“Where is Powell? Where is Yellen? Stop this Crisis NOW,” cried a perturbed and angry David Sacks before market close on Friday March 10.
Sacks, the VC famous for co-founding PayPal, his tech investments, and for buying and dumping $1 billion worth of Solana, was raising the alarm that Silicon Valley Bank (SVB) had financial troubles and could risk a bank run.
In his panicky tweets, Sacks argued that if SVB wasn’t saved, regional and small banks would also experience bank runs, causing financial chaos.
SVB was one of the most important banks on the Silicon Valley venture capital (VC) circuit and conducted business with various companies that Sacks had previously invested in. A particularly notable cohort of SVB clients was the so-called PayPal Mafia, a group of investors who founded PayPal and are often associated with hard right-wing views.
Yet, it seems that a number of the PayPal Mafia’s members pulled money out of the bank before asking the authorities to step in. Indeed, Bloomberg reported that by March 9, Peter Thiel had removed his funds from SVB and was warning other investors and depositors to do the same.
Strangely, Sacks claimed after he started warning about a potential bank run that his VC firm Craft Ventures had no money in SVB.
Blame the Fed
Sacks is blaming the Federal Reserve for the collapse of the bank and is pinning the blame on a rapid rise in interest rates. He says that rate hikes were made after inflation caused by government “money printing” but makes no mention of Russia’s invasion of Ukraine and the subsequent energy crisis.
He also says that the low rates enticed banks to buy mortgage-backed securities and treasuries that have now dropped in value due to the rise in rates. He also associated the crisis at SVB with those at bankrupt crypto-banks Signature and Silvergate Bank. It’s important to note, however, that their problems have little if anything in common with SVB.
Silicon Valley degenerate
Sacks implies that banks risked buying negative-yielding bonds and mortgage-backed securities because the government told them it was safe to do so.
The reality is a bit more complex, however. Banks are allowed to take repository loans against their bonds, treasuries, and mortgage-backed securities. They can then use these loans to trade other financial instruments and/or hedge against their collateral.
Hedging against interest rate hikes with swaps is also a common feature for banks which have significant fixed-income portfolios. However, SVB appeared to go all-in without any consideration of the potential risks. Indeed, its filings show that by the end of last year, the bank’s $120 billion securities portfolio was mostly composed of bonds and MBS totalling around $90 billion.
The bank had deposits of around $189 billion and a total of $74 billion of loans to its clients. But there was one problem: its fixed-income portfolio was completely unhedged, and the bank is now being accused of hiding its losses with creative accounting.
Despite the fact that SVB was struggling with an oversized balanced sheet of securities which were on the wrong side of the trade, it kept giving generous loans and credit facilities to its clients until its very last days.
Everyone gets saved
Prior to HSBC’s buyout, SVB’s depositors were secured with a guarantee by the FDIC, effectively making the $250,000 insurance limit redundant. It was ‘mission accomplished’ for the PayPal Mafia.
Not so libertarian
For years, the PayPal Mafia projected an uncompromising libertarian stance against big government and government spending. Occasionally, it released highly controversial and contrarian positions on social issues and principles embraced by the majority.
For example, Sacks and Thiel once co-wrote an article against positive discrimination that focused mainly on the bias in favor of black students designed to close the racial gap in education.
Today, Sacks prides himself on being an outspoken critic of the US and its helping of Ukraine. He demands the US negotiate peace terms with Russia.
However, his desire to let the world function as it would without any government or state regulation is totally at odds with his demands for the federal authorities to save his favorite bank.