Paul Krugman says Silicon Valley Bank 'was a kind of affinity fraud a la Madoff' because it sold itself on false pretenses
- Paul Krugman said 'what SVB actually did was a kind of affinity fraud a la Madoff.'
- SVB convinced tech startups it was trustworthy by selling itself under false pretenses, according to him.
Paul Krugman is taking issue with how Silicon Valley Bank portrayed itself to the tech startup world over the years, saying the lender relied on 'false pretenses' to gain clients' trust.
In an 8-part Twitter thread, the Nobel Prize-winning economist argued that SVB calling itself the "the only bank dedicated to the global innovation sector" was a marketing tactic above all else.
"In a deep sense — though not a legal sense — what SVB actually did was a kind of affinity fraud a la Madoff. It managed to convince the VC/startup/crypto etc world that it was one of them, part of their community, and hence trustworthy," Krugman tweeted.
"But it is infuriating. At a fundamental level, we're arguably talking about a kind of scam: a bank that sold itself on false pretenses. It's really part of the larger story of delusion marketing that includes crypto," he added.
Krugman was referencing Bernie Madoff, the widely-respected financier who pulled off the largest Ponzi scheme in history when he managed to convince investors to hand over billions of dollars of their savings by falsely promising them high returns.
While SVB was a bank dedicated to startups, that's not where it made most of its money, Krugman said. The bank attracted its clients' deposits and parked them in long-term securities, an investment strategy that went very wrong.
"And in fact longer-term securities paid more than short precisely because there was a one-sided risk that what did happen, would happen — that short rates couldn't go down, but could go up. So this wasn't a brilliant investment strategy, just unacknowledged risk-taking," Krugman said.
"So what was all the "dedicated to global innovation" stuff about? Some real business — but largely, I think, a form of marketing: a way to sell crypto, startups etc on the idea that SVB was their kind of bank, and hence a place to put large uninsured sums," he added.
He also noted that SVB successfully lobbied to weaken regulations that were put in place to safeguard banks, which might have prevented the blowup as former Fed governor Lael Brainard warned back in 2019.
SVB was closed down and taken over by US regulators on Friday when the firm, once a trusted lender for startups, saw its stock price collapse after it failed to shore up $2.3 billion in capital.
The Fed, US Treasury, and the FDIC said they would "fully protect" all the depositors who had funds in SVB. But Krugman said there seemed to be enough systemic spillover for the Fed to have to step in and backstop deposits.
"The good news is that the FDIC has seized the bank, so the stockholders have been cleaned out. Unfortunately, there seems likely to be enough systemic spillover that the Feds will probably have to backstop some although maybe not all the uninsured deposits," he tweeted.
Krugman's tweets come after previous comments he made about SVB where he was optimistic that the lender's implosion wouldn't trigger more bank failures.
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