Everything is Liquid
The Real Lesson of Silicon Valley Bank for all of us
What happened to Silicon Valley Bank is known as a liquidity crisis.
They had plenty of assets. But the assets were in instruments whose value had fallen, that weren’t worth as much as the bank claimed. When Peter Thiel and his bros learned this, they all pulled out their money at once and the bank collapsed.
The main lesson is that everything is now liquid.
Financial assets are liquid. Political assets are liquid. Your reputation and marriage are liquid.
Before the Web was spun this wasn’t the case. It would take time for depositors to pull their money out of a bank, time the bank could use to sell assets in an orderly way. There were still runs but these could be managed through regulation.
This time the fall was sudden, and the punishment had to be severe. The executives all lost their jobs. They deserve to face criminal charges, for cashing out while the walls were falling around them. Everyone who invested in SVB or its debt lost all their money. That’s a hit of nearly $100 billion, mainly to very rich people. Hopefully it teaches other banks to manage their assets better, to sell out money-losing securities quickly so they’re not caught out, in other words to be more transparent.
I’ve been noticing the trend for decades. When I was a kid, I bought some stock. I got a stock certificate, which got punched like a train ticket when I turned it in so no one else could use it. I also had to wait several days for a broker to complete the transaction and my money to arrive. His costs were high, and the price differences were measured in “eighths,” meaning the minimum spread between a bid and ask price was 12.5 cents/share. That’s serious money when the stock is selling for $20.
None of this is true today. Trades execute immediately. Spreads are measured in portions of a penny. Most brokers let you trade free. Stocks are almost as liquid as cash.
Bonds are also getting easier to trade, and so are houses, considered the most “illiquid” thing you can buy. Brokers working with private equity can get you out in a day. Buyers with cash can move very quickly.
Reputations won through years of toil can now be destroyed in days. Will Smith wrecked his in an instant. What’s true in celebrity culture is also true in politics, and even in sports. The Internet lets everyone know, and lets everyone condemn, in Internet time. Off with our heads.
Society is way behind in adapting its rules to this new liquid culture. It makes everything precarious for everyone. Sam Bankman-Fried went from the Forbes 400 to a jail cell in a few weeks. I don’t think he has yet to get his head around how destroyed his life is. (Have a suicide watch ready when he figures it out.)
There are a few industries that still resist this facet of Moore’s Law. Education is one. Health care is another. Law is a third. We have yet to see Trump’s perp walk, and legal delays make new infrastructure almost impossible to build.
Moore’s Law has much to do yet, but as it works its will we need to think more about how making everything liquid has us all like angels, dancing on the head of a pin, praying we don’t fall into hell tomorrow.