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Tucker Carlson of Fox News enjoyed himself the other day (15 March), making fun of the very woke Silicon Valley Bank (SVB). The risk manager of the UK arm of the bank – which sold for £1 to HSBC – described herself as a “queer person of colour from a working class background.” What has that do with banking or risk management, Tucker queried; as he did other woke performances from both SVB and, its fellow failed bank, Signature Bank. Apropos dancing bankers. Apropos a seminar on gender-neutral pronouns hosted by Signature Bank’s president Scott Shay, and featuring Finn Brigham, who identifies as a ”genderqueer trans male.” I can’t define that for you.
I worked in the second half of the 1980s for State Bank Victoria (SBV not SVB) as chief economist. You can’t imagine a set of people less woke. Yet the bank failed in 1991. So it isn’t wokeness per se that brings down a bank. It’s inattention to risk management. However, wokeness, particularly when exhibited in the cause of diversity, equity and inclusion (DEI), surely doesn’t help. It can mean that focus is taken away from the main game. And it can mean that people are employed and promoted on the basis of irrelevant criteria such as skin colour, sex, sexual preference and having gender-bending proclivities.
Risk management is a serious business. In fact you can say it’s the only game in town when it comes to commercial banking. At its core, banking itself requires few skills. Money is accepted on deposit at one rate of interest and then lent at a higher rate. Costs are paid and profit is earned. In normal times, it’s hard to make a mess of that. Thus bankers on the whole are not the brightest kids on the block. They don’t need to be.
A true story. Waiting in line to get the bad news of my redundancy, following the failure of SBV, a fellow executive, older than me and also for the chop, spoke to me in his distress. He told me of his father saying to him, “you’re not that good at schoolwork son, a bank’s the place for you.” He wasn’t at all sure what he would or could do next.
Run of the mill banking is one thing, when it comes to bank risk management, bright people are needed. Muddling along with half a brain doesn’t do. Banks face two main controllable risks. I say controllable, because the risk faced by all banks if the economy completely collapses can’t be effectively mitigated. That’s why, sometimes, government and central bank intervention is required and warranted.
The two controllable risks are credit risk and interest-rate risk. The former is better known than the latter, but both can do banks in. The first is the risk of loans not being repaid, of acquiring poor quality loan assets. As I have seen firsthand, this can happen when corporate lenders are rewarded for simply making loans. Hence it’s best to keep their rewards in escrow until the loans are repaid or otherwise judged to be sound after a lengthy period.
Bad lending brought down the SBV, after its wholly-owned merchant bank subsidiary, Tricontinental, lent recklessly over some years. The fault ultimately lay with the chief executive of the SBV and his inner circle who exhibited too little oversight over Tricontinental and its head, Ian Johns, who was later convicted of receiving secret commissions. But, in general, properly controlling the quality of lending requires that incentives are right, that those making the assessments are at arm’s length from lenders, and that they are skilled, experienced and ethical. But it’s a tricky business, which in the end requires judgment.
As I understand the situation, it wasn’t poor quality lending that brought down SVB but inadequate attention to interest-rate risk. This really comes down to bad banking practice. It’s less tricky to get this right than it is to make sure the lending book is sound.
Ideally, banks should run their business so that their financial position is invariant to, or at least not too much affected by, interest rate changes. Years ago, savings-and-loan associations in the US got into trouble by making long-term fixed-rate housing loans funded by short-term deposits. Not a good position to be when interest rates rise steeply, as they did. When I worked at the SBV we suffered from interest-rate risk of Paul Keating’s making. He maintained a ceiling on housing interest rates of 13.5 percent when market interest rates were rising steeply, For a time in the first part of 1986, this meant that the bank had to borrow some funds at about 17 percent to fund housing loans at 13.5 percent. Not a profitable proposition.
Apparently, SVB (make sure you keep up with the order of letters) suffered an outflow of deposits. In the normal case — that is in the absence of a run — a bank would have sufficient liquid assets to sell to fund withdrawals. In this case, SVB reportedly had to sell bonds. Now, you have to question why a bank would build a sizeable bond portfolio at a time of very low interest rates and keep holding them as interest rates rose, unless it hedged its position somehow. Short-term securities would be the go. Little is lost in terms of revenue, while their value is largely impervious to interest rate increases. Bonds, on the other hand, fall steeply in value when interest rates rise.
A $100 five-year bond paying 1 percent becomes worth much less than $100 (about $80 I think) if interest rates rise to 5 percent. Thus SVB realised steep losses when forced to sell bonds. Makes no sense unless you’re incompetent, hired to satisfy DEI requirements. Or distracted, occupied by the skin colour and sexual wotnots of you and your colleagues.
Fingers crossed our new masters in Canberra don’t follow through on their thought bubbles to force our Super firms to go all SVB (or SBV) on my “honey”. I prefer my Super mob to have maximising investor returns as its No.1 priority, and “See priority No.1” as its No.2 priority
Oh, I forgot to add that I hope the government does not strong-arm the Super industry into investing in winner-picking renewables projects.
“So it isn’t wokeness per se that brings down a bank. It’s inattention to risk management”. I would modify this statement as follows: Initially, it isn’t wokeness, that brings down a bank. It’s inattention to risk management which is the result of thinking processes contaminated by the kudos of wokeness.
A problem with wokeness is that it thinks its issues – diversity, equity, inclusion; environment, sustainability, governance; climate change and emissions reduction – are more important than anything else, everything else. Trouble is, they are not.
Peter, a Brisbane hedge fund manager explained the reason for the SVB and then Signature Bank collapses very clearly on the local Brisbane AM radio. The following is from my memory which is subject to failure when at home…but I’ll try;
Traditional banking like our big four banks, NAB, Commbank, Westpac & ANZ, operate on a strong mortgage belted commodity. These banks welcome customers to deposit money into their bank to earn some nominal interest on those funds in return. The bank then needs to cover or earn more money to cover the cost of paying interest to the deposit account. This is done by selling the depositors money to the mortgage market but at a higher rate than savings deposit account interest rate. So the bank survives by having a large community of mortgage paying clients.
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Silicon Valley California is a community of very wealthy people, a lot whom have gone overnight from two minute noodle bedroom dwellers to billionaires via software app technology etc. these people have money to deposit but they don’t need a mortgage. More importantly for some people these wealthy SV residents are also big Democrat Parter donors. So these wealthy yuppies are attracted to banks which promote a certain clientele and return. SVB put a lot of the depositors money into long term government bonds etc. this sounds great provided you have a government in place that can manage an economy. Managing an economy well is not one of the hallmarks of the current spastic brained Biden administration. When inflation skyrockets and interest rates go up and money is minted to the worlds biggest welfare recipient, Zelensky, then the bottom falls out of bonds.
Now if a big builder or you or me went broke, the government will not entertain a thought of compensation.
But…
…those wealthy SVB are Democrat donors and it would be political suicide if Biden were not to cover and compensate. Apparently Oprah Winfrey is a $600m plus SVB deposit account holder. There is no way Biden will not look after her. At a guess I’d not be surprised if Biden himself had his scurried millions sitting in there as well.
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So for a government to bail out a private bank on identity and not merit is that Corruption or is that Capitalism? Biden thinks it’s the latter…but a lot of us know Biden is incapable of thinking.
Good article and comments. I add my banking motto, “you can’t play Father Christmas with other people’s money”.
Other mottos which come to mind. “Woke is broke” and ” don’t get your honey where you get your money “.
Banking???
Just today we discovered that our Westpac branch had closed, by visiting it and finding the sign that the building was sold – and locked. No prior advice. Problem, we have valuable documents in safe deposit last heard of at our now-closed branch. Where are they now? Who pays if they are lost? Geoff S
Bit of a worry, GS. Probably caused a hypotensive spike or two in your BP. You’ll be OK but it seems remiss of your local Westpack banksters to not inform you of the contingency arrangements for your SDB documents. A similar event happened in our town when the CBA closed. That site is now a successful bistro. The huge original safe is still there, but, doing time as a pantry. Take care, relaxayvous mate. Your documents will be safe.
For hypotensive read hypertensive. Hypotensive is possible but only about half an hour after aerobic activity.
Now, let’s transfer the risk management game to Australian energy.
I would have thought it pretty simple to draw up a table of current MWh of production, the number planned retirements and the number of new MWh being developed. Apply dates to all these columns and a year 6 pupil could see when and what needed to be done. No surprises for anyone. Except our servants in Canberra have managed to be surprised at every turn, let alone the geniuses at the AEMO. What were they doing to manage risk? What are they now doing?
Over to you Batman and Robin, er, I mean, Albo and Blackout.
Uh huh … between the forecast closures of Liddell next month (1.8GW) and Eraring in two years (3GW), we are losing about 5GW from a demand pool of 28-30GW each evening about 6pm. Roughly a 20% loss with a projected “big battery” replacement of about 650MW, able only to supply that level of power for a maximum of 2 hours – when windless, we have an order of magnitude less supply for a period of order of magnitude less at the time of peak demand.
These people are deliberately destroying 20% of our grid supply and replacing it with “feelz”. Watch the body language of the new (Bowen picked) CEO of AOMEI whenever he’s on the TV. He’s absolutely terrified. Through the Looking Glass with Alice we go.
Too many people now think systems run themselves – energy, banking, logistics, etc – and that their own jobs are bullshit jobs, that is, it doesn’t matter if they are not competent. Too many people now think there’s no down side to being incompetent, or appointing incompetents.
Thanks Peter, good piece and the comments cover anything meaningful I could think of plus a lot that I couldn’t so I’ll stick with this ; banks are necessary and good in our free enterprise society but of course they can be mismanaged, mostly due to personal greed bordering on crime ….I don’t think it’s stupidity.
One thing they should be is conservative, definitely not woke…. now that is stupid, for the reasons you mention. In my mind they should also not be politically correct, which they all seem to be leaning towards now I think….even the small ones.
Thanks Peter, good piece and the comments cover anything meaningful I could think of plus a lot that I couldn’t so I’ll stick with this ; banks are necessary and good in our free enterprise society but of course they can be mismanaged, I don’t think it’s stupidity.
One thing they should be is conservative, definitely not woke…. now that is stupid, for the reasons you mention. In my mind they should also not be politically correct, which they all seem to be leaning towards now I think….even the small ones.
Quote: “A $100 five-year bond paying 1 percent becomes worth much less than $100 (about $80 I think) if interest rates rise to 5 percent”
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The present value of a bond depends on what value one assigns to the yearly interest received (and of course how long before the bond matures, which I’ll take as 5 years).
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If one assumes the 1% yearly dividend is re-invested at 1% when received then the $100 would amount to $105.10 after 5 years.
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If one assumes the 5% yearly dividend is re-invested at 5% when received then the $100 would amount to $127.63 after 5 years, and $82.35 would amount to the same $105.10 as for 1% yearly dividend.
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There are as many other ways of calculating as there are of making assumptions about what will be done with the dividends, but $80 is indicative of the reduced worth.
Peter, I have been learning from your many essays in QoL for years without having the wit to work out the fount of your expertise. Thanks for outing yourself in this essay (written in plain English, if I might say so).
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As for myself, one of my main areas of expertise was digging holes, some of them quite deep. I’m wondering how that might qualify any of my opinions.
I found Peter’s fount, along with others, by joining Linkedin and closing the account after locating what I wanted. Then repeat as desired..
Speaking of keeping up with the order of letters, isn’t it time for a slight rearrangement of diversity, equity and inclusion (DEI) to the more appropriate DIE? After all, it’s where our economy (and possibly civilization) is headed, with the mindless, virtue-signalling idiocy (my definition of “woke”) creeping into all levels of management.
Bloody Brilliant, if I can borrow a quote from Ron Weasley (Harry Potter’s mate). Do we have to hit rock bottom before we can break the shackles of the cult that is holding society to ransome?
Seems the Quadrant community includes a veritable brains trust on money and banking. Any thoughts on (a) printing money during pandemics as a cause of inflation and therefore the destruction of the value of my (and everyone else’s) savings, and (b) the likely impact of the dreaded digital currencies on banks and the consumer of banking services?
PS: Tucker is really in top form lately. He did a great job recently interviewing Ed Dowd, the former Black Rock fund manager, who is charting the tragic pandemic of excess deaths occurring wherever there have been mass injections with what the late Dr. Zelenko once described as ‘the poison death shot’.