SVB collapse: Sorting fact from fiction in Silicon Valley Bank blame game
By Sarah Westwood,2023-03-14
After the stunning collapse on Friday of a major bank for the technology sector, critics on both sides of the aisle have blamed their political opponents for contributing to the meltdown.
The blame game started almost immediately in Washington and on Wall Street as fears of a broader fallout mounted.
Here are the facts surrounding some of the loudest claims about SVB.
HOW DID IT GO SO WRONG?
SVB’s leaders had made a series of investments over the past two years that put the bank in a position of weakness, but the sudden nature of the collapse last week materialized when its clients began to panic and attempt to withdraw their money en masse.
The bank had swelled in size since 2021 because cash was flowing freely and more companies from the tech industry were putting their money into SVB than ever before. Deposits at SVB doubled in 2021, and the bank found itself with more money than it could lend out to the startups, venture capitalists, and tech companies that typically line up to do business with it.
SVB executives put chunks of that new cash into investments that are usually considered low-risk: government bonds and government-backed mortgage securities, the latter of which are more highly regulated after the 2008 financial crisis.
SVB’s problems began when the Federal Reserve started raising interest rates because the value of its securities fell significantly as interest rates climbed. The hit from rising interest rates wasn’t immediate, however; SVB would only sustain losses from those investments if they had to sell them while rates were still high.
SVB arrived at that crossroads recently because the economic downturn caused by inflation, interest rates, and a lack of new investment in the tech industry meant the bank’s clients started pulling out their money at a faster pace than usual just to keep their businesses afloat.
To keep up with the pace of withdrawals, SVB had to sell some of its securities at a loss, and on Wednesday, the bank announced that it had lost $1.8 billion on the sale of securities that had been much more valuable when interest rates were low.
That news, coupled with a failed effort by SVB to raise more capital, spooked the bank’s clients and caused a bank run, which means so many clients showed up at the same time to pull their money out that the bank ran out of cash and had to close.
IS SVB GETTING A BAILOUT?
Some Republicans accused the Biden administration of offering to bail out the bank, which would be a politically unpopular move after bank bailouts during the Obama administration sparked a backlash.
It would also give Biden a political headache because many of the bank’s clients are wealthy and work in elite industries, so a taxpayer-funded bailout just wouldn’t look good for a president who often touts his connection to blue-collar America.
“Joe Biden is pretending this isn't a bailout. It is,” Nikki Haley, the former South Carolina governor running for the GOP presidential nomination, said on Monday. “Now depositors at healthy banks are forced to subsidize Silicon Valley Bank's mismanagement.”
"We cannot keep bailing out private companies because there's no consequences to their actions,” Rep. Nancy Mace (R-SC) told CNN.
The federal government has said all depositors in SVB will eventually get all of their money back — not just up to the $250,000 level that the Federal Deposit Insurance Corporation guarantees. And even depositors not insured by the FDIC will get their money returned under the plan.
But the Biden administration has insisted SVB is not getting a bailout.
“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” the Fed, FDIC, and Treasury Department said in a joint statement on Sunday.
Instead, the agencies said “a special assessment on banks” would repay what the FDIC plans to cover. That means money paid into the FDIC by other banks that enjoy insurance coverage for their deposits would go toward paying out all the accounts at SVB.
That means taxpayer dollars are not technically covering the losses of the bank.
However, banks that are not guaranteed the same treatment from the federal government will shoulder the cost of cleaning up the SVB mess. The federal government is only obligated to repay deposits of up to $250,000 each when a bank fails and only for depositors insured by the FDIC.
Critics of the Biden administration’s approach in this case have questioned whether future failed banks will expect the same treatment from federal regulators.
The Fed also made a generous loan program available for banks that might have the same problem as SVB: too much money invested in Treasury securities that have lost too much value since interest rates started climbing.
Banks with similar exposure can apply for loans through a new vehicle, the Bank Term Funding Program, that will let eligible institutions get one-year loans from the federal government by borrowing against their securities. The program is generous because, according to the Fed, banks can borrow against the value of their securities as reflected on their balance sheets and not against the value that the securities would actually hold today if sold.
Federal officials said the loan program’s goal is “eliminating an institution's need to quickly sell those securities in times of stress.”
Who will foot the bill for the loan program? Federal officials said the Treasury Department will make $25 billion available as a “backstop” for the loans, which the Biden administration hopes not to use.
“The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds,” officials said .
Still, the loan program could deepen the perception that the government is propping up banks and financial institutions that made bad bets on the economy — in this case, underestimating the risk that inflation could bring interest rate hikes after Congress poured so much money into the economy following the pandemic.
IS WOKENESS TO BLAME?
Some Republicans quickly pointed the finger at the liberal leanings of some SVB leaders, claiming the bank’s top executives became more concerned with progressivism than business decisions.
“It appears to me, I mean, this bank, they’re so concerned with DEI and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission,” Gov. Ron DeSantis (R-FL) said Sunday on Fox News, referring to diversity, equity, and inclusion, or DEI, efforts that have become popular in some corporate circles.
With its California location and liberal clientele, SVB unsurprisingly embraced progressivism.
Jay Ersapah, the bank’s head of financial risk at its U.K. branch, pushed extensive LGBT campaigns through the company, touted being a “queer person of color,” and promoted “safe spaces” at the bank, the New York Post reported .
The bank also heavily promoted its diversity commitments in leadership, which one Wall Street Journal columnist suggested was a possible factor in why management failed so spectacularly.
“I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands,” the columnist, Andy Kessler, wrote on Sunday.
But even if executives were too preoccupied with progressive pieties to make better investment decisions, that was not the direct cause of the bank’s failure.
Few in the industry appeared to perceive the risk that too many long-term investments could pose, and the problem extends far beyond liberal Silicon Valley’s top bank.
Signature Bank in New York City also closed its doors on Sunday after the SVB collapse, facing a similar run on deposits from customers who panicked after seeing what happened on the opposite coast.
However, Signature Bank is more closely associated with cryptocurrency and faced systemic risks that were not identical to SVB’s problems.
DID 2018 DEREGULATION CAUSE IT?
For their part, Democrats have claimed a law signed by then-President Donald Trump in 2018 paved the way for the SVB collapse by removing key safeguards put in place after the global financial crisis.
"No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules," Sen. Elizabeth Warren (D-MA) wrote in a New York Times op-ed on Monday.
Greg Becker, the CEO of SVB, testified before Congress in 2018 that the rollback was necessary for smaller banks like his own because they simply did not have the same resources to comply with all the new reporting requirements as much larger financial institutions.
The cost of compliance, he argued, was disproportionately higher for regional banks than for global firms with legions more staff.
Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018 to exclude more regional banks from the toughest requirements in Dodd-Frank, the reforms that followed the financial crisis.
The government would only consider banks “too big to fail” and thus subject to the requirements if they had more than $250 billion on the books, up from the existing $50 billion threshold.
Critics say regulators may have caught SVB’s vulnerabilities sooner if the bank had had to perform the battery of stress tests required of larger banks, which involve creating detailed forecasts of what a bank’s performance would look like under a wide range of scenarios in the economy.
Larger banks are also required to keep more cash on hand than smaller ones since the rules were rolled back.
But it’s not clear that SVB would have avoided ruin if the pre-2018 rules had remained in place.
In the end, SVB was done in by a bank run, which is a product of human behavior and emotions. Some analysts have speculated that the uniquely plugged-in nature of SVB’s clientele, coming mostly from tech and venture capitalist firms that closely track the financial industry, contributed to the speed of the run on deposits last week.
And the long-term securities investments that the bank made are usually considered low-risk; at the time the bank made them, it was flush with more cash than it could reasonably hand out through potentially riskier loans, and it’s unclear whether regulators would have discouraged those investments even if they had been updated more routinely on the bank’s decisions.
Still, the collapse has renewed calls for more regulation of banks of the same size and importance as SVB, and if the situation causes a ripple effect of financial turmoil, those calls could gain bipartisan support.
DID PETER THIEL PLAY A ROLE?
Tech mogul and Republican donor Peter Thiel has come under scrutiny this week after critics questioned whether his decision on Thursday to pull his money out of SVB sparked the bank run that closed SVB’s doors.
Thiel’s venture capitalist firm withdrew its money from SVB on Thursday morning and soon advised companies within its portfolio to retrieve their cash from the bank.
Thiel’s fame and influence in the investment world have led to speculation about whether other SVB customers followed his lead and emptied their accounts Thursday and Friday, triggering the run.
But bank runs are difficult to predict and contain; they occur based on the expectations and concerns of many people, and it would be nearly impossible to determine how many SVB clients based their decisions on Thiel.
In addition, SVB was in a position to be gutted by a bank run because of its own decisions and some factors that were out of its control, such as rising interest rates. So, even if Thiel had sparked a run on deposits, that might not have been fatal unless SVB was weak already.
Still, some critics have suggested Thiel had a moral obligation to maintain ties with the bank as the depth of its troubles became clear last week given how much the bank has helped Thiel’s industry in ways traditional banks refused to do.