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If you read no further in this article, here are the two main takeaways from Zach Abraham, the “Know Your Risk” Radio show host and CIO of Bulwark Capital Management, about the reasons behind the collapse of Silicon Valley Bank (SVB).
The people we have in the most important places of this economy are morons.
It really is stupefying but it gives you a good insight of how much incompetence we have in very important places right now. THAT is the systemic risk.
BOOM. Many of us know this, but to hear a person who lives in and watches the financial markets, as well as sits on boards that manage capital and risks, say it is insightful, not to mention refreshing.
Abraham’s fellow radio host, Todd Herman, always seamlessly illuminates the tensions and pitfalls of the intermarriage of pop culture, politics, and its resultant societal decay. Herman interviewed Abraham about the collapse of Silicon Valley Bank and its subsequent auction by federal regulators. As RedState reported, this regional institution collapsed under its own weight, producing shock waves and fear of bank runs throughout the financial industry and the markets.
There’s something very ugly happening right now: VCs & startup execs who stand to lose their deposits at SVB are going *out of their way* to push a narrative that there’ll be a bank run on Monday if SVB depositors aren’t bailed out by the government. They’re yelling fire in the… https://t.co/6GYfGRczPk
— Vivek Ramaswamy (@VivekGRamaswamy) March 12, 2023
Abraham chose not to throw Silicon Valley Bank completely under the bus, and to separate the current bad dream of this crisis from the complete nightmare of 2008-2009.
Silicon Valley Bank did a lot of good work with VCs. I hear them getting kind of thrown under the bus right now, but the job they did in banking with the companies they did it with, they did a real service and they were helpful.
We got about, ummm.. $80-150 grand in jeopardy right now, that we might take a haircut on right now.
Here it comes again, bank run. This is absolutely nothing like 08-09.
How does the Silicon Valley Bank mess differ? Absolutely no risk management.
This is a rookie mistake. When I look at this situation, I would immediately think they hired a 23-year-old to manage their risk department.
Stress tests are all about how levered balance sheets respond to financial shocks. They’re not designed to illuminate the dangers of an unlevered triple A pile of debt with 6 yr average duration. More regs can’t fix this! Competent risk managers can https://t.co/dyxKGQI20x
— Zach Abraham (@KYRRadio) March 13, 2023
Abraham illuminated what most people in panic fail to understand. Inflation does not just affect the consumer, but it affects assets held by institutions and banks. “Big Finance” (Fed, Treasury, Major Banks) have either ignored this or tried to deflect Americans’ attention from it.
But those in the know, knew—even if they chose not to say anything about it. Abraham has not been one of those, and once again sounded the alarm:
When interest rates start going up, it is gonna blow holes in things that people aren’t expecting, because people have been lulled to sleep over 15 years of zero percent interest rates. And when interest rates start going up, everybody is going to talk about the impact that’s going to have on the economy, and they’re going to fail to think about the impact it’s going to have on bank and company balance sheets when their bond portfolios lose 20 to 30 percent of their value.
SVB failed to mitigate the impact of their mortgage securities which are now severely reduced by inflation.
I just cannot enforce to you how stupid this was. They [Silicon Valley Bank] could have hedged out their duration risks a million times.[..]
We all know how rates went up, these guys could have hedged that interest rate exposure when mortgages hit three, when they hit three and a half, when they hit four and half, but they didn’t hedge. So, they just let a massive hole get blown in its balance sheet.
That’s what should scare people—It’s the gross incompetency.
Gross incompetency exacerbated by adherence to an ESG (Environmental-Social-Governance) score. An industry that should be governed by economic sense and mathematics, has also been pulled into the undertow of the WOKE tide. According to the Daily Mail U.K., SVB had no Chief Risk Officer from April 2022 until January 2023.
SVB’s former head of risk, Laura Izurieta, who formerly performed a similar role for Capital One, left the bank in April 2022. She wasn’t replaced until January 2023 when the bank hired Kim Olson, formerly of Japanese bank Sumitomo Mitsui.
For its global division in the U.K., Chief Risk Officer Jay Ersapah appeared to be more interested in equity and diversity than mitigating financial risks for the SVB clientele.
Meanwhile, Jay Ersapah, who acts as CRO for the bank in Europe, Africa and the Middle East and who describes herself as a ‘queer person of color from a working-class background’ – organized a host of LGBTQ initiatives including a month-long Pride campaign and implemented ‘safe space’ catch-ups for staff.
In a corporate video published just nine months ago, she said she ‘could not be prouder’ to work for SVB serving ‘underrepresented entrepreneurs.’
Professional network Outstanding listed Ersapah as a top 100 LGTBQ Future Leader.
Listen to the drivel from Ersapah and other DEI leads about how proud they are to work for a company that prioritizes diversity of others, and the conversations that have been about encouraging vulnerability and a culture of support. It’s a lot of me, me, me, and not a whole lot about the people and companies whose assets they were entrusted to manage.
Maybe that’s the point—they weren’t hired to serve the client, but themselves.
But any mention of assessment of risk for the clientele base, financial competency, or ethical consideration doesn’t seem to factor in here.
‘Jay is a leading figure for the bank’s awareness activities including being a panelist at the SVB’s Global Pride townhall to share her experiences as a lesbian of color, moderating SVB’s EMEA Pride townhall and was instrumental in initiating the organization’s first ever global “safe space catch-up”, supporting employees in sharing their experiences of coming out,’ her bio on the Outstanding website states.
It adds that she is ‘allies’ with gay rights charity Stonewall and had authored numerous articles to promote LGBTQ awareness.
These included ‘Lesbian Visibility Day and Trans Awareness week.’
As Abraham so aptly pointed out:
Maybe having a risk visibility day should have been prioritized slightly higher than having lesbian visibility day.
Think about the fact that she was head of their risk department. The 15 years of zero percent interest rates and the Fed constantly sterilizing every bit of risk in the market, this has created this. You can afford to have somebody like this as your risk manager, because there hasn’t been any risk!
Risk anesthetized and sterilized. I’ll bet you dollars to cents they are not the only bank that has this problem. ESG scores changed what risk meant.
We all need to take a step back. We need to look at the practical impacts. This is what living in this completely contrived, conjured environment does. It takes people’s eyes off what really matters, whether we are talking spiritually, whether we’re talking financially, whether we’re talking culturally, and it gets them out into La La Land where they’re standing for nothing, so they’re going to fall for everything.
Andrew Breitbart used to say that politics is downstream from culture. Culture ultimately infects every aspect of our lives, including our financial stability. Look at how banks are now targeting small businesses and entrepreneurs, or are watching firearm purchases. When institutions define risk as a failure to incorporate whatever the latest agenda is rather than economic sense and proven financial soundness, it becomes an institution that is headed for fallout; but that fallout affects everyone. Another analogy of something else that flows downstream, which I won’t belabor here.
Abraham wrapped it up by saying,
That’s why I always say when you see this craziness going on in the spiritual/cultural aspect, you can bet your bottom dollar the same insanity is going on in the financial markets.
It’s not a leverage issue, it’s just gross incompetence. The problem is, you stack gross incompetence high enough, it can become a really big problem.
Powerfully insightful interview and less than an hour.