Big Tech wins unfair advantage

It’s true that Silicon Valley Bank didn’t get a bailout. But Silicon Valley itself absolutely did. Here’s what happened.

Silicon Valley Bank is a bank for a bunch of Silicon Valley tech companies. It invested deposits in mortgage-backed securities that go down in value when interest rates go up. When the Federal Reserve raised interest rates, SVB ran into trouble.

Another problem? It had a concentrated base of depositors — tech companies — whose needs for capital also go up when interest rates rise. That created a doublewhammy disaster for SVB.

It turns out many of the tech companies who parked money at SVB did so without thinking too much about it — and made some horrendous decisions. The tech firm Roku, for example, deposited a staggering $487 million at SVB. The question is what should have been done about it.

Yelling ‘Fire!’

The normal rules of the road are clear: The first $250,000 are insured by the Federal Deposit Insurance Corporation. After that, the customer is liable for loss.

But Silicon Valley wanted a different set of rules for itself. So Sunday, venture capitalists and startup executives who stood to lose their SVB deposits worked overtime to push the narrative there would be a bank run Monday if the bank’s uninsured depositors weren’t bailed out by the government Sunday.

Narrowly, the gambit worked: Treasury Secretary Janet Yellen announced Sunday night that tech companies that deposited funds at SVB, even those that parked far too much money there without diversifying, would be made whole.

That’s crony capitalism — changing the rules after the fact to help a select few.

What’s more? Ninety-eight percent of political donations from these bailed-out firms went to Democrats. When President Biden talks about bailing out “small-business owners,” most people don’t have in mind elite venture-funded firms in Silicon Valley.

Favoring the ‘elite’

The federal government just sent a clear message to the American people: There are alternative rules if you are part of the favored class.

The Silicon Valley hype machine proclaimed it was about making sure workers at the tech startups weren’t harmed. But that’s mostly bogus, since most companies’ business models are the same today as they were a week ago.

If they’re viable, businesses could raise capital from the same venture capitalists who already funded them to fill the hole of what they’d lost at SVB.

But that would involve equity dilution — which means the chief executive officers and other venture capitalists don’t make as much money when a company becomes wildly successful.

That’s no basis for a bailout, so they pinned it to American workers instead.

Other VCs and tech founders called me over the weekend to make the case that I should be the Republican candidate who stands up for “innovation” by recognizing that Silicon Valley represents the cutting-edge of America.

Perhaps, but it’s no reason to reward financial mismanagement.

It’s a bailout, pure and simple. For years, SVB and its cronies lobbied for looser risk limits by arguing its failure wouldn’t create “systemic risk” and wouldn’t need special intervention by the US government. Yet now the same cronies claim SVB was “systemically important.”

A friendly reminder that everyday customers will have to shoulder the burden of this bailout through higher charges as they top up FDIC.

By selectively changing the rules after the fact for SVB, the US government incentivizes greater risk-taking by banks and depositors in the future.

There are real concerns about a potential bank run in America, but the right way to address those concerns isn’t to bail out tech startups who banked with SVB. It’s by taking basic steps, like the Federal Reserve doing one of the few things it is actually supposed to do — serving as the lender of last resort to American banks.

The deeper problem is that the Federal Reserve has been trying to play God for too long. Except with a fat finger.

As president, I’d put the Fed back in its place: Focus exclusively on making the dollar a stable unit of measurement. Full stop. That’s the first pillar to unlocking economic growth.