The Silicon Valley Bank blame game

The collapse of Silicon Valley Bank has sent a cataclysmic shock through the U.S. banking system, prompting extraordinary measures from both the Treasury Department and FDIC, as well as a vicious blame game as to the person (or institution, or ideology) at fault. Here's a look at where some have pointed the finger thus far:

Jerome Powell and the Federal Reserve

Perhaps the most obvious top-of-mind culprits are the Federal Reserve and Chair Jerome Powell, who together have been on a crusade to tame decades-high inflation by repeatedly raising interest rates, much to investors' chagrin. Before its collapse, however, SVB had decided to invest a bunch of money in mortgage-backed securities with long-term maturity rates, which then plummeted in value as the Fed jacked up rates. When worried account holders began withdrawing their money, the bank had to "sell already-depressed assets at fire-sale prices" to come up with the cash, contributor James Early writes for Forbes. It then attempted to raise more capital via stocks, but it was too late — it had already made itself "roadkill," having been caught "with both assets and customers that were massively sensitive" to interest rate changes.

Nobel economist Joseph Stiglitz insists the entire problem is a result of the Fed and "Powell's callous — and totally unnecessary — advocacy of pain," while Sen. Elizabeth Warren (D-Mass.), long a critic of banks and corporations, urged the chair to recuse himself from the central bank's review of the collapse. And Liz Ann Sonders, chief investment strategist at Charles Schwab, thinks the incident is "clearly an example of something breaking. You know the old adage of the Fed tightens until something breaks … and this is one of them."

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But Early believes Powell "didn't actually kill the bank, at least not on purpose. In fact, he was right to raise rates." Plus, "it was not difficult to foresee" that the Fed was planning for a hike, Wall Street Journal finance editor Charles Forelle said on an episode of The Journal podcast. "It's really banking, like, 101 that if you own a bunch of long-duration assets ... you are in trouble when interest rates go up. How that was allowed to happen inside the bank, I think, is a really important question that will have to get answered at some point." Even so, Forelle continued, regulators did seem to miss that something was wrong.

Donald Trump

Plenty of Democrats have been quick to blame SVB's demise on former President Donald Trump and the bank deregulation that occurred on his watch. "Let's be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed," said Sen. Bernie Sanders (I-Vt.), referring to Trump's partial rollback of the Dodd-Frank Act, which "provided regulatory relief for midsized banks" like SVB, per Axios. In recent remarks on the scandal, even President Biden suggested his predecessor bears some culpability, highlighting how the "last administration" "unfortunately" rolled back some of the industry regulations implemented during the Obama-Biden years. As a next step, the president said he is "going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses."

However, 17 Senate Democrats voted with Republicans to advance Trump's deregulation plan in 2018, Axios points out, meaning that while some members of the party may feel vindicated watching SVB struggle, other Democrats could be equally to blame.

Wokeness

A handful of Republicans and right-leaning commentators have decided that the SVB collapse was not a result of asset mismanagement but rather of unnecessary focus on "wokeness" and diversity and inclusion (DEI) practices. "I mean, this bank, 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," said Florida Gov. Ron DeSantis (R). "I'm not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands," posited Wall Street Journal opinion columnist Andy Kessler, after noting how the bank's proxy statement took care to mention the Black, female, and LGBTQ+ people on its board.

But "you'll recall that racial homogeneity didn't help keep major financial institutions from failing in the run-up to the financial crisis 15 years ago," countered The Washington Post's Philip Bump. Indeed, "it's perfectly obvious why Silicon Valley Bank considered diversity a corporate value," Bump continued. "It's a regional bank in a heavily Democratic, diverse, socially liberal region," and, in the interest of building relationships, "publicly supported efforts that reflected the community's values." Any argument otherwise "is just a shrugging effort to ding DEI for being associated obliquely with an unrelated failure."

Bank executives

Maybe the blame rests on CEO Greg Becker, who, as one employee put it, made the "absolutely idiotic decision" to disclose the bank's precarious financial position before first lining up a survival plan. Leaders "were being very transparent" about what was happening, the employee told CNN. "It's the exact opposite of what you'd normally see in a scandal. But their transparency and forthrightness did them in." Likewise, Jeff Sonnenfeld and Steven Tian — both from the Yale School of Management's Chief Executive Leadership Institute — said SVB's executives deserve to come under fire for their "tone-deaf, botched execution" here. "Someone lit a match and the bank yelled, 'Fire!' – pulling the alarms in earnest out of genuine concern for transparency and honesty," the pair wrote to CNN in an email.

Ultimately, however, the SVB employee, a Wall Street veteran who remained anonymous, believes Becker and his team never meant to do any harm. "The saddest thing is that this place is Boy Scouts," he continued. "They made mistakes, but these are not bad people."

Social media

"In the day leading up to the bank's collapse, multiple prominent venture capitalists took to Twitter in particular, and used their large platforms to raise alarms about the situation, sometimes typing in all caps," CNN reports. The social media firestorm then fueled "viral panic," prompting SVB customers to withdraw their funds online.

Indeed, "social media, which hadn't been a factor during the last banking crisis, pinged both fact and fiction around the world at lightning speed," writes The Wall Street Journal. "Spooked customers whipped out their phones and opened their banking apps. With a few taps and swipes, their money was on its way." Some startup "founders and CEOS" were even sharing tweets about the crisis in "private Slack channels," discussing whether to move their funds.

"Even back in the ancient days, way before we had any form of modern communication, this stuff tended to be rumors that moved really fast. The reason it would happen is people would walk down the street and observe people standing outside of banks," Yale Professor Andrew Metrick told CNN. "Now we don't have that, but we have Twitter."

Ultimately?

SVB's demise was surely brought about by a confluence of factors. But, in the end, what we're dealing with here is most likely nothing more than a typical "mismatch between deposits and assets — the building blocks of the vanilla business of commercial banking," the Journal writes. And "the company was not, at least until clients started rushing for the exits, insolvent or even close to insolvent," adds The New York Times. "But banking is an enterprise that relies as much on confidence as on cash — and if that runs out, the game is over." All in all, this collapse "may have been an unforced, self-inflicted error."

Indeed, SVB "held a high percentage of government bonds that plunged in value as the Federal Reserve increased interest rates," the Post's Bump explained. "An announcement that the bank was trying to raise money sparked a run from depositors looking to withdraw their money," and "the bank collapsed." Perhaps it's that simple.