By José Castillo, a leader of Socialist Left, the Argentinian section of the IWU-FI
13 March 2023. On 12 March, the Silicon Valley Bank collapsed. It unleashed a weekend-long tremor and a sharp fall in the share prices of banks on the world’s stock markets. A new sign of an imperialist capitalism in chronic crisis. Whatever the outcome of this episode, the big capitalists will try to make the working class and the peoples of the world pay the price.
Silicon Valley Bank was a financial institution specialising in financing technology companies, both large corporations and smaller, emerging start-ups. It was the 16th largest bank in the United States. Its failure is the second largest in US history (the largest, in 2008, was that of Lehman Brothers, at the height of the crisis at the time).
Over half of the technology companies in the Silicon Valley region of California had money deposited in the bank, including the vast majority of startups.
Rumours of the bank’s collapse led to a run on Thursday and Friday, when 42 billion dollars were withdrawn. Eventually, the Federal Reserve declared bankruptcy. The US Federal Deposit Insurance Corporation, a state-owned entity, was left as “liquidator” and in charge of the $175 billion in deposits. The problem was that deposits are only guaranteed up to $250,000 per account, covering only 7 per cent of deposits.
Why were there so many large deposits in Silicon Valley Bank accounts? Because most of them belonged to new technology companies, the so-called startups. A startup is a new, usually small company that, because it is in the new technology field, aims to grow quickly. They rely on capital from third parties, be they speculators, other large companies or banks. Start-ups often find it difficult to get financing from more traditional banks, as they do not meet the security requirements. Silicon Valley Bank was a bank that specialised in providing these “risky” loans.
Startups rarely have much income: they pay their employees and other bills with the cash they raise by selling shares to venture capitalists. And they keep the surplus cash they raise somewhere. Many of them had it in accounts at Silicon Valley Bank, as it was that same bank that had given them loans that other, bigger banks had refused.
A deflating bubble
What happened was a new chapter in typical speculative bubble bursts. By 2021, these venture capital technology companies had raised 330 billion dollars in financing. All in a context where, after the pandemic, they were rapidly expanding. But then their businesses became less profitable, and they shrank (the manifestation of this is the laying off of hundreds of thousands of workers in all the companies in the technology sector). The Federal Reserve raised interest rates to lower inflation, making credit more expensive.
Silicon Valley Bank had placed its deposits in 40-year Treasury bonds. When the Federal Reserve raised interest rates, the old bonds, with lower rates, lost value and their value fell. Depositors of technology companies, acknowledging their businesses were not profitable, tried to withdraw their money from the banks. But the bank could not pay them back: it only had these devalued bonds as a counterpart. Silicon Valley Bank tried to sell its own shares to raise cash, but these too fell. That’s when the run and bankruptcy happened.
The bankruptcy of Silicon Valley Bank is a consequence of the Federal Reserve’s rate hike, which, in order to lower the high inflation in the US, is prepared to move towards a recession. With high rates, money is more expensive and scarce, and that triggers runs like the one that destroyed Silicon Valley Bank. But it is also a consequence of the fact that the speculative bubble in technology companies is deflating, and every investor is desperately trying to rescue his or her money.
Banks without control
A pertinent question is why Silicon Valley Bank was allowed to have such exposure to risk, gambling with its customers’ deposits by putting them into bonds that ended up losing value. The answer is that, in 2015, Donald Trump’s administration had dismantled almost all the regulations that had been put in place in the 2008 crisis to prevent this from happening again. It was Greg Becker, the president of Silicon Valley Bank, who was the main lobbyist in the US Senate to reduce regulations on banks with capital of less than 250 billion dollars (all banks with assets of over 50 billion dollars were subject to strong controls). With the relaxation of controls, hundreds of banks, including Silicon Valley Bank, were left with their hands free-for-all kinds of speculative manoeuvres.
The failure of Silicon Valley Bank has affected many technology companies of various sizes, which, if they do not recover their money, are not even in a position to pay this month’s salaries. Such is the case of Roku (low-priced streaming devices), Circle (electronic payment management technology), ROBLOX (online gaming platform), BlockFi (cryptocurrency lender), Compass Coffee (online coffee shop), Camp (online toy store), Axsome Therapeutics (pharmaceuticals), Rippling (payment management), among the most important.
First step towards another crash?
The collapse of Silicon Valley Bank is undoubtedly the one that made the most noise. But previously there had already been the bankruptcy of the bank specialising in cryptocurrencies, Silvergate, and on Monday the Federal Reserve itself had to declare the closure of Signature Bank.
On Monday, the prices of all banks fell on the world’s main stock exchanges, fearing a contagion effect. Branches of those affected appear outside the area of Silicon Valley companies. Technology companies in Israel and India appear to be involved. Also in Britain, where HSBC is reported to have gained the British branch of Silicon Valley Bank for just one-pound sterling.
To prevent panic from spreading, there was a joint statement from the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation to guarantee that all deposits would be paid out. President Joe Biden himself had to come to the defence of the banking system, stating that there would be new regulations, a difficult issue to implement with the current composition of the US Congress. However, none of these announcements brought calm, and at the close of the main markets on Monday, uncertainty remained.
We cannot expect whether we are already facing a new crash of the kind experienced by imperialist capitalism in 2008, or whether the big bankers, the imperialist governments and the international financial organisations will control the situation. What we can say is that what is happening is just another chapter in a chronic crisis of imperialist capitalism that has already been going on for half a century with countless such situations, many of which ended in acute global crises. And which in all cases began with the bursting of speculative bubbles generated by fictitious profits faced with the concrete fact that in productive capital, the rates of profit continue to fall. There are trillions of dollars placed in financial, stock market and real estate speculation, in totally oversized new technology businesses or in the rise and fall of cryptocurrencies. Which could explode at any moment. And then, as always, they will try to make the workers and the subjugated peoples of the planet pay for the crisis.
All this is just another example of why capitalism is not going any further, since it has only crisis, hunger, misery and plunder to offer. It is crucial that workers rule on the road to socialism.