The collapse of Silicon Valley Bank last week sparked a number of debates. Was SVB “too big to fail?” Was the Biden administration response a “bailout?” Are the libertarian-leaning tech CEOs hypocrites? Is this a sign that the Fed’s interest rate hikes should come to an end?
But one element of the SVB collapse has been lost in all the discussion of naive tech bros and their questionable banking habits: the importance of the bank, of the tech industry, and of finance to the project of US global power.
As Fortune put it, SVB was the “central artery for financing the startup ecosystem.” Nearly all of the bank’s depositors were young tech firms backed by speculative venture capital — and the bank’s collapse threatened the very survival of both the tech and VC industries. While many have been rightly focused the potential fallout of the collapse for the US banking system, the geopolitical dynamics of these events have mostly flown under the radar.
The Financial Times reports that “amid fears the government was prepared to let SVB and its uninsured depositors go to the wall, venture capitalists launched a concerted lobbying effort” via their industry group, the National Venture Capital Association (NVCA). The lobbyists argued that the failure of SVB “would not only have big economic repercussions, with companies struggling to write paycheques, but also that an outright failure would have geopolitical ramifications.”
As one participant in the lobbying meetings told the Financial Times: “The theme was: ‘this is not a bank.’. . . This is the innovation economy. This is the US versus China. You can’t kill these innovative companies.”
Leaning into the US-China rivalry is not just deft lobbying from NVCA. And posing this as a threat to the “innovation economy” is not simply a reflection of an ideology that sets venture capital–backed start-ups on the new frontiers of capitalism. Indeed, while every facet of the US economy in the twenty-first century — from manufacturing to consumption — is dependent on access to credit, the peculiarities of SVB bring the relationship between this type of finance and the US military-industrial complex into stark relief.
On the list of major firms that was set to lose about $5 billion in SVB deposits (alongside start-ups in the media, software, and pharmaceutical industries) was at least one semiconductor producer and two aerospace and defense firms. One of them, Rocket Lab, has recently been in the news for “weaponizing space,” while the other, Astra, works closely with Defense Advanced Research Projects Agency (DARPA) on a number of projects.
These firms’ military ties are not unique. Silicon Valley has a long history of collaboration with the US military. Indeed, the first initial public offering in Silicon Valley was for Varian in 1956, which sold microwave tubes for military uses. In the 1960s, Fairchild Semiconductor, considered one of the pioneers of today’s Silicon Valley, started its business through military contracts. These links have evolved to include technologies from microchips to data mining to Apple’s Siri. As Silicon Valley historian Leslie Berlin notes: “All of modern high tech has the U. S. Department of Defense to thank at its core.”
But more than that, the venture capital supporting these start-ups has become increasingly enmeshed with military procurement in recent years, as the Pentagon has turned to private financing to direct military research and development.
This is simply the latest form of a decades-old relationship. Starting in the 1990s, private equity became an important player in the merger boom of armaments firms. This merger boom was key in the transition of the defense industry from a medley of hundreds of small- and medium-sized industrial firms into the handful of massive, publicly traded companies that we know today.
This boom was facilitated by the US government, in an effort to increase efficiency and cut costs during the post–Cold War defense drawdown. But if it was the government pushing the mergers, it was the financial institutions that facilitated them — and reaped the rewards.
Searching for profitable investments in the wake of the savings and loan crisis of the early 1990s, many financial institutions turned to the defense industry as a possible boon. Few in the industry expected the post–Cold War drawdown to last, and investors bet that an industry backed by US federal military spending would be a safe investment.
Big banks, such as JP Morgan, provided funding for a number of major mergers, such as Lockheed Martin’s $9.1-billion acquisition of Loral Corporation in 1996. In addition to big banks, the defense industry piqued the interest of a number of private equity groups, and institutions like the Carlyle Group and the Vanguard Group became specialists in investing in military firms.
Underwriting the merger boom, these bankers and venture capitalists reaped the benefits of the extraordinary growth in military firm profits in the coming decades, as the United States’ wars in the twenty-first century meant a boom in the aerospace and defense sectors.
Today private equity has taken on an even wider role in the armaments industry than in the 1990s, responsible for thousands of investments in aerospace and defense firms. The Pentagon has even established an office dedicated to facilitating the linkages between start-ups with military potential and venture capitalists. Industry leaders thus unsurprisingly see private equity and venture capital as the future of military innovation.
So when the lobbyists argued that the SVB collapse wasn’t just threatening the individual depositors, but also that it was a possible “extinction-level event” for Silicon Valley — and that the VC business model itself was in danger — they were correct to point out that a collapse of these industries would disrupt the military-industrial ecosystem at a time of escalating conflict with Russia and mounting rivalry with China.
While SVB’s heavy concentration of VC-backed tech firms makes it a particularly clear example of these industries’ ties with the US military-industrial complex, it is not unique. Indeed, the US financial system writ large is intertwined with US war-making in the twenty-first century — creating a dangerous situation for the world.
Decades of endless war have dramatically increased the opportunities for militarized profit-making — making military industries an ideal investment for financial capital — and a growing number of financial firms are expanding their military sector investments. This draws the interests of financial capitalists together with those of military-industrial firms and hawkish officials.
As Shana Marshall notes, the interlocking interests of financiers and military leaders in the pursuit of war “ensures a steady delivery of investment in militarized technologies and high returns for finance capital from continued US commitment to a highly militaristic foreign policy.”
In other words, this financial permeation of the military-industrial complex has yielded a vicious circle: Expanding war yields greater profits for armaments firms, which enhance their capacity to attract financial investors. Firms and their financial backers use these profits to lobby for war, to finance pro-war think tanks and research, and to influence media coverage of world problems.
This has created a dangerous state of affairs, where militarism and militarization are the go-to solution to every challenge. The entire project of restoring US global primacy rests on its military power — its ability to effectively challenge rivals through force. Over the past few decades, finance has become increasingly incorporated into that project.
So while SVB may not have been “too big to fail,” it was certainly “too important to fail” — not only to the banking system, but to the project of US world power. The VC lobbyists undoubtedly found a sympathetic ear from administration officials concerned with the “national security” ramifications of the collapse.
But from the geopolitical perspective, the SVB rescue does little to promote stability. It ultimately preserves the status quo of deeply intertwined military and financial systems, reinforces the rhetoric of US-China rivalry, and has angered Western allies who saw the decision to cover all deposits as an unnecessary and hypocritical breaking of international banking rules — rules that the US pushed for in the first place.