Why did Silicon Valley Bank (SVB) fail? The reason I see cited most often — that the bank was too heavily invested in long-term securities which took a big hit when the Fed raised short-term rates — seems plausible as far as it goes. But does it go far enough?
Scott Shepard of RealClearMarkets doesn’t think so. He argues that SVB’s commitment to the ESG (environment, social, and governance) investment movement played a decisive role in the bank’s failure:
He writes:
It quickly emerged after Silicon Valley Bank was shuttered two weekends back that it had spent millions of shareholder (and, it appears, depositor) money for partisan political purposes that lie beyond the scope of its directors’ and executives’ statutory remit, including on – of course – decarbonization and equity-based discrimination initiatives. The expenses by themselves did not sink SVB, but its larger ESG commitments, and the assumptions and blindnesses that go along with them, certainly did.
Regarding ESG spending:
SVB blew quite a lot of money on ESG-style politics. It committed $5 billion to the decarbonization pipe dream, and its collapse was mourned by Christina Qi, a former ESG-committed hedge fund manager, because it “has been devastating in more ways than one: They supported women, minorities, & the LGBTQ community more than any other big bank.”
But, says Shepard, it was not so much the spending as “the thorough-going commitment to ESG thinking, to notions of ‘sustainable’ and ‘stakeholder’ and the other varieties of non-at-all-capitalism capitalism, that really did the bank in.” In his view, ESG thinking led SVB to invest way too heavily in tech companies that share its woke goals:
Tech companies have been some of the most nauseating in their embrace of ESG goals such as equity-based discrimination, political-schedule decarbonization (despite the vast amounts of energy that tech server farms hoover up), and censorship of facts and opinions that challenge the hard-left narrative in the solidly Newspeak name of “safety and harm reduction.” And so the types of investors who push ESG and subscribe to its shibboleths invested heavily in tech, while underinvesting in nasty, dinosaur industries such as reliable energy.
This investment strategy suggests that at least a significant percentage of the ESG squad really did, in Barack Obama’s immortal words, “believe [their] own bullshit.” They really did think that ESG meant “doing well by doing good,” with good in their eyes being reviving illegal discrimination, shifting away from reliable energy, and stifling thoughts with which they disagreed.
The counter-argument, I suppose, is that it was natural for a bank in Silicon Valley to invest in tech start-ups, quite apart from ideological affinity. Such investments are inherently risky, but the mistake wasn’t making them. Rather, it was overreliance on long term bonds even as it became likely that the Fed would pull the rug out as part of its quest to reduce the inflation rate to 2 percent.
Kim Strassel of the Wall Street Journal acknowledges the important role of SVB’s reliance on bonds, but also contends that woke ideology played a major role in the bank’s demise by leading it into a flawed investment strategy. Citing SVB’s own words, she points out that the bank prided itself on “serving those creating positive environmental change.” Accordingly, it skewed its loans in the direction of woke companies that weren’t profitable and in some cases had no product. Strassel quotes one tech executive who says that SVB, in effect, was offering “social credit.”
But Strassel suggests that significant blame also rests on the Biden administration’s wokeness and perhaps that of bank regulators. As to Biden, she writes:
While the main reason SVB failed was its decision to buy bonds at the top of the market (it got hit when it had to sell), it had also in the past few years further stretched itself by sizably increasing its loans and lines of credit to subprime firms. How much of that would have happened if not for the Biden pot of gold at the end of the green-tech rainbow?
A Washington Post story acknowledged that SVB’s weekend collapse initially meant that “many major clean tech companies faced insolvency.” It even accidentally admitted Washington’s role when it noted that many investors were nonetheless hopeful “the infusion of hundreds of billions of dollars in public money” from Washington legislation would “blunt the fallout from the bank collapse.”
As to bank regulators:
Even a junior banking regulator should have picked up on SVB’s distress, but that’s apparently a grade above San Francisco Federal Reserve President Mary Daly. She and her team have spent more time of late focused on hypothetical climate risk than the real risk of bank failures. What woke overseer wants to clamp down on the darling of clean-tech banking?
If bank regulators let woke ideology influence their decisions, we have a big problem. And in the present climate, why wouldn’t we expect some regulators to succumb?
Strassel’s analysis rings true to me, but I’m no expert in this area. Most of our readers probably have at least as much insight as I do about the collapse of SVB. What are your thoughts?
My sense is that wrong asset mix was the cause, and ESG a contributing cause, of the bank's downfall. It was the wrong treasuries, not the wrong loans, that caused the failure, since the bank had to sell long-term treasuries at a steep loss to make deposit withdrawals. On this analysis it wasn't imprudent loans to favored tech start-ups that laid the bank low. However, only one member of the bank's board had banking experience, a likely result of political or ideological considerations, so the board was not equipped to oversee the bank, and the officers' commitment to an ESG agenda probably took their eyes off the ball. Jim Dueholm
As I see it the problem with the position that ESG was the SOB for SVB is the lack of public evidence that the loans made to the startups were significantly in default or non-performing. It may have happened, but I haven't seen evidence of it. The bigger problem seems to be SVB's business model. It apparently required or strongly encouraged borrowers to place their deposits with SVB, producing a lot of money that had to be put to work. SVB, without a risk manager for eight months, assuming the low inflation environment would last forever, plunged in long-term treasuries and didn't unload them when Biden's policies and the Fed produced an inflation that inverted the yield curve and crushed the value of SVB's assets. When the depositors came calling for their money, SVB had to unload its treasuries at a big loss. The rest is history. Jim Dueholm