The woke philosophy of Silicon Valley Bank didn’t directly cause the cash crunch that led to its rapid failure, but analysts say the bank’s management paid more attention to its climate and social justice mission than its financial health.
The analysts said SVB officers were heavily focused on so-called ESG policies while ignoring risk management responsibilities that could have detected trouble in time to save it from collapse and government intervention last week.
ESG stands for environmental, social and governance.
In another sign of trouble in the banking industry, officials in Switzerland on Wednesday were discussing with Credit Suisse Group AG ways to stabilize the huge bank after comments by its biggest shareholder led to a fall in its stock value to a record low. Saudi investors said they would no longer fund the bank.
In the U.S., the recriminations continued over the bank collapse and the Biden administration’s rescue of SVB and New York’s Signature Bank. The Justice Department and the Securities and Exchange Commission are investigating SVB‘s downfall, including stock sales by its top executives.
Many of the questions are focusing on poor management.
Only one member of SVB’s board of directors, Tom King, had a career in the financial industry. The others were major campaign donors to Hillary Clinton, Rep. Nancy Pelosi and other Democrats.
Bank director Garen Staglin, 78, is a winery owner in California who donated $54,000 to Mrs. Clinton’s campaign in 2016. Director Kate Mitchell is a venture capitalist who also donated heavily to Mrs. Clinton’s presidential campaign. After Donald Trump won the election, she prayed for guidance at a Shinto shrine in Japan.
As an example of the bank’s left-wing agenda, SVB committed $5 billion in 2022 toward “loans, investments, and other financing to support sustainability efforts” through 2027. The bank also pledged to be carbon-neutral by 2025 and promoted DEI — diversity, equity and inclusion — initiatives.
SVB donated more than $73 million to the Black Lives Matter movement and other social justice causes, according to online data first reported by The Federalist.
For most of the past year, the bank’s managers left vacant the post of risk management officer.
“The reason for the failure was clearly poor judgment, poor management and maybe lack of supervision by regulators,” said David Kass, who teaches advanced financial management and business finance at the University of Maryland’s School of Business. “The bank did not have a risk officer. That’s absurd. It was just very poor management at the bank for investment policy.”
As for a connection between the bank’s woke policies and its collapse, Mr. Kass said, “I don’t see the link.”
The bank’s troubles became public on March 8 with a public notice that SVB had offloaded $21 billion worth of securities and intended to sell $1.25 billion of its stock. The credit rating firm Moody’s downgraded SVB.
By the next morning, venture capital investors in SVB were warning one another about the bank’s apparent cash shortage. That day alone, investors pulled out roughly $42 billion from SVB accounts. State and federal regulators closed the bank the next day, March 10.
Economists say the acute problem was that SVB held an unusually high percentage of its $209 billion in assets in Treasury bonds and mortgage-backed securities. As the Federal Reserve raised interest rates rapidly in the past year to fight soaring inflation, the value of the long-term debt held by SVB fell.
As panicked investors withdrew money last week, the bank couldn’t easily sell its assets to cover its deposits.
“The primary reason behind the collapse is the fact that the bank was taking in depositor money and putting it in investments that were not risk-appropriate,” said Joel Griffith, an economic policy researcher at the conservative Heritage Foundation. “Those investments plunged in value when interest rates went up.”
As another example of poor management, Mr. Griffith said, SVB was paying its customers as much as 4.5% interest on their bank deposits.
“Of course, none of us are getting that on our checking account,” he said.
A woke agenda didn’t directly doom the bank, Mr. Griffith said, but it diverted management’s focus from the company’s basic financial health.
“A lot of the managers were focused on a number of woke causes, including the risk manager in the United Kingdom who was involved in a number of social justice causes,” he said. “But the bottom line is, they apparently weren’t focused on actually managing the risk of the bank. Even when they had all of these ESG, DEI working groups and the big focus on ensuring that they were funding a lot of woke investments in the green energy space, at the same time they were doing all that, they went more than half this past year without a risk manager here in the United States office.”
Mr. Griffith said many of SVB’s investors were venture capitalists who reaped millions of dollars in government aid during an unprecedented pandemic-era spending binge by the Trump and Biden administrations.
“A lot of the venture capital firms in that so-called clean energy space that had put their money on deposit at SVB, those are government-subsidized companies,” he said. “They are taking advantage of renewable energy mandates, of tax credits, of tax subsidies. They were awash in capital because so much money had been put into the stock market during COVID with all the money that was printed. So they were already benefiting at the expense of taxpayers. And then they put money at a woke bank, Silicon Valley Bank. These are sophisticated investors. These people are worth millions, if not billions, of dollars. And they chose to put those assets at risk, and there is no reason why they should be demanding a bailout.”
At Signature Bank, Mr. Griffith said, managers parked deposits in long-term debt while vowing that the bank wouldn’t invest in fossil fuel companies, firms that built prisons or companies that manufactured weapons for the U.S. military.
“Those are probably three of the safest investments a bank could make,” he said.
Sen. John Kennedy, Louisiana Republican and a member of the Senate Banking Committee, said Wednesday that SVB‘s managers were not focused on what mattered most.
“If the management of Silicon Valley Bank had known the difference between a banking textbook and an L.L. Bean catalog, Silicon Valley Bank would have never bought securities that are so sensitive to interest rates without hedging that risk, and it’s a very easy thing to do,” he said on the Senate floor.
Mr. Kennedy also blamed regulators for failing to detect problems at SVB before it was too late.
“Where were the regulators?” he said. “I guess they were asleep, but this whole debacle could have been avoided if the regulators had just done their job and stepped in and said, ‘Silicon Valley Bank, what you’re doing is dumb, and you can’t do it anymore.’”
Mr. Kass said even some stock analysts at major banks were rating SVB shares as a good buy within one week of its collapse. He noted that JPMorgan and Wells Fargo rated SVB stock as “overweight” or worth buying on March 9 and Goldman Sachs rated it as “buy” on March 3.
“A lot of people were asleep at the switch,” he said.