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In the immediate aftermath of Silicon Valley Bank’s failure on Friday, I shared some thoughts on the major takeaways:

There are lots of takeaways from the Silicon Valley Bank failure and the potential fallout:
✅ Massive potential for contagion amongst startups (SVB clients that didn't have diversified cash portfolios are facing an existential crisis. May need emergency cash to make upcoming payroll)
✅ Some potential contagion among banks/financial institutions. How entangled was SVB with other banks and financial players?
✅ Reminder of the fragility of an economy based on fractional-reserve banking -- where a lot of the money in the economy doesn't 𝘳𝘦𝘢𝘭𝘭𝘺 exist. We're never that far away from complete economic chaos.
✅ Does this accelerate/exasperate a potential recession?
✅ Next time someone tells you that government doesn't do anything, point them to the government regulators that just stepped in to take over SVB.
What else?

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As of this writing, the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation have announced that they would make SVB’s depositors whole.

As the situation developed over the weekend and more high-profile voices began advocating for specific solutions, I wondered about the speed and reflexiveness with which people advocate for direct government support of some and not others.

I don’t have answers here, just questions. And without documenting specific statements made by specific people, it's hard to point to specific instances of hypocrisy.

But trust me; hypocrisy is among us.

The government made the right decision. Fractional reserve banking is built on confidence. A loss of confidence increases the likelihood of potential contagion and runs on smaller banks. The federal government has a national interest in maintaining the public’s confidence in the banking system.

And once you strip away all the financial complexity, the reality is that a bunch of people had their money in a bank. Not just any bank, but one of the 20 largest banks in the country. These people did nothing wrong. I find it hard to root against them getting all their money back.

But most of SVB’s depositors with account balances >$250K are businesses, not individual people. While very few individuals are qualified to make a nuanced risk assessment of their bank's balance sheet, EVERY business should be able to do so.

The loudest pro-depositor argument is that the businesses that are currently banked with SVB currently employ hundreds of thousands -- perhaps even millions -- of people. If these companies didn’t get access to their money soon, many would have had trouble paying their employees in the days and weeks ahead.

But suppose the goal was to ultimately protect the “regular Americans” who work for these companies and whose paychecks were in jeopardy. What makes them different than the millions of Americans who are currently experiencing financial hardship through little or no fault of their own?

The truth is that everyone loves a bailout when it benefits them or those close to them.

Again, I believe the government has a national interest in protecting SVB’s depositors, but I also believe that the government too often bails out institutions under the auspices of bailing out people.

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Jamaal’s Letter

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