Week 11: A story within a story...
Sasja Beslik
Chief Investment Strategy Officer @ SDG Impact Japan | Economics, Business, Asset Management
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Dear all,
A Silicon Valley drama, with chai-latte, low-fat aftertaste. There is a story within this story. As always. Not so obvious as it seems, thus equally grim, dramatic and extravagant. Pensioners in Sweden, venture companies in the US and across the world, entrepreneurs seeing their dreams burn up in front of their eyes.
Yes, it’s the story of a dangerous game that started as many other games: with people and money. And lots of it. But let’s have a look at it. There is Mr. Frank and there is regulation, and there is a board, and there is this deep sense of irony in all of this.
The suspicious role of Mr. Frank
Let’s start with Mr. Frank. Barney Frank was the primary architect of the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. President Barack Obama signed the Dodd-Frank law in July 2010. At the signing ceremony near the White House, he effusively thanked Mr. Frank and his co-sponsor, Senator Christopher Dodd, for having worked “day and night to bring about this reform.”
But since his retirement in 2013, he had repeatedly voiced support for softening one of the law’s key planks: that any bank with more than $50 billion in assets should face especially intensive federal supervision. Lifting the threshold to $250 billion had of course big consequences, which was their proposal. Among other things, scores of very large banks would escape, at least initially, the Federal Reserve’s annual “stress tests” and enjoy easier financial-safety requirements which were imposed after 2008.
One beneficiary of this let’s call it relieving change of regulation was Signature Bank, a New York lender whose board of directors included, guess who? Yes, Mr. Frank. On Sunday, regulators shut down Signature, fearing that sudden mass withdrawals of deposits had left it on dangerous footing. Its failure came barely 48 hours after the collapse of Silicon Valley Bank, whose executives had joined Mr. Frank in successfully pushing to lift the $50 billion threshold, to $250 billion.
If the $50 billion threshold had remained in place, Signature would have either needed to stop expanding or become a subject to the Federal Reserve’s stress tests and other requirements designed to curb aggressive risk-taking and ensure its safety. But you see, Signature had Mr. Frank. So instead, thanks to the 2018 change of this regulation (done by ?? Trump) Signature was free to have a growth expansion. It went from about $47 billion in assets at the time to $110 billion last year. It expanded into six states.
Mr. Frank, who received more than $2.4 million in cash and stock from Signature during his seven-plus years on the board, left the job on Sunday as regulators dissolved the board. He said on Monday that the bank was the victim of overzealous regulators. When asked by FT why he did what he did, he responded: He needed cash.?
A breakdown of American capitalism?
Ken Griffin, founder of hedge fund Citadel, said the rescue package for Silicon Valley Bank unveiled by US regulators shows American capitalism is “breaking down before our eyes”. Griffin told the Financial Times that the US government should not have intervened to protect all SVB depositors following the collapse of the Santa Clara-based bank on Friday.
“The US is supposed to be a capitalist economy, and that’s breaking down before our eyes,” he said in an interview on Monday, a day after US regulators pledged to protect all depositors in SVB — even those with balances above the $250,000 federal insurance limit. “There’s been a loss of financial discipline with the government bailing out depositors in full,” Griffin added. “It would have been a great lesson in moral hazard,” he said.
Is he serious on this one? A moral hazard? A lesson? Markets have no morals. People do. Sometimes.
Biden to the rescue…
Taxpayers nor customers will feel the brunt of Silicon Valley Bank’s and Signature Bank’s failures, US president Joe Biden announced late this week. Instead, the money will be sourced from fees that US banks pay to the Federal Deposit Insurance Corporation. There were fears that the overwhelming majority of deposits were uninsured, but decisive action seems to have been taken.
Biden said: “All customers with deposits in these banks can rest assured, they’ll be protected and they’ll have access to their money as of today. America can have confidence that the banking system is safe,” he said touting the “immediate action” taken by his administration.
Invoking the rhetoric of his predecessor Donald Trump, Biden then moved on to other matters.
“The management of these banks will be fired,” he stated, par the course for when a bank is taken over by the FDIC. Investors in the bank are also out of luck, and “will not be protected” since they knowingly took a risk that didn’t pay off.
“That’s how capitalism works,” said Biden.
The cardinal sin of SVB?
The rapid collapse of SVB has stunned the venture capital and start-up community, many of whom now face uncertainty about the fate of their bank accounts and business operations. SVB provided banking services to half of all venture-backed tech and life sciences companies in the US and played an outsized role in the life of entrepreneurs and their backers, managing personal finances, investing as a limited partner in venture funds and underwriting company listings.
In 2021, at the height of an investment boom in private technology companies, SVB received a flood of money. Companies receiving ever larger investments from venture funds ploughed the cash into the bank, which saw its deposits surge from $102bn to $189bn, leaving it awash in “excess liquidity”.
Ultimately, SVB committed a cardinal sin in finance. It absorbed enormous risks with only a modest potential pay-off in order to bolster short-term profits. Searching for yield in an era of ultra-low interest rates, it ramped up investment in a $120bn portfolio of highly rated government-backed securities, $91bn of these in fixed-rate mortgage bonds carrying an average interest rate of just 1.64 percent.
While slightly higher than the meagre returns it could earn from short-term government debt, the investments locked the cash away for more than a decade and exposed it to losses if interest rates rose quickly. When rates did rise sharply last year, the value of the portfolio fell by $15bn, an amount almost equal to SVB’s total capital.
SVB and two of its top executives, CEO Greg Becker and CFO Daniel Beck, are being sued by shareholders, Reuters reported. The shareholders are accusing the group of concealing how rising interest rates would leave its Silicon Valley Bank unit, which failed last week, “particularly susceptible” to a bank run. In the lawsuit, shareholders said SVB “failed to disclose how rising interest rates would undermine its business model, and leave it worse off than banks with different client bases,” according to Reuters.
The lawsuit seeks unspecified damages for SVB investors between June 16, 2021 and March 10, 2023.
The Financial All-Star Bank
Forbes’ 14th annual America’s Best Banks list looked at growth, credit quality and profitability to rank the 100 largest (by assets) publicly-traded banks and thrifts from best to worst. And guess what, the California-based SVB Financial Group bagged the 20th spot on the list with $213 billion in assets and 13.8 per cent return on equity.
The now collapsed bank ironically had non-performing assets as low as 0.05 per cent, according to the Forbes list. The publication’s inaugural Financial All-Stars List, on the other hand, presents 50 companies selected by the financial services specialists at KBW in seven sub sectors–banks, capital markets, consumer finance, fintech, insurance, mortgage finance and business development companies. SVB Financial Group’s 5-year return was 79 percent. SVB had a Moody’s credit rating of A just 3 days ago.
Rating agencies have a problem. Indeed.?
领英推荐
This is how moral works, and this is the lesson?
HSBC Holdings PLC announced on Monday that its UK subsidiary, HSBC UK Bank, is acquiring Silicon Valley Bank UK for ￡1. Reports over the weekend suggested there were a number of interested parties battling to buy the business which is the UK arm of stricken US bank Silicon Valley Bank which was closed by US regulators on Friday.
The FTSE 100 lender said that, as of 10 March 2023, SVB UK had loans of around ￡5.5bn and deposits of around ￡6.7bn. For the financial year ending 31 December 2022, SVB UK recorded a profit before tax of ￡88mln. SVB UK’s tangible equity is expected to be around ￡1.4bn while a final calculation of the gain arising from the acquisition will be provided in due course, the bank added.
HSBC said the assets and liabilities of the parent companies of SVB UK are excluded from the transaction which will be funded from existing resources and completed immediately. In a statement, Noel Quinn, HSBC Group CEO, commented: “This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.”
Commenting on the deal, chancellor Jeremy Hunt, said: “Today the government and the Bank of England have facilitated a private sale of Silicon Valley Bank UK; this ensures customer deposits are protected and can bank as normal, with no taxpayer support. I am pleased we have reached a resolution in such short order. HSBC is Europe’s largest bank, and SVB UK customers should feel reassured by the strength, safety and security that brings them.”
When ESG is not ESG…
There will be a lot of questions on this. After all, SVB has published an ESG report and if you look at the ESG ratings it has received (see here , for example), the company looks solid. A rated by MSCI, medium risk by Sustainanalytics and Refinitive.
I went through the latest ESG report published by SVB.?One paragraph caught my attention; this one will be a hard one in court.?
Unfair, Deceptive, or Abusive Acts or Practices Policy?
Our Unfair, Deceptive, or Abusive Acts or Practices?Policy (UDAAP), a framework we use to meet regulatory expectations, guides our approach to ethical sales practices. We train employees annually to ensure that our team members have the awareness, skills and knowledge to perform activities in a manner that supports compliance with UDAAP standards and requirements.
You can find the report here (hurry up, before they remove it!).
The most ironic thing of all is that when I search the PDF file, the ESG report 2022, for “financial risk” nothing comes up. Not a single sentence. The ESG report contains no information on how various policies and principles are connected with financial growth of the company and risks associated with expanding assets with almost 100% in a couple of years. Nothing.
The word “risk” is mentioned 82 times, but not a single one of these are about financial risk.?
It is mind-blowing and a reminder to everybody out there to consider any ESG rating with great scrutiny. It simply does not work as it is.?
That’s it for this week. Next week we have a look at Credit Suisse, a Swiss bank struggling for its survival.?
Have a great non-rated ESG week.
Kind regards,
Sasja
Sources (and recommended reading):
https://www.nytimes.com/2023/03/13/business/signature-silicon-valley-bank-dodd-frank-regulation.html
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Corporate Sustainability/ESG Consultant, Professor Associado na FDC - Funda??o Dom Cabral, Advisor Professor at FDC
1 年Sharing in Linkedin group "Shareholder Engagement on ESG" - linkedin.com/groups/3432928/
Writer
1 年Maybe the banks could all start playing dominoes.... https://youtu.be/5uHUVyy3rNw
Head of Sustainability and ESG at Teachers Mutual Bank Limited
1 年Exceptional as usual Sasja Beslik
Calm your mind, make better decisions, get better results. I work with business leaders and teams who know they are their own best asset.
1 年Thanks Sasja, this is helpful to wrap my head around what happened here. It’s shocking, dangerous and shows just how fragile the system is as it currently stands
Your change partner on your company's journey to put sustainability and positive impact at the heart of your business. B Corp since 2015.
1 年Thank you Sasja Beslik for this sharp article and the rich anecdotes. Following your hint I read the svb ESG report: nice and shiny it is too. (And they haven't taken it down yet ??) I did in fact find a reference to financial risk in there. It's in the Governance section of the report, on p43, Enterprise Risk Management: Effective risk management is key to our success. Our Enterprise Risk Management (ERM) team is responsible for developing standards and guidelines to support programs that manage our risks, and helps us earn the trust of our stakeholders. As SVB grows, we continue to enhance our ERM approach to comply with new and applicable regulations and adopt appropriate strategies to ensure that our risk management function is fit for the current and future environment. SVB is committed to maintaining and enhancing an ERM framework that is commensurate with our growing size and complexity. Our framework includes establishing the governance and standards for risk management programs that assist us with the identification and management of key risk types across the organization. We integrate ESG risks (including climate) into our Strategic Risk program. Nothing on Risk Management activity conducted, however...