End run: Silicon Valley Bank

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Hello and welcome to the Intelligence from the Economist. In New York, I'm John Fastman.

And in London, I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world.

The leaders of America, Britain and Australia are meeting today. Their recently formed security pact is expected to involve the United States sharing some of its most closely guarded secrets in a sign of growing concern over China's military ambitions.

And among the earthly remains of British kings and queens at Windsor Castle is the body of an Ethiopian prince. The story of how he ended up there brings us to a topic that increasingly troubles postcolonial societies. The restitution of looted artifacts.

But first.

For the founder and venture capitalist classes of Silicon Valley, it's enough to make the blood run cold. On Friday, Silicon Valley bank, the biggest of its kind, aimed at the tech community, folded.

The collapse of Silicon Valley bank is causing shock waves across the entire business world.

The second biggest bank collapse in US History.

The storms on Wall street continued today after regulators seized the assets of Silicon Valley bank.

With about $200 billion in assets. SVB's failure was by some way the largest since the global financial crisis. By this morning, though, it seems American regulators had done plenty to avoid further contagion in the banking sector. And the British arm of SVB already found a buyer. HSBC will snap it up for the princely sum of £1. That's not to say there aren't still plenty of questions about SVB's ultimate fate at home, about whether government intervention amounts to a bailout, and about how much the demise of the valley's favorite bank will chill the tech sector.

Silicon Valley bank went bust in the same way, as Ernest Hemingway put it in his novel the Sun Also Rises, gradually and then suddenly.

Alice Fullwood is our Wall street correspondent who also presents Money Talks, our sister show on the world of business and finance.

But suddenly is Essentially the events that we've witnessed over the past four or five days. The bank announced that it needed to raise capital, in part because it had taken some losses on some bonds that it had sold. That capital raise seemed to spook its customers and its investors. Its share price collapsed. It customers rushed to pull money from the bank. Some $40 billion worth of deposits were attempted to be pulled on Thursday, which is about a quarter of the total deposits that Silicon Valley bank had. And then on Friday at around noon Eastern time. So just 36 hours after this all began, the Federal Deposit Insurance Corporation, which is America's big depository regulator, stepped in and said that it had taken over the bank and placed it into receivership. And events have continued to sort of spiral very quickly from there.

So what's the latest?

Regulators over the weekend stepped in. You got a joint statement from the treasury and the Federal Reserve saying that all depositors in Silicon Valley bank and Signature bank, which is a bank that was taken into receivership and closed by regulators on Sunday, would be made whole and would be able to access their money on Monday night. And you also had the outset of a new facility, a new lending facility by the Fed. And all of these events raise a lot of questions.

Well, the first of which is how did things get so bad for svb?

Because of Silicon Valley's business model, it was uniquely exposed to certain risks. So its deposit base, for example, is very, very heavily commercial deposits or company deposits, and those tend to be uninsured, which makes it uniquely susceptible to this kind of run. So Federal Deposit insurance was put in place after a series of panics that felled the American banking system in the 1930s. And it, in theory, cover deposits up to $250,000. Now, that protects, like, all the cash that you or I, that most individuals would keep snashed in a bank account. But it's very unlikely to cover all the funds that a company would need to keep on hand to do payroll or to pay its expenses. Silicon Valley bank banks, almost exclusively companies. So some 93% of its deposits were uninsured. So its customers, unlike those at most other banks, they had a real incentive to run, and they responded to it. They all pulled their money en masse in a single day.

All of which is enough to spook far more than just SVB's customers. Right. I mean, what do you make of what happened over the weekend?

It's clear from the actions of the treasury and the Federal Reserve that they thought that there was a real risk that if they didn't intervene that there could be some kind of contagion. So even if other regional banks maybe were sound economically, you might see corporate treasurers who, you know, have been sitting, watching events over the weekend thinking to themselves, do I really want to leave all of my company's money in a relatively small region regional bank where the share price has fallen by a lot. And it seems like it's exposed to some of the same risks as Silicon Valley bank. And it's easy to see why. You know, in order to keep their job, they might just decide to move those deposits to a big, extremely safe bank, something like JP Morgan or Bank of America. And so clearly the risk that there was deposit flight run spooked regulators and government officials enough that they did decide to step in.

Okay, what did they step in and do?

We've had this big package of interventions. So this sort of joint statement from the treasury and the Federal Reserve, and that did two things. One was that it said that all of the depositors in Silicon Valley bank and signature bank would get access to their money on Monday. Now a lot of people are going to go around suggesting that this is a bailout. And the treasury pushed back on that idea for two reasons. One is that they say that equity holders and bondholders are going to be zeroed, so their investments are now completely worthless. And that is the sort of first cushion that will take any losses that either of these banks have made in the event that that isn't enough that all depositors get their money back. There is this fund called the Deposit Insurance Fund, which is collected and run by the Federal Deposit Insurance Corporation. And that's essentially a sort of fee levied on every bank in America in order to pay for deposit insurance. But what you're likely to see happen is for banks to have to top up that fund fund in the event that there is a drawdown on it. And what we've also heard from treasury officials is them sort of mooting the idea that maybe once all this is said and done in the aftermath of everything, they might have a rethink of the sort of appropriate level of deposit insurance. The cap is 250,000 at the moment, maybe that could be raised. What is the real logic of having protections for individuals and not protections for companies?

And if this was Silicon Valley's, the tech world's favorite bank, what do you think the knock on effects will be.

Here in terms of the damage to Silicon Valley? There was sort of two risks. There was a short term damage risk, and that was that a lot of startups A lot of people in the tech ecosystem wouldn't be able to access their cash. They might not be able to make payroll. Maybe they would have to lay people off, sort of exacerbating some of the tech layoffs that we have experienced over the past sort of six months or so. That now looks to be completely moot. All of these companies are going to have access to their funds on Monday morning. There should be no real problems. In reality, they only didn't have access to their cash for basically one working day. And so that risk is completely nixed. Now, the longer term risk is what would happen if Silicon Valley bank went away and it was an important institution in the Valley. It made loans to companies that, you know, maybe other banks wouldn't look at because it's sort of hard to lend into these tech startups, but they don't have any assets. Greg Becker, who was the boss of Silicon Valley bank, was an important figure. He used to sort of introduce startup founders to venture capitalists, and he would help them sort of build those kinds of relationships. Now there are probably lots of people in the Valley that can maybe fill that role.

But focusing back on Silicon Valley bank itself, what's going to happen to it.

Now, we actually still don't really know. So the Federal Deposit Insurance Corporation was in the process of running an auction for Silicon Valley Bank. It will probably run a similar process for Signature bank as well. And what seems to have happened is that it's obviously enormously difficult to, in the course of a weekend, even for a big bank, to do enough due diligence to decide that you're comfortable bidding or what price you're comfortable bidding for an institution like Silicon Valley bank, where you have this sort of uncertainty of the value of the loan portfolio, you have all of these other assets and businesses that you have to evaluate. And so it seems like that auction process basically couldn't be resolved as quickly as the weekend. And that was one of the reasons why you saw the government step in. They didn't want to leave the situation unresolved on Monday morning and sort of put all of the tech companies in the position of having to sort of make some very difficult choices. So someone may still buy Silicon Valley Bank. The institution may live on. And that will just be sort of one of the fascinating strands of this story to keep watching.

Thanks very much for your time, Alice.

Thank you for having me.

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Today, Joe Biden, the American President, Rishi Sunak, Britain's Prime Minister, and the Australian Prime Minister Anthony Albanese will meet in San Diego. There they are expected to cement a pact established 18 months ago known as Aukus. That pact will allow Australia to acquire some of the rarest and most capable military platforms in the world. Nuclear powered submarines. It will bind the Allies together in unprecedented ways right into the 2000-40s and beyond.

Back in 2016, Australia signed a deal with France to replace its very old Collins class attack submarines. And it's basically signed a very lucrative deal. France would supply diesel electric boats. But as it grew increasingly mindful of the threat from China, it began to think about a more ambitious option.

Shashank Joshi is our defense editor.

And what happened in September 2021 was that it signed the Aukus deal and made the switch to saying it would see nuclear powered, although I have to emphasize, not nuclear armed. That's a very different thing. Submarines and nuclear powered submarines are very capable because they can basically stay submerged for any length of time as long as crew can survive. So that makes them much more stealthy than the electric boats and it gives them much, much greater range and speed. So these are very capable platforms. They can carry lots of missiles. They could project Australian power all the way up to the Taiwan Strait to the South China Sea. So that was a landmark announcement. But on the other hand, only six countries operate nuclear armed submarines. America has never shared this technology with anyone other than the UK and so the complexity was in how you make this happen. And what we're going to see from the three leaders today in San Diego is exactly what's called the optimal pathway, the means by which this is going to be done.

Give us a sense of what that is. What have these three countries agreed to?

Well, the plans are being held pretty tightly, but we've seen a number of leaks in various press outlets, and what I think has become very clear is a few things. First of all, the big choice that Australia had to make was whether it was going to go for an American design, whether that's based on the American Virginia class, the most advanced attack submarine today, or a successor to the Virginia class, or a British design. And what the reports suggest is that it has gone for a British design. It's going to be based on the next generation British submarine, the one that succeeds the current Astute class. In addition to that, there's going to be a number of other announcements, we think, on the interim capability. In other words, on what bridges the gap until that new Australian submarine is ready down the line.

What do you mean by interim capability?

Well, building a submarine takes a long time. So if you think about the British successor to the Astute, it's not going to be ready till the late 2000s, some people think, maybe even the early 2000s. So Australia's not going to get its first boat for a very, very long time. On the other hand, its current boats are old. Some of them were laid down before the Soviet Union had dissolved to give you a sense of how old they are. So there's going to be a gap between the old subs retiring and Australia getting its own shiny new nuclear submarines. What is going to fill that gap? What the leaks suggest so far is that we're going to see a couple of things. One is going to be that America is probably going to deploy its own submarines to the Pacific in ways that may help Australia get practice in maintaining submarines. They'll invest in shipyards in Australia that can maintain those boats, that can perhaps replenish them. But the big news that seems to be in store for us this afternoon, according to Reuters News Agency, among others, is that Australia is going to acquire somewhere between three and five Virginia class submarines from America as well. That is very surprising. It's a really big step. America has never shared this technology, as I mentioned earlier on, and indeed, it doesn't even allow the closest allies into the back half of its nuclear subs, where the propulsion rooms are kept. That's a no foreigner space. So to actually allow Australia to operate an entire Virginia class, that is a huge deal.

Let's shift gears for a minute and talk about motives. Last week we had Anton LaGuardia on the program. He's our diplomatic editor. We had a long discussion about fears of war over Taiwan and America wanting to strengthen its presence in the Pacific. How strong a motive do you think those fears were in creating this deal?

I think a huge part of it, this is about America and its allies saying we can't just tinker with our policies. You know, a few exercises here, a few, couple of extra missiles here. We need to find a dramatic way to change the naval balance in the Pacific to deter China from invading Taiwan or making other dramatic aggressive steps. And we see that right across America's alliance policies, which are changing very fast. It agreed to sell hundreds of cruise missiles to Japan, placing a Marine regiment on the island of Okinawa. In February. It secured access to four additional military bases in the Philippines. And Aukus itself is only part of a much bigger boom in US Australian defence ties. So America has been investing enormous amounts in building up stockpiles of fuel, of ammunition in Australia. It's been expanding airfields to allow long range heavy bombers to operate from the north of Australia, which would allow them to basically strike China while remaining out of range of Chinese missiles. And as part of Aukus, the investment in naval bases around Perth on the western coast of Australia is going to make it much easier for America and indeed other countries, you could say the Brits, even the French, to send subs into the Pacific for long periods without having to have them slog all the way back to Guam or Hawaii, which would be much more cumbersome. So this is part of a much bigger American effort, an allied effort to bolster deterrence against China and basically say that if you invade Taiwan, if you take steps like that, the amount of conventional firepower that you could face, not just from the US but also from our allies, who we are going to upgrade and arm up, is going to be bigger than you would have faced 10 years ago. It's going to be something that you really need to think twice about.

How do you expect China will respond to this development?

There'll be a lot of bluster, as usual. They'll say this is about the containment of China. And you know what? They won't be entirely wrong. It is. What it underscores to me is that the scale of the Chinese military buildup is beginning to prompt some very dramatic responses. What I think is really interesting though is that this isn't just about China, John. When Aukus was announced, a lot of Southeast Asian countries were a little bit concerned. They said, look, we're worried about nuclear proliferation, because although these subs are not going to carry nuclear arms, they will have nuclear fuel on them. So how is Australia going to deal with the problem of spent fuel once these reactors are finished? Countries like Indonesia were worried about arms racing. And I think that one aspect of this that the Australians will be watching very closely is to say, well, it's not just what China says, because China's going to be angry no matter what we do, but we're really interested in making sure that this announcement sits well with all of those other countries, Indonesia, Singapore, Thailand, who don't get as much attention but are absolutely vital to a vision of a kind of multipolar, balanced, really international Asia that is not dominated by China.

Shashank, a pleasure as ever. Thanks so much for your time today.

Thank you very much for having me again. John.

The crypt inside St. George's Chapel at Windsor Castle is the final resting place for nearly a dozen British sovereigns. In one corner of the chapel, you'll also find an ornate bronze plaque inscribed in both English and Amharic. This is in memory of Alamayu, the son of Teodros ii, the former emperor of Abyssinia, which became Ethiopia. Alamayu's remains are emblematic of a much wider the restitution of treasures taken during colonial era looting.

So the story of how Alamayu came to be buried at Windsor Castle is a wild, sad saga that Andrew Heavens recounts in his new book, the Prince and the Plunder.

Andrew Miller is our backstory columnist and our culture editor.

His father, Theodos, fell out with the British in the mid 19th century and held several dozen Europeans captive at his highland citadel, Magdala. And then in 1868, an Anglo Indian military force, complete with elephants and artillery, freed the prisoners and killed hundreds of the king's men. Now the king shot himself. As his fortress fell, the British proceeded to pillage crowns and robes and jewelry, sacred artifacts and manuscripts. And when they left, they also took away his son, Alamayu.

And what happened to him then?

Well, there are some photos that were taken of the prince soon after his father's death as he was whisked from the highlands to the coast. His mother died on that march after supposedly requesting that the young boy, then seven years old, be cared for in Britain. And when he got there, Queen Victoria took a shine to him. But he ended up dying of pneumonia at just 18 and at the queen's behest, was buried in the catacombs at Windsor.

And what about the rest of what was taken there? The crown's robes Jewelry, artifact.

Well, in 1871, Gladstone, who was then Prime Minister, decried the pillage at Magdala in Parliament. And over the decades, a few items have trickled back to Ethiopia, including hair cut from the emperor's corpse. But most of it remains in British institutions such as the Victoria and Albert Museum and the British Museum. Especially sensitive for many Ethiopians, the British Museum holds, but never displays 11 tablets, which are plaques that are supremely sacred in the Ethiopian Orthodox Church.

And so we come to a topic that we've talked a lot about on the show before, one and one of restitution. Why haven't more of those treasures gone back?

Well, I asked both the Victorian Albert Museum and the British Museum about this, and they say with some justification that as it stands, the law in Britain prevents them as state institutions releasing these objects from their collections, as is the case with other contested items like the Benin bronzes and the Parthenon sculptures. The British Museum says it aspires to lend the Tabats, those sacred plaques, to an Ethiopian Orthodox church in Britain. And I also asked the authorities in Windsor about the remains of Alemayo the prince, and they said it would be too difficult to exhume his remains without disturbing the resting places of others in St. George's Chapel. And I guess the real problem here, Jason, is that in cases like this, there's no real effective international mechanism for countries to reclaim colonial era plunder.

So what recourse is there then?

Well, UNESCO, the UN's cultural agency, has a sleepy committee on this subject. But in general, redress comes through ad hoc concessions by individual countries or from museums. And campaigners think that the principles that were widely agreed on dealing with art stolen by the Nazis, might offer a model for these disputes about colonial era plunder. But the truth is that apart from the bureaucracy and the rules, there are other hurdles that countries like Britain have to get over in this and similar discussions, and they're to do with some hard truths, which I think Alamayu testifies to. Because the fact is that while museums like the British Museum take a lot of flak for holding onto looted goods, as Alemayo's burial at Windsor symbolizes, responsibility often runs right to the top. And the ultimate culprit in this and other cases was the state.

Andrew, thanks very much for your time.

Thanks for having me, Jason.

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