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Pentagon Tries to Cast Bank Runs as National Security Threat

The next time banks need a bailout, they’ll have a new argument for why it’s necessary: national security.

In recent months, the Pentagon has moved to provide loans, guarantees, and other financial instruments to technology companies it considers crucial to national security — a step beyond the grants and contracts it normally employs. So when Silicon Valley Bank threatened to fail in March following a bank run, the defense agency advocated for government intervention to insure the investments. The Pentagon had even scrambled to prepare multiple plans to get cash to affected companies if necessary, reporting by Defense One revealed.

Their interest in Silicon Valley Bank stems from the Pentagon’s brand-new office, the Office of Strategic Capital. According to the Wall Street Journal, the secretary of defense established the OSC in December specifically to counteract the investment power of adversaries like China in U.S. technologies, and to secure separate funding for companies whose products are considered vital to national security. It enjoys special authority to use loans and guarantees not normally available to the Defense Department to attract private investment in technology.

The full extent of OSC’s authorities has not yet been determined, as its charter is still being drafted, an OSC official not authorized to speak publicly told The Intercept. OSC’s website identifies its mission as twofold: first, identifying critical technology areas, and second, funding those investments using investment tools. “These financial tools are new to the Department and will be complementary to ongoing technology innovation efforts,” the agency’s mission states.

OSC is so new that it does not yet have its own budget, but President Joe Biden recently requested $115 million in funding.

According to Defense One, the Pentagon worried about supply chain disruption and startups needing to stop work. But although SVB’s clients included tech startups, The Intercept was not able to identify specific Pentagon contractors whose viability might have been at risk. Major defense contractors like Northrop Grumman, Lockheed Martin, and Boeing gave no public indication that they had any cash in SVB.

Instead, it appears the Defense Department wanted to ensure that the entire venture capital system did not suffer a blow. It was an “opportunity to really get serious about growing that connective tissue between the national security enterprise and the commercial capital markets … and show that we’re good and sophisticated partners,” said Michael Madsen, acting director of the Pentagon’s Defense Innovation Unit, at a Reagan Institute event, as noted by Defense One.

SVB provided “a mechanism where you don’t need to go find investors, you can work with an institution like Silicon Valley Bank to finance that transition from prototyping to production,” Joe Laurienti, the founder of a rocket engine company who spoke at the Reagan Institute event, also said. “I think this is a huge opportunity for DoD and the federal government to find new forms, new mechanisms for financing that bridge.”

“I know of no precedent for DoD to invest in the financial system itself or to bail out financial institutions in any way,” Gordon Adams, a former associate director for national security programs at the Office of Management and Budget and professor emeritus at American University, told The Intercept.

The national security argument for bailout, notably, found an influential friend in the Senate. As the Biden administration intervened to protect Silicon Valley Bank depositors on March 12, Sen. Mark Warner, D-Va., who chairs the powerful Senate Intelligence Committee and also sits on the Banking Committee, issued a press release warning that the bank run posed a national security risk.

“After an unprecedented and reckless run on Silicon Valley Bank, there were very real risks of instability spreading to other institutions and undermining our national security and technology innovation system,” the statement said. Warner — the only member of Congress to have publicly tied SVB to national security — has received significant contributions from the financial sector, including maxed out donations from SVB’s super PAC.

“When our financial system is under assault, that is a national security issue,” Warner told The Intercept, adding that he also had concerns about “deepfakes”: doctored videos purporting to be real videos of real people. “If you see adversaries potentially being able to use, and I’m not suggesting this, I’m going to ask this question, but I’ve been worried about deepfakes in the system for awhile,” he said. It was not clear how deepfakes related to SVB; when asked to clarify, Valeria Rivadeneira, a spokesperson for Warner, did not respond. But “deepfakes” are often used as a stand-in for the possible threat posed by artificial intelligence and disinformation.

In 2018, Mark Warner led 16 other Democratic senators in joining with Republicans to revoke key parts of the Dodd-Frank Act, legislation put in place after the 2008 financial crash to regulate banks out of risky lending practices. Warner helped write the original Dodd-Frank Act and describes himself as one of its “key authors,” saying last month that his yes vote “put in place an appropriate level of regulation on midsize banks.”

Senators who supported the revisions to Dodd-Frank claimed in recent days that they don’t have enough information to reach a determination about whether the 2018 rollback had an effect on Silicon Valley Bank’s collapse. The Intercept asked Warner whether his vote had any impact. “The question that I have for you, though,” he said, “is, you tell me what regulatory system can get rid of 25 cents on every dollar,” he said in reference to the amount of SVB’s bank run, where 25 percent of their deposits were withdrawn in a day.

In 2022, Mark Warner was the only senator to receive a campaign donation from Silicon Valley Bank’s super PAC.

Since 2012, Warner has received over $21,000 from Silicon Valley Bank’s super PAC, and in 2022 was the only senator to receive a campaign donation from the PAC. His net worth has hovered around $200 million, with tens of millions in mutual funds, government bonds, and equity stakes making up huge parts of his portfolio.

Before his career as a senator, Warner founded the investment fund Columbia Capital with the earnings he made flipping Federal Communications Commission telecom licenses in the mid 1980s. Warner is a major recipient of campaign contributions from the very banks he’s invested in, with the “securities & investment” listed as his top industry donor, according to data compiled by the Center for Responsive Politics.

Warner has had a cozy relationship with both Silicon Valley startups and some of the largest venture capitalist players in the country. In 2019, he invited a dozen firm leaders and the president of the National Venture Capital Association into a Senate SCIF (a “sensitive compartmented information facility,” designed for handling classified materials) to discuss competition with China.

The day after Warner’s statement, on March 13, the Pentagon’s OSC reportedly sent out an internal email saying that it was “assessing impacts to national security” posed by the collapse of SVB.

 The defense budget is already bloated, without having to additionally ensure the financial health of the investment economy.

But to extend financial protection to tech startups on national security grounds struck some as going overboard. The defense budget is already bloated, without having to additionally ensure the financial health of the investment economy.

“That surprised me,” Lawrence Korb, a former assistant defense secretary and now senior fellow at the Center for American Progress, said of the Pentagon’s email in a phone interview with The Intercept. “The defense companies as far as I know are doing pretty well.”

The OSC was originally pitched as a counterweight to China. The White House’s National Security Strategy, released last year, identified China as “the only competitor with both the intent to reshape the international order and … technological power to do it.”

While the OSC’s role is unique, it is predated by the Defense Innovation Unit, an independent advisory board established in 2015 to facilitate the Pentagon’s adoption of commercial technology. The unit was restructured after being met with resistance by companies skeptical of the Pentagon.

During a regular press briefing on March 13, the Pentagon said that under the OSC, it had sought to connect with the venture capital world inhabited by SVB, which itself had a venture capital arm — though not SVB itself. Pentagon Comptroller Michael McCord referred to OSC as “an initiative that the Secretary cares a lot about,” explaining that it was “trying to connect us better with the venture capital world to get their ideas and their capabilities into our system. It’s not connecting us to the Silicon Valley Bank but it is connecting us to that world.”

While the run on Silicon Valley Bank was accelerated by venture capitalists encouraging one another to remove their funds after the bank’s liquidity problems surfaced publicly, it was the extremely risky deposits from venture capitalists that SVB cultivated that set the stage for its failure in the first place.

“Because of their [OSC’s] charter, I have no doubt they are interested in the financial viability of firms doing R&D in critical technologies,” Adams, the former Office of Management and Budget associate director, said. “I can’t say that means they can or will invest in financial institutions, but, given their mission and the heavy concentration of technology suppliers in California, it would not surprise me to learn if any of their investments were in any way at risk as a result of bank failures.”

The post Pentagon Tries to Cast Bank Runs as National Security Threat appeared first on The Intercept.

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