12, 2023
What happened to Silicon Valley Bank, in 12 sentences
(Deep breath) ALL KILLER, NO FILLER, HERE WE GO!
Silicon Valley Bank is a mid-size bank serving primarily tech companies. It collapsed in the span of 48 hours because customers fundamentally lost faith in the bank.
See, banks aren’t warehouses for money. They don’t hold your money and do nothing with it—they use it to buy investments for themselves that make money. They only keep a portion (usually 10% or less) in liquid cash at any given point.
If many customers demand all of their money, in cash, right goddamn now, it’s called a bank run. When the bank runs out of cash, they need to sell some of their investments to repay the customers. Silicon Valley Bank had invested heavily in ultra-safe government bonds, but due to recent interest rate hikes, now is a bankruptingly terrible time to sell… especially since many of those government bonds had not yet reached maturity.
“But wait,” you say, “aren’t bank accounts insured by the government?” Yeah—but only the first quarter million. Most of these tech companies had magnitudes more than that on deposit at SVB. Because libertarian tech bros are famous hypocrites where their own money is concerned, some combination of the government and a rainy day fund paid into by all banks will ultimately make all SVB’s customers whole.
Lesson #1: Don’t put all your eggs in one basket
Okay, so most banks want to have a diverse client base. They like it that way.
But Silicon Valley Bank wasn’t like most banks. They catered primarily to one particular kind of client: tech startups funded by venture capital. This lack of diversity would come back to bite them in a few different ways.
First and most simply, they made themselves too dependent on one very specific source of income. Now, I get why. The venture capital money spigot’s been blasting like a fire hose for years, and Silicon Valley Bank wanted nothing more than to get wet. But despite signs that tech was becoming increasingly overvalued and unstable, they didn’t diversify their client base much.
Specializing can be good, but it can also be dangerous if it limits your options to pivot.
Think of it this way: there will always be work for translators. You may make a name for yourself as a translator of a rarer language—like say, Swedish. But if you spend decades specializing in translating furniture assembly manuals from Swedish into English, you’d better have a really damn good plan in place if something bad happens to Ikea. Doubly so if there’s broad consensus that Ikea is overdue for what their catalogues call a Mājɔr Dau̇wntürn.
Lesson #2: Don’t depend on people who aren’t dependable
The technology industry is full of people who are… hmm. How shall I put this? I believe the technical term is “in Goblin Mode.”
Constantly and intentionally.
Tech startups enjoy being chaotic and unpredictable! They wear the term “disruptor” as a badge of honor. They think “move fast and break things” is an inspiring and accurate motto to live by. The titans of tech are known for being cold, controlling, selfish, greedy, destructive, retaliatory, exploitative, thieving, lying psychopaths who will achieve success at any price.
Given that Silicon Valley Bank largely catered to this clientele, I’m very confused as to why they didn’t anticipate a greater degree of instability.
Did they think these
money-hungry sociopaths mission-driven entrepreneurs would make for calm and loyal customers? You’re a zookeeper building a cage for face-eating leopards. Surely you accounted for their nature, being infamously less than peaceful and docile…?
The lesson here is obvious. Don’t depend on undependable people. If your boss gives you inconsistent work hours in June, don’t assume it’ll all turn around in July. And if your coworker gossips to you, assume they also gossip about you. If your parents want you to co-sign a loan for them because their credit is bad, the most likely outcome is bad credit for you too.
Whenever possible, be self-reliant and defensive with your precious time, reputation, and money. Only extend trust to those who demonstrate consistent trustworthiness.
Lesson #3: Don’t surround yourself with people who talk, act, and think exactly alike
Tech Bro’s Mom: “If Peter Thiel jumped off a bridge, would–“— Bitches Get Riches (@BitchesGetRich) March 14, 2023
Tech Bro: (is already midair)
“Diversity is good for business.” When we say that, you might hear “diversity is good, so businesses should embrace it.” But that’s not what the data says.
Adding people of different ages, genders, races, education levels, and socioeconomic backgrounds to a company’s workforce helps it generate better ideas. Diverse companies literally make more money, period. Diverse boards are correlated with less corruption, bribery, and negative litigation.
You’d think “making money” and “following laws” would be high priorities to banks. Yet somehow, the financial sector persists in having some of the worst diversity metrics among all industries.
What do you get when you collect thousands of people who share the same wants and fears together in one place? If you answered either “the wildebeest scene from The Lion King” or “the Silicon Valley Bank Crash,” you’re right.
Analysis has already attributed the wave of recent tech layoffs to nothing more than tech companies copying each others’ panic. In the idolatrous founder-worshiping cult of tech startups, one significant figure can make the whole herd stampede. Silicon Valley Bank died because its own customers triggered a bank run, and advised their peers to do the same. Everyone was in such a hurry to save themselves that they launched the Titanic lifeboats when they were only half full. Piggy will get mad if I mix any more metaphors, but the fallout is clear.
“I also told all my panicking friends this, too”— Vote Brandon Johnson for Mayor (@bainard) March 13, 2023
When you need help, you need a network to ask for advice. Make sure you fill your network with people who aren’t exactly like you. If everyone in your network is drawing on tremendously similar life experiences, you’re not going to get fresh ideas or competing viewpoints back. I cannot tell you the number of times that a great insight has come to me, like a beautiful gift, from someone who’s lived an extraordinarily different life than mine.
Lesson #4: Laws tell you what’s legal, not what’s right
Here’s a critical point: As far as we know, Silicon Valley Bank didn’t break any laws.
But this does not mean that they did everything right.
In our brief explainer, we mentioned that only a small portion of a bank’s money must be kept in cash reserves. And only the first quarter million dollars in a bank deposit account is insured by the federal government.
If Silicon Valley Bank wanted to stay safe, they could’ve kept more cash in reserves than was legally required. They could’ve considered the general instability of the tech sector, and noticed how their clients were all part of the same tightly-knit industry prone to a chaotic kind of herd mentality, and pumped the brakes.
… But that would’ve meant making less money. And as a publicly traded company, their imperative is to make their shareholders the maximum amount of profit possible. The decision makers at that company own shares too, so they never want them to tumble, and make incredibly risky decisions to sustain their profits. But risky decisions can lead to catastrophic failures like this one. This paradox is one of many reasons why investing ethically is so difficult.
Here’s the lesson: Just because something is legal doesn’t mean it’s right. If you follow all traffic laws—wear your seatbelt, use your blinker—would you knowingly merge into a lane behind a driver who’s driving super erratically? No! You’d avoid them, bide your time, make another choice, because you’re not trying to die today. To protect yourself, you usually have to do more than the bare minimum.
Lesson #5: The most dangerous place to be is in the middle of a crowd
When a terrorist attack struck my city, I stood up from my desk, exited the building, and walked three miles home in my high-heeled office shoes. There was no way—no way—I was descending to the underground, into the busiest subway station in the city, with a mass of increasingly panicked people. Uh-uh. No. Not today, Satan.
My instinctual fear of crowds extends to my money and career as well. When a large group of people rushes toward one investment, one career, one idea—you’ll usually find me racewalking in the opposite direction in impractically high footwear. And that’s a choice I’ve never regretted.
It’s just like Yoda said! “Fads lead to bubbles. Bubbles lead to crashes. Crashes… lead to suffering.”
If you want to learn more about this, we have an in-depth article on it here. Or just watch this old Japanese game show footage. Your choice.
Here’s the key takeaway: Good financial decisions are intrinsically motivated. You put more money here and less money there to try to maximize your personal safety and happiness, which only you can fully understand. If you join a crowd (“learn to code!” “invest everything in BitCoin!” “pull all your money out of SVB!”), you’re surrendering yourself to a potentially highly damaging force for way too little gain.
Lesson #6: Bitches Get Riches is always right
Y’all, we try not to wave the “we were right” flag too often. But it’s really hard not to because the opportunity presents itself several times, every day. Even if we’re not perfectly right, we’re probably tangentially right. But more importantly—we’re never wrong!
We have been loud and proud about our aversion to cryptocurrency. We’re confident we will never regret that stance, no matter how hot that market may get.
Instability in the crypto market didn’t cause Silicon Valley Bank to collapse.
But it didn’t not cause it.
Five months before the SVB crash, Sam Bankman-Fried’s FTX folded essentially overnight. Billions of dollars up and vanished like a fart in the wind. Silicon Valley Bank’s clientele certainly would’ve been among those affected, directly or indirectly. And this abrupt, chaotic collapse would’ve primed them to spook at every rustling leaf and snapping twig.
In an alternate universe where a major crypto boy king hadn’t abruptly lost billions, I think Silicon Valley Bank would’ve quietly weathered the storm of a little over-leveraged debt.
So, the final lesson? We’re always right. Listen to your aunties!