There is a cousin to wokeness lurking in Silicon Valley Bank’s failure. We used to call that cousin the ‘cool factor.’
There was too much focus on partying with the cool kids, and too little on the nuts and bolts.
N umerous conservatives claim the failure of Silicon Valley Bank, the U.S.’s 16th-largest bank, is a result of its woke policies, laying bare the realities of putting social policy above sound business judgment. Progressives claim SVB’s failure is the result of Trump-era bank deregulation. Both are wrong, though there is a cousin to wokeness lurking in SVB’s failure. We used to call that cousin the “cool factor.”
Advancing the theory that SVB’s failure is caused by wokeness, a Fox Business report last week pointed to its public commitment to DEI (diversity, equity, and inclusion), August 2022 statement that two-thirds of its workforce meet diversity criteria, and Claremont Institute data for the proposition that the bank donated $73,450,000 to social-justice causes. In fact, the Claremont estimate consists largely of loans and investments in businesses that comply with SVB’s ESG criteria. There is no evidence that those loans or investments contributed to SVB’s failure.
In 2021, SVB announced its five-year Community Benefits Plan to lend $5 billion to small businesses, allocate $4.8 billion in Community Reinvestment Act loans and investments, extend $1.3 billion in residential mortgages to low- to moderate-income (LMI) borrowers and borrowers in LMI census tracts, and make $75 million in charitable contributions.
In January 2023, SVB issued a DEI report that proclaims its values include standard principles like integrity and taking responsibility, and woke babble like empathy and embracing diversity. The report declares that SVB is committed to DEI within SVB, the “innovation ecosystem” and “communities” by increasing representation of, and funding to, underrepresented groups in the innovation economy. The report noted that all SVB employees are required to participate in DEI education and touted SVB’s contribution of $20 million to nonprofit organizations in 2022, and loans and investments totaling $4.4 billion to small businesses and affordable housing over the last 20 years.
According SVB’s 2023 proxy statement, its DEI goals include ensuring a diverse candidate pool during the interview stage for senior leadership roles, and a five-year, $50 million commitment to reach 25,000 “Black and Latinx” people through fellowships, internships, scholarships, and other avenues.
While some of these programs and verbiage are disturbing, the specifics show that much of SVB’s commitment is mere posturing. SVB intends to achieve many of its goals by “connecting diverse groups to SVB’s vast network,” rather than by making loans or investments outside of its normal underwriting requirements. Its loan commitments are neither remarkable nor concerning for a bank of its size. To a conservative who believes in prudently supporting people who seek the American dream by working within the system, I applaud many of these commitments, though I would quibble over the verbiage and some details.
Many conservatives in social and traditional media allege the SVB board includes only one director with banking experience, and the management team is inexperienced. In fact, the board includes several members with substantial experience in banking, financial markets, and accounting, and its executive management team ranges from age 50 to 64, each with decades of relevant experience.
Many on the left blame the Economic Growth, Regulatory Relief, and Consumer Protection Act, which rolled back some of the Dodd-Frank Act regulations put in place after the 2008 financial crisis. There is no indication that SVB’s failure would have been avoided had the Dodd-Frank regulations remained in place. Former representative Barney Frank, who sponsored the Dodd-Frank Act, disputes that the 2018 regulatory change played a role in SVB’s problems.
Speaking with Fox’s Maria Bartiromo, Florida governor Ron DeSantis was more nuanced, contending that SVB’s focus on DEI and politics “diverted from them focusing on their core mission.” That appears to be on target.
SVB invested billions of dollars in long-term government bonds when interest rates were low. It failed to efficiently ladder maturity dates or hedge the portfolio. In addition, SVB carried about $95 billion of its bond portfolio at par, rather than each quarter “marking-to-market” the change in value. According to a Janney Montgomery Scott research report, banks with at least $1 billion in assets, on average, marked-to-market 94 percent of their loan portfolios, while SVB marked just 25 percent of its portfolio. As interest rates have been rising, the market value of previously issued bonds declines, particularly long-term bonds.
As interest rates increased, SVB required additional liquidity to pay higher interest to its depositors and redeem assets from depositors who were moving their funds to higher-return opportunities. SVB commenced a low-key effort to raise additional equity funds. When that did not progress quickly enough, to obtain liquidity, SVB sold $21 billion of its long-term loan portfolio at a loss of $1.8 billion. On March 8, SVB announced the loss, and a $2.25 billion equity offering, including $500 million for which SVB had already secured a commitment, subject to the offering’s being successful.
To put these numbers into perspective, according to an investor presentation SVB also issued on March 8, as of the prior month, SVB had $334 billion of client funds, more than $925 million of annual income, and exceeded all regulatory capital requirements. SVB projected that after the offering it would have ample liquidity and flexibility to manage its capital needs. However, for 2022, SVB’s parent reported a consolidated net loss of $230 million, compared to profits of $1.2 billion in 2021 and $1.7 billion in 2020.
It is unlikely any of this would have caused SVB to collapse if it had a normal customer base. Instead, SVB was the hub of U.S. and U.K. venture-capital lending, investments, and custodial services for companies incubated in the venture-capital ecosystem. According to Fortune, SVB was the financial institution of choice for an estimated 50 percent of all U.S. start-ups.
Given its highly interconnected network, when word circulated that SVB was seeking capital and had taken a loss on its portfolio, depositors panicked and at the speed of text messages alerted their friends. Within a day, this overwhelmingly progressive crowd put their principal ahead of their principles and withdrew $42 billion, causing the bank to collapse. If SVB had a more diversified base of depositors, had not sought equity capital within its network of depositors, had hedged or laddered its portfolio, periodically marked its portfolio to market (avoiding the one-time loss), or if some of these things had been done differently, SVB likely would have weathered the interest-rate increase.
SVB’s collapse is not the result of its ESG or DEI lending or investing policies, charitable or social-justice contributions, or the politics of its management or board. Most of those policies were for show. As one of the hottest employers around, it is plausible that its DEI hiring and promotion policies also were immaterial.
I was a director of a savings and loan during the S&L crisis. Though we could not avoid becoming one of more than 1,000 S&Ls that failed as a result of increasing interest rates coupled with the Fed’s concurrent rewriting of mark-to-market policies and an increase in required core capital, because our board and officers did the tedious work required to guide a bank, few depositors suffered losses, and we escaped the litigation that befell hundreds of other S&Ls.
SVB collapsed because instead of focusing on the unglamorous, unforgiving business of banking, its management and board wanted to be part of the “in crowd.” As Maureen Farrell reported in the New York Times:
The tale of Silicon Valley Bank is one of ambition and management mistakes, of a chief executive who talked so much about innovation and the future that he and his lieutenants didn’t pay enough attention to the mundane but enormously important work of managing risk and ensuring financial prudence. . . .
SVB’s bankers were omnipresent at tech happy hours and conferences, and they often hosted networking events and dinners where clients could schmooze. They learned about the various tech businesses, from artificial intelligence to climate, and even helped founders with recruiting.
[The bank’s offices have] an aesthetic that one person described as “part stainless-steel tech vibe, part V.C. resort vibe.” Wine fridges dotted the offices. Visitors to the office on Sand Hill Road in Menlo Park, the heart of the Silicon Valley ecosystem, often remarked on the display of wines from the vineyards the bank had financed.
In this hip, virtue-signaling, social-justice, progressive-wannabe miasma, SVB lost track of the gritty, unglamorous nuts and bolts of banking. In 2021, the Federal Reserve Bank of San Francisco cited the bank for liquidity risks and in 2023 initiated a review of its risk management. During this period, as SVB’s communications consistently featured its parties, contributions, and chief DEI officer, for eight months, it had no chief risk officer. Nothing could more clearly illustrate SVB’s misplaced priorities.