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Get Woke, Go Broke: An Analysis of the Collapse of Silicon Valley Bank
By guest author Jonathan Wellum, CEO of Rocklinc Investment Partners
The full-court press to push the Environmental, Social, and Governance (ESG) agenda on the corporate world is dramatically changing the economic model for Western businesses. Today, businesses are being pressured to create social credit scores based on Marxist ideology, make investment decisions based on pro-abortion and pro-transgender policies, and elect boards of directors and executives based on race quotas rather than competence and merit.
The results will be devastating: lower economic returns, less innovation and creativity, and ultimately decreased standards of living for the majority of the population. The recent bank failures in the United States give us a preview of what we can expect more of moving forward. In the collapse of Silicon Valley Bank we see an outstanding case study of what happens when competitive free markets are rejected and ethics are stripped of biblical truth and creational norms.
What Happened to Silicon Valley Bank?
How did the 16th largest bank in the U.S. so quickly become the second largest bank failure in U.S. history? What caused their stock price to drop over 60% in six hours, driving depositors to pull $42 billion in deposits in a matter of days? Interestingly enough, the name of the bank gives us a hint as to what went wrong; it turns out that acting as the lender of choice to “woke” technology startups wasn’t the best strategy in the world.
According to the Wall Street Journal, Silicon Valley Bank (SVB) was already known for its willingness to offer banking services to unprofitable startups, its lack of attention to financial risk management, and an overall lack of banking talent. Is it any wonder they claimed to have banked nearly half of all U.S. venture-backed technology and healthcare startups in recent years, as well as more than 1,550 companies in the climate technology and sustainable sector? The fact is that many of these companies had weak business models to begin with. Without the zero-cost money offered by the Federal Reserve Bank (Fed) and “welfare” cheques from various government programs, they would have died out long ago.
When the Fed started to raise interest rates in an effort to tackle the growing inflation problem, it meant that already unprofitable companies found it harder and harder to raise capital in step with their expenses. They began to withdraw some of their deposits and looked to move remaining deposits to short-term investments that would provide higher investment returns.
Short-Term Pain for Long-Term . . . Pain
During the pandemic, things seemed to stablize somewhat. Due to lockdowns, many technology companies that were clients of SVB found themselves sitting on large swaths of cash. Private equity and venture capital firms, along with their portfolio companies, parked their newly raised funds in SVB deposits. From March 2020 to March 2021 SVB’s deposits doubled, going from $62 billion to $124 billion.
The problem is that for banks, deposits are considered liabilities, not assets — often they run out the door even quicker than they came in! In the short-term, deposits are often used to buy assets that will help generate a return on deposits while they sit in the bank.
In the case of SVB, however, most of the assets the bank purchased were safe assets with no credit risk, such as US Treasuries bonds, which must be held to maturity in order to realize their full value. The problem was that while credit risk was controlled, duration risk — the risk that changes in interest rates will either increase or decrease the market value of the bonds — was not being adequately being addressed.
This meant that even as deposits were rushing into SVB there was virtually no return being paid on short-term bonds and other interest-bearing securities. This is because the Fed, along with other central banks, had been holding interest rates close to zero for over 15 years in order to prop up indebted countries around the world. In response, SVB bought longer-dated bonds. Why? Because the only “reasonable” return (if you call 1% to 2% reasonable) the bank could get were on longer duration bonds. So that’s what they bought!
The problem was a serious mismatch in their assets and liabilities. They took short-term deposit money and invested it in long-term securities, hoping that the deposits were going to stick around for a long period of time.
Such would not be the case.
The Sound of Desperate Clawing
After the pandemic ended in March of 2022, the global economy was faced with a serious increase in inflation. To combat this, the Fed (along with other central banks) started to aggressively raise interest rates. In less than twelve months, the Fed lifted the Fed funds rate (the average rate that banks pay when borrowing from each other overnight) from zero to around 5.00%, where it still sits today.
As interest rates rose, the assets on SVB’s balance sheet fell in price. While theoretically SVB planned on keeping their assets, as depositors started to withdraw money, the deposits SVB was holding became real liabilities. As more deposits left SVB, those which had financed low-yielding assets on the bank’s balance sheet now had to be sold at a loss. The treasuries they continued to hold also had to be marked down in value and were now being carried at a loss.
The reality of what was happening to SVB’s balance sheet only surfaced at fiscal year-end 2022 when the bank revealed its equity wasn’t much more than $16 billion. The Federal Reserve Bank of San Francisco, which is supposed to oversee SVB, didn’t even see these problems developing. So much for regulators!
When Goldman Sachs (a leading global financial institution) entered into the situation to help SVB raise $2.25 billion in new equity to cover losses, it became clear that the game was over. Equity investors panicked when they realized what was happening and started selling their shares at the same time depositors started furiously withdrawing money from the bank. As the vicious cycle took over, regulators stepped in and closed the bank, consigning the keys to the Federal Deposit Insurance Corporation (FDIC) —and SVB — to the history books.
A Post-Mortem Review
But is there more to this saga? How could such a large bank as SVB find itself in such a position? How could the management of the bank so flagrantly disregard basic risk management strategies?
Let’s consider three possible reasons:
Easy money and poor regulations.
The Fed’s almost two decade-long zero interest rate policy had flushed too many dollars into the economy, helping prop up businesses that should never have seen the light of day. With all this easy money washing through the economy, many of SVB’s clients had large amounts of cash available to deposit. The thought that interest rates would eventually have to go back up again was rejected as nonsense.
Corrupt policies coming out of Washington D.C., which lured SVB into loaning money to more speculative businesses (businesses in which no physical commodities are exchanged).
The financial handouts spewing from Washington enticed SVB to dive headlong into the “endless” government gravy train. Congress’ $1.2 trillion 2021 infrastructure bill acted as the starting pistol for a clean-tech frenzy. It made available hundreds of billions for new climate technologies: electrical grid modification, solar, carbon capture, battery storage, electric-vehicle charging infrastructure, geothermal, “smart community” widgets, microgrids, CO2 transport, hydro, wind, fuel cells, waste management, and efficiency gains.
In 2022, the misnamed “Inflation Reduction Act” threw even more dollars at so-called green innovators while extending billions in household tax credits in an attempt to lure Americans to buy these government-fueled fantasies.
The bankruptcy of “progressive” ideology.
Easy money from the Fed boondoggle projects combined with the religion of wokeism turned out to be a fatal combination. Ultimately, this was because of a wholesale rejection of both created order and the revealed law of God.
Instead of auditing its own books and focusing on matching their assets and liabilities, SVB used the largesse made off customers’ funds to conduct an “equity audit” to gauge its effectiveness in “advancing women and Black and Latinx individuals to positions of influence in the innovation economy.”
In September 2022, SVB boasted that they had joined a group called CEO Action for Diversity & Inclusion. In November, they bragged about subsidizing Diversity VC’s report “The Equity Record” while lamenting that less than two percent of industry assets under management go toward diversity, equity, and inclusion investments. In December, they patted themselves on the back for investing $17.5 million in “Black-, LatinX-, and Women-led Community Development Financial Institutions.”
In a nutshell, SVB dedicated significant corporate assets to promoting leftist causes, while ignoring their most important responsibility: protecting their shareholders’ capital.
While SVB was busy being honoured for its corporate responsibility, they weren’t focusing on protecting client deposits. Even though in its 2022 ESG report, SVB management declared that “we are committed to following all laws and regulations pertaining to anti-money laundering,” allocating client resources to the latest Diversity, Inclusion, and Equity fads and not focusing on hiring competent bankers is really just another form of money laundering.
In the end, they all led to a form of wealth redistribution and eventual capital destruction.
The Dead End of Woke Policy
Sadly, woke institutions inevitably suffer from a distortion of purpose which leads them into a fantasy world of their own making. This distortion of purpose helps explain SVB’s inability to perform the most basic functions of a bank. They literally could not see the utter foolishness of a Bank devoting such an enormous amount of its resources to promoting the latest social agenda while placing the future of the entire business at risk; not to mention the depositors who had entrusted precious resources with them.
Substituting ESG parameters for well-established risk management strategies and hiring professionals based on gender ideology and not merit and competence is a blatant rejection of reality. When placed in the real world of risk and competition it can only lead to the eventual collapse of an institution. Silicon Valley Bank should be a cautionary tale to all institutions hoping to emulate their business practices and priorities.
If we want to flourish in God’s world, including the spheres of economics, finance, and banking, we must submit to God’s Word and bow before King Jesus. Today we have “exchanged the truth about God for a lie and worshiped and served the creature rather than the Creator” (Romans 1:27). But financial success will only be as strong as the values in our society. Without the supporting structure of God’s moral standards, our economy and businesses will only continue to deteriorate.
As Christians, God has given us our orders. We have been instructed to “destroy arguments and every lofty opinion raised against the knowledge of God and take every thought captive to obey Christ” (2 Corinthians 10:5).
This includes addressing the lies and inequalities of our deposit-taking institutions.
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