What a week it was for the tech community.
It started with many of them fearing they may not be able to make this week’s payroll after the US Government moved to freeze the assets of the Silicon Valley Bank, a mid-sized company that was banker to 44% of venture-backed tech companies in the US.
A handful of New Zealand companies with operations in the US were in the same boat, including Rocket Lab, which had US$38 million in cash held at SVB, 7% of its overall reserves. With the Federal Deposit Insurance Corporation scheme only ensuring the first $250,000 of deposits, it seemed last weekend that many tech companies would be cut off from their funds until the bank was put into receivership and sold. Even then, depositors may have taken a 10 – 15% haircut and had to wait months for the sale process to play out.
Photo credit: Mariia Shalabaieva, Unsplash
The lobbying power of tech
Instead, the US regulators issued a “systemic risk exception” for SVB as well as Signature Bank, the favoured banker of companies operating in the crypto space. These companies weren’t “too big to fail”, like the banks bailed out in the last financial crisis, but were clearly too important to allow to collapse into liquidation.
Everyone with deposits at those banks received their deposits in full, an unprecedented move that led to Silicon Valley breathing a massive collective sigh of relief, but which creates a very odd environment moving forward.
While the US Government didn’t use taxpayer funds this time to bail out these banks – the FDIC is backed by contributions from the banking sector itself, it has effectively lowered the bar massively for the types of financial institutions it is willing to make exceptions for. It’s not a great vote of confidence in the health of the banking sector. But it also sets up a moral hazard. If investors now know that the government is likely to step in to make everyone whole in the event of a bank collapsing, they are more likely to do business with a bank that is offering higher returns, but also a greater level of investment risk. It basically rewards bad behaviour.
But the SVB saga also highlights the lobbying power the tech sector can apply. Last weekend, thousands of Silicon Valley entrepreneurs, including Sam Altman, the co-founder of OpenAI, called on the government to come to SVB depositors’ aid. They feared an “extinction-level event” in the start-up community, setting US innovation back years. They took to Twitter, signed petitions and I’m sure their lobbying machine went into overdrive in Washington D.C.
Crypto collapse avoided
That argument clearly had some weight with the Biden administration, which has strong links to Silicon Valley. But it effectively rewarded the risky behaviour of self-interested tech investors, like the owners of Circle, which operates the USDC stablecoin. It had a staggering US$3.3 billion on deposit at SVB and the fallout from the bank’s failure saw USDC temporarily lose its peg to the US dollar. The tech sector needs strong and innovative banking partners, but this whole saga shows that there’s been poor management at the preferred bankers to Silicon Valley and not enough oversight of their investment decisions – a disastrous strategy of investing in long-term US Treasury bonds undid SVB.
As the Federal Reserve hiked interest rates, SVB found itself unable to make up the difference between the interest yielded on its assets and the higher interest it needed to pay on deposits. A surge in withdrawals as start-ups ate into cash reserves tipped it over the edge and forced it to sell its underperforming assets at a loss.
Sure, the US banking sector narrowly diverted disaster this week. But the tech elites also got their way. Risky behaviour was rewarded. It doesn’t bode well for the future.
Nor does the Biden Administration’s increasingly hostile actions towards Chinese-owned video-sharing platform TikTok, which was this week sent a clear message – divest Chinese ownership or face a ban in the US. The Trump administration first raised the prospect of a ban, on the grounds of “national security interests” and tensions between the US and China have only escalated since then.
Time running out for TikTok
A ban on TikTok, presumably put into effect by forcing Apple and Google to remove the app from their app stores, would set another terrible precedent. TikTok has 100 million users in the US. It’s vastly popular, an innovation success story. But seemingly too successful for the US, which is supposed to be the home of free enterprise.
TikTok’s Chinese founders are about as enthusiastic at the idea of selling out of the company as Mark Zuckerberg is about offloading his multi-billion stake in Meta. The US government may fear TikTok being used to manipulate users with disinformation campaigns run by the Chinese Communist Party. But there are other ways to deal with that, such as requiring that TikTok’s data collected on US users don’t leave the US and that there’s third-party auditing of any data transfer back to China. TikTok has effectively proposed that to the European Union with Project Clover.
But a few years ago we saw Huawei make similar overtures in a bid to save its 5G business in the Five Eyes countries, including New Zealand. But the perceived threat of Chinese infrastructure running our mobile networks saw the door slammed in its face. The irony is that the biggest threat the US has faced to date when it comes to social media, was exposed in the Cambridge Analytica scandal which involved one of its homegrown stars – Facebook.
We should see the moves to curtail Huawei and TikTok for what they are – power plays in an increasingly bitter geopolitical battle for supremacy that will accelerate the decoupling between the US and China on all things tech. That’s bad for everyone concerned.