Where is the empathy?
Sometimes we have to think about collective impact.
My uncle likes to joke that he cursed Washington Mutual Bank.
Many years ago, Washington Mutual royally screwed up something with his mortgage. It was a huge mess and took a lot of time and effort to fix. My uncle said that he cursed WaMu — and then WaMu failed as a bank during the 2008 financial crisis. “I guess my curse worked,” my uncle says with a grin.
And I’ve laughed at that story. I’ve worked in the banking industry for a long time. Banks doing really risky things (especially knowingly) shouldn’t be in business, I thought. It makes everything harder for banks that are trying to do right by their customers.
A week ago, Silicon Valley Bank was in big trouble. It happened suddenly and within 48 hours, the bank was closed by the FDIC. I’m not going to rehash all of the events (if you want a detailed explainer, you can read it here).
The thing I want to focus on is that depositors of the bank were at risk of losing billions of dollars if the government hadn’t stepped in and invoked an emergency provision allowing deposits above $250,000 (the maximum allowed by FDIC insurance) to also be guaranteed. No depositor will lose money as a result of SBV’s failure.
I’ve seen a lot of callous remarks online. “The bank deserved to fail.” “That was the bank of rich venture capitalists.” “The depositors were knowingly taking a risk by having more than $250k at the bank.”
Those views are extraordinarily narrow. And I want to reflect on what it means to hate a company (like my uncle hated WaMu) or a system, while also recognizing that people — not just companies — could have been impacted by SVB’s failure.
Bad companies shouldn’t exist
Like my uncle, I’ve also wished bad things on individual companies. I know of companies with absolutely terrible business practices that cause real harm to people that use their services and employees that work there.
Make no mistake: I don’t think these companies should exist. I could say the same for some companies that cause harm to the planet. I can’t justify that they should remain in existence just so the people who work there remain employed.
By cheering for bad companies to collapse, I want to make space for good companies to grow. The customers and employees go elsewhere. There’s often a huge power imbalance that keeps companies (and the people who run them) from facing real consequences for their actions.
I’ll probably always dream of a world where bad companies don’t exist…. but that’s different than actively hoping for a mass extinction of companies that would simultaneously impact hundreds of thousands of people.
We know that SVB served half of the tech startups in the U.S. and had about 40,000 depositors (mostly business accounts). But beyond that, we don’t know specifically which companies banked there, other than the few that made public announcements over the weekend before the government intervened. If the depositors hadn’t been protected, we would have seen a lot of announcements on Monday morning. Everything from companies unable to make payroll to potentially shutting down without access to their money.
We know that Etsy banked there, and expected that it would be unable to pay its sellers. Rippling is a payroll provider, processing payroll on behalf of its clients. And a small business I know learned that its 401(k) provider banked at SVB.
Some depositors might have been terrible companies, sure. Some might have been wealthy (greedy?) venture capitalists. And others most certainly were small and mid-sized companies, just trying to run a business.
As Ed Zitron ofpointed out:
Even if said company “should” die, does that mean that everybody working for them should be unemployed? Should we delight in their suffering because we didn’t like the business?
There is a vast difference between critiquing a stupid business model and actively wishing thousands - if not hundreds of thousands - of people would become unemployed at a moment’s notice.
Someone commented that the market should just “work itself out.” And yes, I alluded to that in my fantasy that a bad company might die and the employees go elsewhere.
But that’s not this scenario. If hundreds of thousands of people hit the unemployment line at the same time, that’s disaster. It’s the reason that the CARES Act was passed during the pandemic — to (try) to protect people who were suddenly out of a job with additional unemployment benefits and mortgage relief. And loans to small businesses trying to stay afloat.
On top of that, the tech industry has been ravaged by layoffs lately. Flooding the market with more people looking for a job would have made a bad situation worse.
A bank failure could have impacted everyone
Maybe some people are still able to say, “I don’t care about tech companies” or “I don’t care about SVB depositors.”
Paul Krugman wrote in an opinion article for the New York Times:
The bigger question is whether, by saving big depositors from their own fecklessness, policymakers have encouraged future bad behavior. In particular, businesses that placed large sums with S.V.B. without asking whether the bank was sound are paying no price (aside from a few days of anxiety). Will this lead to more irresponsible behavior?
It’s a difficult argument to make that depositors were being feckless. There are a few options for protecting deposits above $250k, but the reality is that keeping large amounts of money in the bank is common practice.
Krugman also overlooks the fact that SVB often required its customers to have an exclusive relationship — meaning the companies had no choice other than to keep all of their money at another bank. You can’t really argue that these companies should have just found another bank… SVB, by design, was willing to work with tech companies that other banks wouldn’t serve. That’s how it ended up with such a concentration in one industry.
For some perspective, I looked up my own bank (the information is publicly available on the FDIC’s website). My bank has assets of $46 billion, compared to SVB’s roughly $200 billion. Only 66% of my bank’s deposits are insured. Meaning, if my bank collapsed tomorrow, a third of the deposits would be at risk of being wiped out.
Past bank failures have resulted in finding a buyer — a new bank to take over. Usually that buyer is lined up in advance. Often, the buyer assumes all deposits of the failed bank and depositors don’t lose any money, even above $250k. There have been instances where depositors have lost money (and that’s very unfortunate), but certainly not at the scale that SVB was facing, due to the unique nature of its business.
Banks have to disclose to depositors that anything above $250k is not protected. But the reality is that banks don’t have much of an incentive to encourage people and businesses to take their money elsewhere. Banks take the money from deposits and turn it into loans — and that’s how banks make money.
I’m certain that more than a few banks were worried about the fallout of SVB. If their depositors suddenly feared that money above $250k wasn’t safe, they would take it to one of the Big 4 banks, the “too big to fail” banks. Bank of America already saw an influx of $15 billion in new deposits after SVB’s collapse.
If money is pulled out of smaller banks, it further squeezes the banking sector. Over the past few decades, many banks have merged/consolidated because they simply can’t compete. And that’s really unfortunate, because regional and community banks are the institutions that really put money to work — making loans to small businesses that big banks don’t care about.
Less competition in the banking market isn’t healthy. I’d challenge anyone: Do you like having options for your banking needs? Or do you think only megabanks should exist?
And let’s go one step further into Krugman’s accusation that these companies were “feckless.” Should everyday people have to worry about where their employers bank? Bear in mind that — other than keeping more than $250k in an account — these companies were not acting irresponsibly. They’re not like Enron or other scandalous companies cooking the books.
As a friend of mine pointed out, “I have a reasonable expectation in 2023 that the money in my bank account is mine.” Same would hold true for the companies that banked at SVB.
Crisis shows true colors
I wrote a LinkedIn post, marveling at the lack of empathy around this whole situation.
Someone commented back, “Empathy for who? Bank management for taking unnecessary risks? The government for de-regulating the banks?”
That comment was exactly the lack of empathy that I’m referring to. I was clear that empathy should be extended to the depositors, the people they employ, and the potential downstream impacts. While blaming the systems of power is valid, it’s pretty heartless not to think about the potential victims of this crisis.
The Federal Reserve has said that it will conduct a “thorough review” of its supervision of the bank, and whether this crisis could have been averted. That’s what should happen. Michael Barr, appointed to oversee the review, said, “We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience.”
And other people have angrily used the word “bailout,” bringing up feelings of resentment from the 2008 financial crisis. This situation was much different: it is not a bailout. The FDIC is invoking an emergency provision that exists for a reason. The bailouts of 2008 were something “above and beyond” what was otherwise available to help troubled companies and banks.
The government has made it clear that taxpayers won’t bear the burden of this emergency action. It’s paid for out of the FDIC insurance fund, which all banks pay into (and only if the losses can’t be recouped by the sale of the bank’s assets).
Someone commented, “I own bank stock (at a small, community bank). I pay taxes and the bank pays taxes, so saying that taxpayers don’t bear the burden isn’t true. Some taxpayers will pay.” That’s a warped view of the situation. This person chose to invest in a bank and knows how the system works, including FDIC insurance and bank failures.
It’s frustrating. The past few years overall, especially during the pandemic, have exhibited a similar lack of empathy. That it’s “all about me and the impacts on me” rather than society as a whole.
I deleted both comments on my content rather than argue on The Internet. I can’t make people care about others.
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Thank you for the insightful read Anna! There were so many people affected by what happened with SVB that were not rich venture capitalists! Our startup company had all of our funds there and as the news came out not knowing if I would receive a paycheck in the next couple days or several weeks was a huge burden for our family. As the bread winner of the family it was difficult not to let panic set in. Thankful that I still have a job is an understatement.