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Tags: fdic | svb | bonds

Biden Bailouts Only Cover Costly ESG Failures, Solve Nothing

business and banking failures

Larry Bell By Friday, 24 March 2023 04:26 PM EDT Current | Bio | Archive

One might wish that a series of recent bank failures might serve as a wakeup call regarding woke Environmental Social Guidance (ESG) investment and spending addiction policies that the rest of us will wind up paying for.

But don’t count on Biden administration bailout responses leading to any favors benefiting your retirement portfolio or children’s college fund.

I’m referring here to predictable consequences of a $19 trillion government bailout in the woke wake of federal financial backstops for California’s struggling Silicon Valley Bank (SVB) and New York’s Signature Bank through applications of a "systemic risk exception" law.

SVB and Signature, the second- and third-largest bank failures in U.S. history, respectively, have sparked deserved dread that anxious customers will drain customers from small and midsize banks, and government stepping in with "temporary fixes" that end up nationalizing the entire banking system.

Guaranteeing deposits beyond $250,000 per customer limits previously covered by the Federal Deposit Insurance Corp. (FDIC) now makes it even more attractive for banks to blow money chasing promised green dreams.

SVB’s implosion, which alone lost roughly $200 billion, billed itself as a go-to bank for those “creating positive environmental change” working with some 1,550 companies in the “climate technology and sustainability sector.”

As quoted a tech entrepreneur describing SVB’s products, "They’re basically subprime business loans.

"You’re talking about companies that have no credit profile, they’re burning cash and are unlikely to raise the same type of capital because of interest rates. . .  It was basically social credit."

A key reason SVB failed was its decision to buy bonds at the top of the inflated government market, then got hit harder after further stretching itself over the past few years by sizably increasing its loans and lines of credit to subprime firms.

Perhaps SVB’s biggest problem was ignoring the "guidance" part of ESG, namely failing to have proper management in place to bring market interest risk assessment discipline to lending practices.

The company has operated without a chief risk officer since April 2022, which as Charles Elson, a retired professor of corporate governance at the University of Delaware equated to "like having an airplane without a pilot or a ship without a captain, it will move, but to what direction? That’s the concern."

As reported in the Wall Street Journal, SVB was beloved for its willingness to offer "banking services to startups that often weren’t profitable, in some cases didn’t have a product, and would otherwise have a hard time getting a line of credit or a loan from a larger bank."

The SVB bailout occurred a year to the day following a 2008 shotgun marriage rescue of troubled Bear Stearns, Countrywide Financial and Washington Mutual through purchases by big private banks such as JPMorgan Chase & Co. and Bank of America Corp.

This time around, however, FDIC couldn’t find a SVB buyer in time to quell panic and contagion to other — perhaps hundreds — of other banks.

Soon after alarm bells went off over SVB insolvency, Signature Bank — another mid-sized firm — began to see significant outflows of uninsured depositors as well, followed by withdrawal pains from many other midsized banks whose share prices had also been tumbling.

Days later, top FDIC overseers concluded that their only option to avoid broader contagion collapse was to backstop all SVB and Signature depositors, also concluding that doing otherwise would endanger billions in deposits at other regional banks.

This SVB and Signature charity also doesn’t necessarily apply to local banks which provide a preponderance of loans to small businesses.

San Francisco’s First Republic Bank, with assets concentrated in single-family residential mortgage loans and municipal bonds, has since lost 70% of its investment share value with its credit rating downgraded to junk status and about two-thirds of its deposits uninsured.

Most municipal bonds are held by households and mutual funds that can’t rapidly be sold to redeem profits and losses, and the Fed’s emergency lending facility doesn’t accept most muni’s as collateral.

And yes, lots of inflationary woke-ESG-driven congressional spending has also contributed to increasing risks of not being able to bank on bank security.

As Heritage Action Executive Director Jessica Anderson observed in a Daily Caller article, "Inflation and rising interest rates killed Silicon Valley Bank slowly by moving their balance sheet out of balance . . . But inflation doesn’t just happen and interest rates didn’t raise themselves."

"This," she said, "is all a direct result of the trillions and trillions in extra spending that Congress dumped into the economy" under Joe Biden’s leadership.

Wall Street Journal contributor Kimberly Strassel agrees that liberal ESG policies like Biden’s "Build Back Better" and Congress’s $1.2 trillion 2021 "infrastructure bill" began a clean-tech frenzy that “made available hundreds of billions for new "technologies."

Add to this, she observes, "last year’s so-called Inflation Reduction Act threw yet more dollars at would-be green innovators, while also extending billions in household tax credits in an attempt to lure Americans to buy these government-fueled concoctions."

In short, Strassel rightly concludes that the big lesson in all of this is that "no good ever comes from D.C. attempts to micromanage markets. . . SVB and its clients were doing exactly what Washington invited them to do — chase the money."

(Related articles may be found here, here, and here.)

Larry Bell is an endowed professor of space architecture at the University of Houston where he founded the Sasakawa International Center for Space Architecture and the graduate space architecture program. His latest of 12 books is "Architectures Beyond Boxes and Boundaries: My Life By Design" (2022). Read Larry Bell's Reports — More Here.

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Guaranteeing deposits beyond $250,000 per customer limits previously covered by the Federal Deposit Insurance Corp. (FDIC) now makes it even more attractive for banks to blow money chasing promised green dreams.
fdic, svb, bonds
Friday, 24 March 2023 04:26 PM
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