- Paul Krugman said “what SVB actually did was a kind of Madoff-style affinity fraud”.
- SVB convinced tech startups it was trustworthy by selling itself under false pretenses, he said.
- The Nobel Prize-winning economist is frustrated by this “delusional marketing” which also includes the crypto industry.
Paul Krugman takes issue with the way Silicon Valley Bank has presented itself to the tech startup world over the years, saying the lender has relied on “false pretenses” to gain customer trust.
In an 8-part Twitter threadthe Nobel Prize-winning economist argued that SVB calling itself the “only bank dedicated to the global innovation sector” was a marketing tactic above all else.
“In a deep sense – but not in a legal sense – what SVB actually did was a sort of Madoff-style affinity fraud. It managed to convince the VC/startup/crypto world etc. that it was the ‘one of them, part of their community, and therefore trustworthy,’ Krugman tweeted.
“But that’s infuriating. At a fundamental level, we’re arguably talking about some kind of scam: a bank that sold itself under false pretenses. It’s really part of the larger story of delusional marketing that includes crypto,” he added.
Krugman was referring to Bernie Madoff, the highly respected financier who pulled off the the biggest ponzi scheme in history when he managed to convince investors to hand over billions of dollars from their savings by falsely promising them high returns.
While SVB was a bank dedicated to startups, that’s not where it made the most money, Krugman said. The bank lured deposits from its customers and parked them in long-term securities, an investment strategy that went horribly wrong.
“And in fact, the longer-term securities paid more than the short-term securities precisely because there was a one-sided risk that what happened would happen – that short-term rates could not come down. , but could go up. So it was not a brilliant investment strategy, just an unacknowledged risk-taking,” Krugman said.
“So what was all this ‘dedicated to global innovation’ stuff like? Real business – but largely, I think, a form of marketing: a way to sell crypto, startups, etc. on the Internet. idea that SVB was their kind of bank, and therefore a place to put large uninsured sums,” he added.
He also noted that SVB successfully lobbied to weaken regulations put in place to protect banks, which could have prevented the blowout as former Fed Governor Lael Brainard. notified in 2019.
SVB was shut down and taken over by US regulators Friday when the company, once a trusted lender for startups, saw its stock price plummet after failing to raise $2.3 billion in capital.
The Fed, US Treasury and FDIC said they would “fully protect” all depositors who held funds in SVB. But Krugman said there appeared to be enough systemic fallout that the Fed had to step in and guarantee the deposits.
“The good news is that the FDIC seized the bank, so shareholders have been cleaned up. Unfortunately, it seems likely that there is enough systemic fallout that the Fed probably needs to back some, but maybe not all. uninsured deposits,” he said. tweeted.
Krugman tweets are coming after previous comments he did about SVB where he was optimistic that the lender’s implosion would not trigger more bank failures.