Books

I know. I know. Everyone is talking about the indictment of Donald Trump. For the last two to three years, I’ve complained that I’m extremely tired of talking about and writing about Donald Trump. It is hard to adequately tell you how sick and tired I am of discussing Donald Trump.

Since 2015, he has dominated the headlines like no other person during my lifetime. There have been various celebrities over the last several decades that have dominated headlines—like Madonna, Michael Jackson, the Bee Gees, Taylor Swift, the Beatles—and there have been politicians that have had their time in the spotlight like Spiro Agnew, Richard Nixon, and Ronald Reagan, to name a few. But no one has been constantly in the news like Donald Trump. So, I’m going to start off this month’s column by talking about finance and the Silicon Valley Bank.

Savings-And-Loan

Some readers remember the hundred-billion-dollar bailout of the savings-and-loan industry from the 1980s. Savings and loans used to be the neighborhood bank. They were a place we could put your money, and your money would steadily grow over time. You could get small loans, like a mortgage or car loan, but nothing risky.

Then, in the early 1980s, Congress, in its infinite wisdom, decided to deregulate the savings-and-loan industry. Very quickly many of these S&Ls began investing in highly speculative real estate. At the same time, many of them began using fraudulent lending practices, because there was little or no oversight. They were loaning money to friends with no collateral. They were loaning money to shell corporations that existed only on paper. They were loaning money to politicians to make sure oversight stayed away.

Finally, interest rates began to rise. Many of these savings-and-loan institutions had invested in real estate at a fixed interest rate. As interest rates began to rise, profit margins began to shrink and disappear. In order to rescue this industry we poured billions of dollars into what seemed to be a black hole.

Remember the Keating Five? Five senators— Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), Donald W. Riegle, Jr. (D-MI) and John McCain (R-AZ)—intervened to keep the Federal Home Loan Bank Board from investigating Lincoln Savings and Loan and its chairman, Charles H. Keating, Jr. When the bank collapsed in 1989, the scandal went public—and Charles Keating went to prison.

Remember this tale. Deregulation. Risky investments. Rising interest rates. Failure. Government rescue.

Silicon Valley Bank

Until about four weeks ago, I suspect none of us had heard of Silicon Valley Bank. Why would we? It’s headquartered in California. It was a regional bank. Yet, it was the 16th largest bank in the country.

The original idea behind Silicon Valley Bank was relatively simple. They wanted to cater to Silicon Valley startups. The bank opened in 1983 (this is somewhat ironic since the savings-and-loan collapse began right around this time). Over the next several years, the bank found its niche in the technology sector. It developed a symbiotic relationship with several of the biggest venture capital groups. Slowly, they began to open branches throughout the country—but strategically located those branches in technology sectors. The bank continued to grow steadily.

In 2017, the Trump administration decided that small and regional banks did not need onerous oversight and regulation. Therefore, these banks were placed under what would one could call light supervision. So, a bank that had assets of less than $200 billion was considered small or regional. Banks would only get increased scrutiny when they had assets of over $200 billion.

This regulatory change allowed Silicon Valley Bank to become top-heavy with risky loans to start-up companies that have a high rate of failure. SVB also had a large number of loans that were unsecured.

One of the final pieces to this complex puzzle was the fact that Silicon Valley Bank had invested heavily in treasury bonds. Treasury bonds are a great investment when interest rates are low. So, Silicon Valley Bank grew rapidly in a two-to-three-year period with little or no oversight—until they reached that $200 billion threshold in late 2021. At that point, regulators were seeing problems in Silicon Valley Bank. Citations were issued, but it appears that they were too late to avoid the disaster that was ahead. Covid hit the world. Inflation started to grip our economy. This was followed by an increase in interest rates. Those treasury bonds switched from being an asset to being a debt. (Do you see the familiar pattern emerging?)

You don’t have to be a Nobel prize-winning economist to predict that interest rates wouldn’t stay low forever. This was predictable. The executives at Silicon Valley Bank were either stupid or reckless, or both. The big unanswered question is how many other banks have taken advantage of these looser regulations and will need to be bailed out in the near future?