There are some absolute turkeys out there, no question -- but there were/are also a lot of people who have taken pay cuts and betting it all on themselves to try to bring something innovative and important into the world. And when you say "they got into trouble", what you mean is: the bank in which they (we) are depositors was subjected to a bank run (something that no bank can survive). And yes, I believed and believe that depositors should be made whole: we -- as a group -- were not acting with avarice or recklessness. I am proud of my government and our hard-working regulators who were able to ignore the shrill caricature and see the very real lives that would been adversely affected by deposit loss.
I'm sure the whole story will come out eventually, but I think there were some better options that I really hope were seriously entertained and that this was a last resort after those didn't pan out. We probably disagree on this (and I think reasonable people can), but I think one of those better options would have been a private sale with some relatively small haircut - 50% no, 99% definitely, 95% probably, 90% maybe; it's fuzzy - to uninsured deposits. That would have been painful. But it is also painful to make up yet more ad hoc public backstops for a banking sector that reaps large profits. Theoretically they earn those profits in large part through risk management on their customers' behalf. But increasingly it is actually the federal government of the US that is actually taking on that risk.
I have a ton of empathy for everyone with business or paychecks at risk, really I do. But I also don't like continuing our march toward privatizing profits while socializing losses.
We definitely disagree, because anything less than 100% was going to result in the failure of other banks -- probably FRB among them. (It's very hard to argue that there wasn't systemic risk when Signature also failed!)
Isn't this a bit of a narrative switch? It seems like this started with empathy for founders and employees of companies with deposits at SVB, and I feel that very strongly, for all those individuals.
But then there's this whole other narrative about the banking system as a whole, and that side of this I'm much more annoyed by. It really reminds me of the financial crisis bailouts, which I found frustrating, being painted into a corner like that and forced to save the banking industry. And this is frustrating for the same reason. Which is not to say it isn't the right decision! It was the right decision in the financial crisis and I trust that it's the right one now.
But until the FDIC and Fed and Treasury clearly all came to this conclusion, I was more skeptical of this narrative, because most banks don't have such a high concentration of uninsured deposits as SVB did.
But I do trust that the regulators had more information than me about the systemic risk of this, and made the right decision, and like you said, I'm very glad we have that institutional capacity.
Why let depositors in the US banking system lose capital when there's an insurance fund covered by the banking system itself for this purpose? The investors in SVB lost everything, isn't that accountability enough? You really want businesses with payables and payroll that exceed the FDIC limit by millions to be exposed to risk for relying on the US banking system, to what end, why?
Because this isn't the purpose of that insurance fund. Its purpose is to cover insured deposits, and these are uninsured deposits.
I'm very open to ideas about how to change the program to better support businesses on the large side of small or the small side of medium. I think raising the insurance limit, maybe conditioned on payroll size or something, and thus also raising the insurance premiums, seems like an idea that makes a ton of sense.
But that wasn't the rule on Friday, and it wasn't what the premiums historically charged to banks to build up that insurance fund were priced for. And it's especially rich that banks (like SVB!) have long lobbied to keep those premiums low, and now want to benefit from suddenly switching the insurance policy to be unlimited. It's like if I constantly pushed to keep my home insurance premium low with the trade-off that they would only cover part of my losses in a fire, and then after a fire I made a big stink about how my insurance company should cover an unlimited amount of my costs to rebuild.
This is the second time in my life now that I've woken up to find that I'm being held hostage by banks essentially saying to my government "nice society you have there, it would be a shame if something were to happen to it...".
They're right, we do have to bail them out, but it's bad that this is the case.
What losses are being socialized? This is a liquidity issue that is being reconciled with short term loans, not a solvency issue being bailed out with tax dollars.
So I don't know for sure, but my intuition is that if this were a great deal with no losses, there would have been a private solution.
The socialization of the losses is the mechanism where any losses that do happen will be passed on to other banks, who will pass that on in some way. I am certainly glad it isn't taxpayer funds, but it's not a free lunch.
I mean, they spent the weekend trying to find a private buyer and clearly nobody wanted it. Doesn't seem to be a reach to conclude it might not actually be a great deal for the new owners (the US government)...
> [W]e -- as a group -- were not acting with avarice or recklessness.
(First off, unashamed Oxide/Bryan Cantrill fan!)
Perhaps I am misunderstanding you, but some of the depositors obviously were reckless. Circle had $3.3 billion at a single bank. Roku had $487 million.
If you're trying to say that you/Oxide did not act recklessly, maybe not, but some of the depositors obviously did.
Ask yourself, if I was your accountant/CFO/CRO and I approved keeping vast uninsured amounts in a community bank, and that bank went under (as some have), and FDIC chose to uphold the letter of the law (as sometimes it has -- I'm not miles from were one of the most important oil and gas bank failures occurred), ask yourself -- would your board allow me to keep my job? I think not.
This bailout, with a few day's hindsight, is probably an okay policy, but this industry's failure to understand why people feel this way, and to shade the truth around something depositors are not supposed to be doing, is simply terrible politics! (Goes to "Why do people hate us?! We're not the tech bros...")
How would I get this industry on the road to being likable again? Be humble -- say we (as an industry, as a company) made a mistake, thank the feds and the people of the US for helping your industry get back on its feet, and you personally, out, and the put your head down and get back to work. Don't you dare imply people shouldn't be resentful when you've been given a special break/bailout. Be thankful, no one was entitled to this bailout.
It's not a bailout, it's a backstop -- it's making depositors whole. There is no doubt in our mind that there would have been contagion from anything less, but even if you assume the absolute bleakest scenarios, we would have been returned 80 cents on the dollar of our deposits -- and we likely would have made up the gap in the debt that we owed the bank. (We'll go into this in a bit more detail in our Oxide and Friends on Friday.[0])
In terms of "this industry", do you mean venture-backed startups? I'm not sure what mistake you're looking for people to acknowledge; taking on venture debt? Agreeing to a (non-negotiable) covenant that required us to bank with the provider of that debt? I think it's too reductive to think of this as one mistake, but if you must: the mistake wasn't made by depositors, it was made by Congress when they rolled back key provisions of Dodd-Frank.[1] (Part of Trump's "doing a number" on Dodd-Frank.) Without that SVB would have needed to be stress tested much more than they were -- and depositors would not have been exposed at all.
>>> [W]e -- as a group -- were not acting with avarice or recklessness.
>> this industry's failure to understand why people feel this way
> In terms of "this industry", do you mean venture-backed startups? I'm not sure what mistake you're looking for people to acknowledge; taking on venture debt?
Let's not be coy. I think we all know the VCs who tried to talk this country into more bank runs this weekend (which you may have appreciated, but which the rest of the country found disgustingly selfish). You couldn't miss their pod or their constant posting in our Twitter feeds. And you, in particular, would seem to be well-adjusted enough to understand to whom I'm referring, you're talking about the same industry in this video: https://vimeo.com/190937358
> I think it's too reductive to think of this as one mistake, but if you must: the mistake wasn't made by depositors
You will not get any argument from me that deregulation had a part to play in this bank's failure. And no one is pointing fingers at Oxide for taking venture debt and/or agreeing to that covenant. Yet, most industries also don't destroy their bank out of "out of boredom and a desire for Twitter clout"[0].
I simply do understand the unwillingness to recognize that Circle and Roku were playing with fire, because sometimes community banks fail. You perhaps didn't deserve this, and you were perhaps subject to a term that was bargained for, but I thought you had chosen to discuss this issue re: the entire industry (if not here, then on Friday). The entire industry was given a break and you got lucky too, right?
I can see that the venture-backed start-up industry is feeling very embattled right now, which is unsurprising given 1) it all almost went down the tubes, and 2) you are taking shots from both the left and the right. However, this isn't as complex as you and others make it out to be -- many companies left vast sums (88% [1]) uninsured for very little reason, and were saved because FDIC went above and beyond what was required by law. Note -- which was probably a good thing for America!
The issue, political or otherwise, is acting entitled to it, and remember -- the pleas for a backstop/bailout were dripping with entitlement. At this moment, you don't have to act like you deserved a bailout/backstop, so why should you? Because the smart political/comms/marketing move is to be the first to say, "These events were almost tragic because it is tragic when any dream dies. Far too often, some in this industry have set themselves apart from the rest of America. Not today. Our government took action to stop a cataclysm for us. We will be forever thankful. We are so proud to live in a country, and among a people, who cared enough to not let the dream die. We won't forget." That may sound cheesy to you, but the alternative is "of course, it's the Rs and deregulation" and "no small business pays attention to insurance limits". Technical reasons that make a super majority of Americans want to barf up their lunch.
If you want to know why the country wants to kick you while you're down -- it's because you don't sound grateful and you should be grateful. I can hear you right now say "My company is all about heart" but you need to start sounding like it.
I think our perspectives on this are just really different. To me, this is much closer to a natural disaster -- which honestly prompts a question that has been troubling me: we in the Bay Area are in a seismically active region, with fault lines running through much of our urban areas. In a seismic event, am I going to have to first apologize for "the mistake" for where I live? Is FEMA aid going to be couched as a "bailout"? Is this going to be dubbed a "broquake" whereby innocents are made to pay a price because some unsavory people are as affected as they are? If this seems far-fetched to you, it doesn't to me, which may highlight how divergent our perspectives are...
> I think our perspectives on this are just really different.
Appreciate the opportunity to converse, and I hear your perspective. I was trying let you understand why others feel very differently, if you're going to ask yourself why some may not love your industry.
> To me, this is much closer to a natural disaster
It's interesting to analyze it in this way, but this analogy runs into its some difficulties. Natural disasters are one reason why we have insurance, and subsidizing/bolstering insurance in the wrong ways often leads to moral hazard (insurance is where I believe we get the phrase). It's plainly fair to ask whether we should subsidize flood insurance in a flood plain. The benefits of FEMA disaster relief are widely shared, and are not unlimited. Private insurance pays for plenty of the costs associated with hurricanes, etc. So, this analogy is imperfect for lots of reasons, but the most salient of which is, this bank failure was in no way natural. Bank failures are simply a fact of financial life.
This isn't to say your bailout/backstop is not now a fine policy. I bet you and your employees have been through what seems like hell the last few days. And you've done amazing things at your new company over a few short years. I can fully understand how you feel this way because I might feel this way too.
But IMHO what people are desirous for in public life is less entitlement, less division, and more fellowship and public spiritedness. Values which I am almost certain you share.
