Last weekend marked the 23rd anniversary of Barron’s “Burning Up” cover story, one of the most daring, ambitious, and most influential enterprise stories ever published in American journalism. Reporter Jack Willoughby, a decades-long friend of mine dating back to our days competing in Canada, methodically calculated that high-flying dot.com companies would run out of cash within 12 months.
“For scores of ‘net upstarts, that unpleasant popping sound is likely to be heard before the end of this year,” Willoughby predicted.
Willoughby’s story is widely credited for bursting the dot.com bubble, hence the death threats he received for his analysis. The NASDAQ composite hit a record high ten days before Willoughby’s story, but fell 60 percent after it was published, and didn’t reach another record high for 15 years.
Willoughby retired from active journalism, and Barron’s these days prefers to publish thumb-sucker stories like its favorite women in American finance listed alphabetically, which it posted last weekend amid the current banking crisis. Forbes, another publication whose stock and trade was once challenging conventional wisdom, has also lost its way. In February, Forbes published its 2023 “Best Banks in America” listing, which ranked Silicon Valley Bank No. 20 and Signature Bank No. 73. SVB and Signature recently became wards of the FDIC.
Jeffrey Lee Funk, a retired professor and technology consultant, and Gary Smith, an economics professor at Pomona College, have picked up Willoughby’s mantle and again sounded the alarm about the state of America’s startup companies. Unfortunately, America’s startups are in far worse shape than in Willoughby’s day, meaning there’s still a proverbial second shoe to drop in wake of the collapse of Silicon Valley Bank.
The force of the inevitable thud will be deafening.
SVB’s failure was reportedly the result of a foolish and risky bet that no responsible bank would make — a wager that interest rates wouldn’t rise and that SVB’s business depositors – mostly fledgling upstart companies — wouldn’t have an increasing and immediate need for their money. As a result, SVB took its depositors’ money and invested it in long-term bonds and mortgages, which paid slightly higher rates of interest.
As interest rates rose and the stock market declined, SVB’s business customers had increased difficulty raising money to fund their operations and were forced to tap into their bank accounts to keep the lights on. To meet increased depositors’ demands, SVB was forced to sell its long-term duration investments at a $1.8 billion loss because in a rising interest rate environment, the value of long-term bonds declines.
Here’s a critical detail to remember as we move forward: SVB wasn’t required to flag to its shareholders that the value of its investments had substantially declined and regulators, Wall Street analysts, and the media were too clueless to notice. Once SVB’s risk management negligence became apparent, SVB’s customers rushed to withdraw their money, investors bailed on the stock, and the FDIC closed the bank.
That’s how and why SVB went from Wall Street and media darling to failure in a matter of days.
Funk and Smith have warned that SVB might have gone bankrupt even if it hadn’t gambled on the direction of interest rates. They say U.S. startups are hemorrhaging red ink in unprecedented amounts, and the argument that Amazon for years also lost money is a mistaken comparison.
According to Funk and Smith, Amazon became profitable in its 10th year of operations after accumulating $3 billion in losses. They say that 18 publicly traded “unicorns” – companies that are valued at $1 billion or more – have more than $3 billion in cumulative losses, of which three have more than $10 billion.
Funk and Smith say the average age of America’s 144 publicly traded unicorns is 14 years and warn: “While Amazon’s $3 billion in cumulative losses were about equal to its revenues in year 10, almost 60% of publicly traded American unicorns have cumulative losses greater than their 2021 revenues, meaning that even if they become profitable — a big if — it will be difficult for them to overcome their cumulative losses.”
According to CBI insights, there are 1,207 privately held unicorns cumulatively valued at $3.79 trillion.
“The true market value is surely far less,” Funk and Smith say. “Our guess is south of $500 billion.”
A lay person lacking a Harvard MBA or a finance degree would instinctively ask, “How is it possible that venture capitalists holding critical public and retirement funds can report values and investment returns that have no grounding in reality?”
The answer: Because they can and it’s no secret among those in the know.
A few VCs have significantly marked down the value of their private company holdings, including Tiger Global, which the Wall Street Journal reported reduced by $23 billion the value of its investments in upstart companies last year. But other firms are reporting supposed returns based on inflated valuations, which is why a wide range of investment returns are being reported within the same asset classes and similar investment strategies.
“I don’t think I’ve seen a year where we’ve seen such a dispersion of returns with asset classes,” Pension & Investments reported Molly Murphy, Chief Investment Officer of the $20 billion Orange County Employees Retirement System, telling a Feb. 22 investment committee meeting.
Americans wouldn’t sleep at night if they understood the ineptitude of the Biden Administration’s handling of the banking crisis to shape an agenda that was never disclosed to them.
When SVB failed, Treasury Secretary Janet Yellen immediately moved to make the bank’s depositors whole, whose funds were only FDIC guaranteed up to $250,000. But Yellen didn’t guarantee that customers with deposits at banks whose management and directors weren’t major contributors to the Democratic Party would get similar treatment, which resulted in panicked investors rushing to withdraw funds from healthy banks into institutions deemed, “Too Big to Fail.”
The New York Post reported that 90 percent of SVB’s deposits wound up at Jamie Dimon’s JPMorganChase bank, who the Wall Street Journal shamefully portrayed as a responsible and capable elder statesman in the mold of J. Pierpont Morgan. Although semi-retired, Morgan in the Panic of 1907 rallied his fellow bankers to shore up a number of lenders that also experienced a run on their deposits.
The best Dimon could do was to convince his fellow bankers to park $30 billion in deposits at First Republic and some other banks rumored to be vulnerable. That’s not a lot of money when you consider that SVB lost $42 billion in deposits in a single day. First Republic continues to teeter; its stock on Friday logged its third consecutive week of double-digit losses. The shares have dropped about 90% this year and erased roughly $20 billion of market value.
Dimon deserves some of the blame for the collapse of SVB, which was focused on pursuing a woke agenda rather than protecting its depositors and shareholders. The argument the New York Times and others use to deny that SVB was overly woke is that other banks, including Chase, have the same stated goals, hence SVB was adhering to best banking practices. That argument has merit – here’s a link to all the climate and other good deeds Chase claims it is committed to.
Chase famously staged a photo with Dimon taking a knee in front of a bank branch at the height of the BLM protests. Dimon was also quick to apologize to China – not once, but twice — for making a quip the country’s communist government took exception to.
Yellen’s mismanagement made America’s already too powerful banks even more powerful, and there’s no reported plan or strategy in place on how to deal with the likely massive write downs venture capital firms will have to take, which in turn could impair the big banks that lend to them and their portfolio companies.
Being “Too Big to Fail” doesn’t mean “Too Smart to Fail.” While Dimon was pursuing his failed First Republic rescue, Bloomberg reported that nickel contracts owned by JP MorganChase and traded on the London Metal Exchange turned out to be backed by bags of stones rather than metal.
Bloomberg said Chase registered the bags of material as being deliverable against the LME contracts in early 2022. Bloomberg said JPMorgan is the leading bank in metals markets but noted it has been at the center of several controversies in the past year. The bank, which has connections to various Chinese companies, reported a $120 million loss related to nickel a year ago.
One need only look to Switzerland to appreciate that possibility of big banks failing. UBS was forced to bailout Credit Suisse because Switzerland was in danger of collapsing. Perhaps if Credit Suisse had focused a tad on risk management it would still be around to pursue all its other admirable goals.
It’s not only America’s financial system the Biden Administration has harmed. Dr. Marty Makary, one of America’s foremost physicians, publicly accused the Biden Administration of making misguided pandemic decisions to distract from its debacle in Afghanistan. Two of the world’s foremost vaccine experts resigned from the FDA because of political pressure to rubber stamp vaccine boosters Jeffrey Zients, Biden’s former Covid czar, wanted approved. Zients is now Biden’s chief of staff.
The FTC recently disclosed U.S. consumers reported losing nearly $8.8 billion to fraud in 2022, an increase of more than 30 percent over the previous year. That’s no surprise. Under Biden appointee Lina Khan, the FTC has suffered an irreparable brain drain of experienced regulators with decades of experience, including the agency’s former top economist Marta Wosinska, ex-privacy and identity protection chief Maneesha Mithal, and former Bureau of Consumer Protection deputy director Daniel Kaufman.
America’s airline industry is a mess, there have been a slew of near aircraft disasters, but Transportation Secretary Pete Buttigieg is more focused on spending $1 billion “to build racial equity in roads,” which will be challenging because of his appalling ignorance of the construction industry.
Americans are much wiser than the entrenched media understands, and they instinctively know that all isn’t well in Joe Biden’s America.
The Wall Street Journal reported today on a survey it conducted with the nonpartisan NORC organization that revealed an overwhelming share of Americans doubt their children’s lives will be better than their own. Four in five respondents described the state of the economy as not so good or poor, and nearly half said they expect it will get worse in the next year.
“(The findings) strikes me as something that’s kind of an intractable level of pessimism,” said Jennifer Benz, vice president of public affairs and media research at NORC.
The entrenched media is salivating about the possible arrest of Donald Trump next week to serve as a welcome distraction.