The $153 billion power leak

When you’re betting against the system, bet big

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Introduction

There are some interesting details emerging from the Silicon Valley Bank (‘SVB’) collapse. Let’s zero in on an area with lessons for dissidents and those of us who anticipate wider systemic decline.   

This piece will analyze how the use of a financial tool called cash sweep programmes lead to SVB customers losing control of billions of dollars of assets that appeared to be completely protected. 

I’ll break down what a cash sweep is, how it all went wrong, and how dissidents should use this example to secure their own assets against unanticipated supply chain vulnerabilities and broader network collapse. 

I intend for this to be accessible, interesting, and useful for those that have no formal background in finance. If applied correctly, these lessons will help us hold onto key resources against a backdrop of civilizational decline. 

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Wojciech Siudmak, ‘Flag of Discord’

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Cash sweep programmes

The principles behind sweep accounts are straightforward. 

Let’s say you’re a company that has $50m in your account. In addition to having access to these funds, you want to generate a return on this capital, by finding a convenient and safe method of investing it. 

A sweep account automatically moves money between this primary cash account and secondary investment accounts. You nominate the amount that you need to always be present in your cash account, to cover regular expenses like payroll, and the bank dynamically ‘sweeps’ capital above this threshold into investment vehicles. 

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We love diversification

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With Silicon Valley Bank, through your SVP online interface, you can select which funds you want your investments to go into. SVP assures you that these will be reliable flagship funds from BlackRock, Morgan Stanley, and Western Asset Management. 

This is designed to all feel very reassuring. You can login to your SVP account, and see your funds nicely tucked away in these highly respected institutions. The site says you’ll “always have access to your invested funds, so you’re always covered.”

¹

At the end of last year, SVP had $64 billion of client cash in sweep money-market funds and $89 billion in managed client investment funds.

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Nice! What could go wrong?

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Ruh-roh

³

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The leak

The issue is fundamentally one of loss of control. A loss of actual power, as opposed to theoretical power. 

Cut to venture capitalist David Sacks last week decrying the position that his companies were now in: 

“So the mutual fund that you thought you owned was actually not hypothecated in your name. It was in SVB's name at BlackRock. And so our companies have been calling BlackRock and calling Morgan Stanley saying, “Hey, do you have my money market fund?” And they're like, “No, sorry, that's SVB.” So now they're sitting in a creditor line in bankruptcy.”

⁴

It turns out that while these companies technically owned their investment funds, SVB had made itself a necessary intermediary between its customers and the mutual fund complex. It had co-mingled all customer assets and managed them all as nominee. SVB, not the investment firms, maintained ownership records for these funds.

⁵

 

The customers had nothing like the control that they had assumed. They now have billions of dollars in limbo. 

It’s kind of a hilarious Catch-22. Funds that were swept out of the primary accounts and used to purchase fund shares are no longer considered deposits in SVB, are not subject to receivership, and are not FDIC insured. Nevertheless, the FDIC has seized control over SVB, so SVB can’t reinstate access to the funds. 

Ultimately it looks like access to these funds will be restored once the FDIC lays out a procedure for their return.

⁶

The timeline for this remains unclear. Every day that it fails to do so is an existential disaster for these companies. Even if still theoretically theirs, an interruption of this magnitude of access to their cash can still collapse a business. 

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Takeaways

In the coming instability, you must always couple the question “Do I own this?” with ancillary checks like “Do I actually control this?”, “Can I protect this?”, “Do these assumptions hold if a system I do not control breaks?”.  

In many ways this parallels the concern about owning ebooks, as opposed to physical books. If you ‘own’ an ebook that is actually a digital asset managed through the cloud by an external party, that party may be able to alter your copy at any time, revoking it or revising it to fit regime narratives. RIP Roald Dahl. 

For your most important assets, all links in their custodial chains must be examined. Where are the weaknesses that would allow a black swan event, or just casual incompetence of a kind that we’re increasingly going to experience, to break your control? 

An example that we should follow is that of hedge fund manager Michael Burry during the 2008 financial crisis. Burry saw the flaws in the housing market before the crash and bet against it, taking massive positions with credit default swaps. He realized, however, that if he was right about the scale of the coming collapse, the bank that issued the CDSs (Goldman Sachs) would be so severely impacted that it would face its own solvency issues, meaning that they wouldn’t be able to honor their obligation to pay him. Thinking two steps ahead, he proactively established a payment structure to mitigate this risk. 

The SVB episode is Illustrative of a broader issue of network weaknesses and unanticipated supply chain vulnerabilities. The fact that so much of modern ‘ownership’ is entirely theoretical and only supported by decaying power structures that are going to be increasingly challenged - both intentionally and by systemic entropy - should be recognized.

While I support engaging the current system to build as much wealth and power as possible in the short term, we must always be thinking about how to translate these gains into assets and structures that are not dependent on the vitality of this system. If you think the system is going to fail, act like it. Bet big. This opens up a series of very interesting questions that I’m keen to explore in future editions. 

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Feedback for this week’s edition would be appreciated. I’d like to know if you enjoyed or detested this more technical and applied analysis. If so I’ll mix more into the theoretical analysis, philosophy, and history that this project provides. Reply to this email or leave a comment below with thoughts. 

As always, likes and subscribes are greatly appreciated - please do hit the buttons below. Thanks folks. 

Sic transit imperium,

Johann 

1. https://www.svb.com/liquidity-management/deposits-and-investments/svb-cash-sweep

2. https://www.bloomberg.com/news/articles/2023-03-13/svb-clients-in-limbo-after-seeking-refuge-in-money-market-funds

3. https://www.svb.com/globalassets/library/uploadedfiles/content/how_we_help_clients/products_and_solutions/cash_sweep_program/svb-cash-sweep-product-sheet.pdf

4. All-In Podcast, “E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more”

5. https://www.morganlewis.com/pubs/2023/03/silicon-valley-bank-collapse-initial-issues-raised

6. https://www.realclearmarkets.com/articles/2023/03/11/with_svb_it_takes_a_villageto_mess_things_up_this_badly_886767.html