All Depositors Were Equal, But Some Were More Equal Than Others

All Depositors Were Equal, But Some Were More Equal Than Others

All animals are equal, but some animals are more equal than others.”―George Orwell, Animal Farm

Editor’s note: We’ve previously published an article about the vicious cycle of bad money policies that led to the recent economic crisis.  

On the failure of Silicon Valley Bank, according to UW School of Law:  “Through its nearly four decades of existence, Silicon Valley Bank served numerous tech startups and became the largest bank by deposits in Silicon Valley. Over a period of just two days in March 2023, the bank went from solvent to broke as depositors rushed to SVB to withdraw their funds, resulting in federal regulators closing the bank for good on March 10, 2023.

“The Silicon Valley Bank failure is the largest bank failure since 2008. This is significant. It’s been a long time since the last failure that was as big as this one, which was Washington Mutual.

“There are a lot of specific reasons why this happened. Silicon Valley Bank was a bank in the tech area — Silicon Valley, California. Many of its companies were tech startups, so there’s a concentration of money from just one sector. When we started to see rising inflation rates and other things, many companies started struggling to get additional financing from venture capital and elsewhere. So, they needed to draw on the deposits they had at Silicon Valley Bank. When you have one industry that suddenly needs cash, many companies will go to the bank and try to withdraw all their money. That’s a run on the bank. A bank doesn’t have all that cash on hand. Silicon Valley Bank, in this instance, had invested that money because it’s better for them to take that money from depositors and invest it. And when these tech startups wanted all their money in cash it resulted in a run on the bank.”

The nation’s deposit insurer (FDIC) let slip the other day which large depositors were bailed out when Silicon Valley Bank (SVB) failed last spring. SVB banked the nation’s tech illuminate.

Its failure exposed fractional reserve banking’s Achilles heel when a bank run was initiated via social media and carried out with depositors moving money on their cell phone apps. The bank’s assets were primarily government or government-backed securities, unfortunately purchased when interest rates were near zero.

Fortune.com reports:

A document from the Federal Deposit Insurance Corp., which the agency said it mistakenly released unredacted in response to a Bloomberg News Freedom of Information Act request, provides one of the most detailed glimpses yet into the bank’s big customers.

Bank deposits are insured up to $250,000, except in the case of SVB, which was termed a “systemic risk exception.” President Biden commented at the time that covering all deposits, “protects American workers and small businesses, and keeps our financial system safe.”

Small businesses? Ha! Depositors bailed out included: Sequoia—the firm famous for backing iconic companies including Apple, Google, and WhatsApp—had $1 billion at SVB. Kanzhun, which had $902.9 million in deposits with SVB. The company—which was heavily backed by Chinese giant Tencent before it went public on the Nasdaq in 2021—was among the largest Chinese companies to IPO in the US that year. Altos Labs Inc.—a life sciences startup that works on cell regeneration—had $680.3 million on deposit with the bank. The privately-held company had raised billions from billionaires including Jeff Bezos and Yuri Milner, as well as Mubadala Investment Company and other investors.

Advertisement

Payments startup Marqeta Inc. had $634.5 million at the bank. IntraFi Network, which provides deposit services to financial institutions, had $410.9 million worth of deposits at the bank, according to the document. Crypto stablecoin company Circle Internet Financial Ltd. was SVB’s biggest depositor with a balance of $3.3 billion. Streaming set-top box maker Roku Inc. had $420 million on deposit. Fintech company Bill.com had $761.1 million deposited.

SVB’s top 10 depositor accounts held $13.3 billion total.

Last month, Duncan, Oklahoma-based bank—First National Bank of Lindsay—failed. The Office of the Comptroller of the Currency (OCC) stepped in, believing the bank was “an unsafe or unsound condition to transact business.”

Bankingdive.com reported that $7.1 million of the Oklahoma bank’s $97.5 million in total deposits were uninsured. Oklahoma—being a long way from Silicon Valley and without boldface business titans as deposit clientele—received no special treatment from the government. Rajashree Chakravarty reported, “The FDIC said it would make 50% of uninsured funds available to depositors Monday, adding that the amount could rise as the FDIC sells the failed bank’s assets.”

First Bank & Trust bought Bank of Lindsey’s insured deposits and just $20 million of the failed bank’s loan portfolio. Thus, the uninsured depositors will have to wait until the FDIC sells the failed bank’s loans to see how they come out on the other half of their deposits. They shouldn’t hold their breath.

Murray Rothbard explained:

“Deposit insurance” is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public.

As for fractionalized banking, “the entire fractional-reserve system is held together by lies and smoke and mirrors; that is, by an Establishment con.” The con continues for Big Tech. For Oklahomans, not so much.

Banner Image: Pile of animals. Image Credit – Pfüderi