Silicon Valley Bank Collapse: Go Woke, Crash the Economy
17 March 2023
The failure of Silicon Valley Bank comprises a perfect storm of hot-button political issues — and wokery.
Summoning ghosts from the 2007-2008 global financial crisis was the collapse last Friday of Silicon Valley Bank — the 16th largest bank in the United States, and the second largest ever to fail.
Silicon Valley Bank (SVB) was geared towards tech entrepreneurs and start-up companies based in its geographic namesake in the Bay Area of California.
In the worst US failure of a financial institution in nearly 15 years, anxious SVB depositors rushed to withdraw their funds late last week after hearing the bank was trying to “raise funds” — code for panic-selling their way out of trouble. It soon came to light that SVB had over-invested in long-term Treasury bonds whose value was tanking as the Federal Reserve continued hiking interest rates in the fight against inflation.
Regulators have now stepped in to clean up the mess, bail out another bank “too big to fail”, and stop the panic from spreading through the American and global economies.
The Silicon Valley Bank collapse comprises a perfect storm of hot-button political issues, from populist anger at bailouts, spending and inflation, to concerns about the power of Big Tech, to perennial issues like bank regulation and government intervention.
And then, of course, there is wokery — also known in the business world by its various three-letter acronyms, such as CSR (corporate social responsibility), ESG (environmental, social, and governance) and DEI (diversity, equity and inclusion).
According to the United Nations Industrial Development Organisation, CSR is “a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders”. It is “the way through which a company achieves a balance of economic, environmental and social imperatives (‘Triple-Bottom-Line- Approach’)” which includes “environmental management, eco-efficiency… social equity, gender balance, human rights” — and the list goes on.
Silicon Valley Bank, it turns out, was a world leader in this field.
It had an A rating on the MSCI index for its ESG policies. It was included in Bloomberg’s Gender-Equality Index for five years running. SVB had announced that it would invest US$5 billion by 2027 to support “companies that are working to decarbonise the energy and infrastructure industries and hasten the transition to a sustainable, low-carbon, net zero emissions economy”, according to its 2022 ESG report.
As reported by the Federalist, according to a database by the conservative Claremont Institute, Silicon Valley Bank donated or pledged to donate nearly $74 million to groups related to the Black Lives Matter movement.
Moreover, the bank’s acting Chief Risk Officer for Europe, Africa and the Middle East — Jay Ersapah, who describes herself as a “queer person of colour” — organised a swathe of LGBT initiatives, including a month-long Pride campaign and safe space catch-ups for staff.
According to the Daily Mail, Ersapah filled this role temporarily, using it for rainbow activism, while SVB was without a Chief Risk Operator for eight months. It was the same period during which the bank also pressed forward with investments that would eventually cause it to go belly-up.
To be sure, the case against Silicon Valley Bank is not that it collapsed because it was woke. Jay Ersapah was not the cause of SVB’s collapse. But she was a symptom. SVB collapsed because it did not correctly assess the risks it had taken on, even as it was pouring energy and resources into wokery.
But don’t expect to ever see this admitted in writing. Baked into the CSR-ESG-DEI industrial complex is the dogma that wokery is always good for a company — a rainbow with an endless pot of gold. It will improve your brand, increase productivity, boost sales and profits, provide access to new capital and markets.
Right up until it comes tumbling down like a house of cards, apparently.
In a piece entitled “Conservatives blame Silicon Valley Bank collapse on ‘diversity’ and ‘woke’ issues”, NBC News complained that “the most vocal early reaction to the bank failure on the right was more concerned with bank culture than balance sheets”. Wrong.
What “the right” (and anyone with common sense) is trying to point out is that a concern with bank culture over balance sheets was the fault of Silicon Valley Bank, not its critics.
In the words of Florida Governor Ron DeSantis, “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.”
Home Depot CEO Bernie Marcus agrees: “I think that the system, that the administration has pushed many of these banks into [being] more concerned about global warming than they do about shareholder return. And these banks are badly run because everybody is focused on diversity and all of the woke issues and not concentrating on the one thing they should, which is shareholder returns.”
Silicon Valley Bank and its depositors and investors have learned the hard way that financial mismanagement and collapse is a genderless, colourblind and environmentally apathetic affair. Or as the American Institute for Economic Research summarises:
It’s likely that over the past weekend SVB depositors were as pleased with their bank’s deep commitment to diversity, equity, and inclusion as individuals with funds in FTX brokerage accounts were to learn about Sam Bankman-Fried’s devotion to “effective altruism.” And while it will be likely derided as a specious association, it is curious that virtually all of the firms which have recently detonated in spectacular fashion were devout standard-bearers of the environmental, social, and governance (ESG) doctrine.
Originally published at MercatorNet. Photo by Mariia Shalabaieva.
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You’re right to call out the bank on the basis of “Get Woke, go broke”, because I share your belief that one day common sense (and the general population’s natural conservatism) will prevail. Some day there will be a calling out that the Emperor has no clothes.
I have a friend who I’ve known for over 40 years, who rose to a high position in the financial sector, and a few days ago he shared his expert opinion on the situation, which might help to clarify certain details:
“Yes, this was a significant event, but financial history has been full of individual institutions facing significant events without that causing contagion and systemic problems…One bad apple does not spoil a whole basket of financial apples.
This is mostly because the monetary authorities – in the US this is the Fed (Federal Reserve Bank) and in Australia it’s the Reserve Bank – have lots of tools to address these things. Today, the Silicon Valley Bank (SVB) situation has been dealt with by the Fed in an effective and creative way, basically providing a guarantee to depositors of SVB that will be paid for by all the other banks in the US.
One thing you need to understand is that when you hear an institution in the US being referred to as a ‘bank’ that doesn’t mean the same thing as it does in Australia. The oversight of banks in America isn’t as stringent or comprehensive as it is in Australia. SVB is a case in point and when you read the following summary you’ll see that no institution calling itself a bank in Australia could be set up like this:
– it had a very concentrated deposit base, being set up to hold the cash raised by speculative IT start ups (look at the name for a big hint about this)
– because of that, it’s depositor base didn’t need to borrow any money. They raised gazillions on the stock market to have a go at some new tech venture and really didn’t need to borrow any more.
– so SVB only had a very small amount of loans on its balance sheet. The rest was assets like mortgage-backed securities and US Treasury bonds. Very safe from a credit risk perspective, so no risk of default losses. BUT stupidly SVB bought long term assets instead of short term assets.
– they were loaded up on assets that went down in value sharply when interest rates started going up last year, which has continued into 2023 as we all know.
– as long as SVB kept getting new deposits coming in, they didn’t have to sell any of those assets to pay be able to pay out depositors taking their money out.
– and they really needed new deposits! Because the tech startup nature of their client base meant that they would run down their deposits with SVB pretty quickly as well, as they spent money to get their start-ups started up.
– new deposit flows dried up as interest rates went up and the speculative gloss went off that sector. They found raising cash on the stock market got harder and fewer starts up have been incubated recently.
– therefore SVB had to start selling some of its very safe government bonds. But if you buy a ten year government bond for a yield of 2% then have to sell it a year or two later at 4%, you will lose money. When that money has been borrowed in the first place – you are leveraged – those losses eat up your own capital quite quickly.
– so SVB went to Wall Street recently to raise more equity capital to bolster up its own balance sheet. That was when the trouble started because share market investors took a closer look (they must have been asleep previously) and decided that putting more money into SVB was too risky.
– the result was that SVB had neither its own capital nor new deposits coming in, so had to sell those bonds at a loss. That can’t go on very long.
So really SVB is not a typical ‘bank’. It really is a combination of two things as far as I can see:
1) a highly leveraged bond fund. Nothing wrong with that if that’s what you’re meant to be, but banks are not meant to be highly leveraged bond funds. Especially when the borrowed money is at call but you invest in long dated bonds! While the yield on those bonds is dominating the return it’s OK, your cash flow is positive. But as soon as yields go up, capital values go down and that’s the wrong time to be selling. (Australian banks also borrow short and lend long, but our lending is at variable interest rates for the most part and so doesn’t generate losses from higher interest rates. If you borrowed $500k from the bank and they had to call your loan you’d have to give them $500k back. SVB was only getting $480k back on their $500k of Treasury bonds.)
2) a Ponzi scheme, really needing new money coming in to hide the financial truth as long as it could. (Australian banks have to calculate their ‘net stable funding ratio’ which works out how sticky their deposits are. The authorities wouldn’t allow an Australian bank to have as bad a net stable funding position as SVB obviously had.)
Like I said above, there’s nothing wrong with investing in bonds, including long dated bonds, if that’s what you’re meant to do. I know, because I used to managed bonds – in fact I led the team that managed the largest pool of bond funds in Australia at one point in my career. But in the funds I managed, if the value of the bonds went down and an investor wanted to redeem funds, they took the hit and only got back what we could sell the bonds for in the market. SBV – like any bank – owes its depositors full dollar value for their deposits. (I also know about that, having been the CEO of a bank-like financial institution for 7 years.) That’s the difference and why it was sheer stupidity on their part to invest their balance sheet the way they did. Given both my roles in the past, I just scratch my head about how SBV got away with this for so long!
What about government guarantee of deposits? They have that in the US too, like the system we have where the first $250k of deposited funds per person is government guaranteed. But SVB was taking money from institutions, start up companies, not individuals. So all its depositors had many millions of funds in their bank, way above the guarantee limit. To some extent I also say ‘more fool them’ for not spreading their deposits around. A sound financial system is based on risk spreading. Lots of people in this sad story have forgotten that and concentrated their risks intensely.”