Category Archives: ethics

Whitewash

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It seems the Federal Reserve knew of the risks stemming from SVB management moves as long ago as 2019 [emphasis added].

In January 2019, the Fed issued a warning to SVB over its risk-management systems, according to a presentation circulated last year to employees of SVB’s venture-capital arm….
The Fed issued what it calls a Matter Requiring Attention, a type of citation that is less severe than an enforcement action. Regulators are supposed to make sure the problem is addressed, but it couldn’t be learned if the Fed held SVB to that standard in 2019.
…
Following the 2019 warning, the Fed informed SVB in 2020 that its system to control risk didn’t meet the expectations for a large financial institution, or a bank holding company with more than $100 billion in assets, the presentation to employees at SVB’s venture-capital arm said.

And:

Over time, the central bank issued numerous warnings to SVB, suggesting the bank’s problems were on the radar of the Fed, the bank’s primary federal regulator.

So, what was done by the Fed’s regulators in response to this string of noncompliances?

A central-bank review of its oversight of SVB is due by May.

Will those prior whitewashes be followed up with an official whitewash?

I’m not holding my breath over a favorable outcome, which IMNSHO would include, at the very least, the public firing for cause of the Fed regulator(s) directly responsible for SVB oversight and that individual’s/team’s supervisor. Pour l’encouragement des autres régulateurs.

No Chief Risk Officer

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That’s what Silicon Valley Bank had for the last 8 months of 2022. Much is being made of SVB’s choosing to employ a Diversity, Equity, Inclusion person in an executive position during that time frame, but a more important function is being missed in this kerfuffle. That is the answer to this question:

It is not clear who handled [SVB CRO until April ’22, Laura] Izurieta’s duties in the last eight months of 2022.

SVB has a President, a Chief Credit Officer, a Chief Operations Officer, and a Chief Auditor. Each of those persons are, or should have been, fully capable of assessing the level of interest rate risk involved with the interest risk of the bank’s holdings with the Fed vs the interest rates it was paying its depositors.

Each of those worthies are, or should have been, fully capable of assessing the demand and cash flow risk associated with the concentration of particular categories of depositors—startups and venture capitalists—with intrinsically very high cash flows and so high rates of cash deposits and withdrawals compared with “ordinary” consumer depositors’ rates of deposits and withdrawals.

Each of those persons are, or should have been, fully capable of assessing the amount of cash held in accounts above the FDIC-insured maximum of $250,000 compared with the amount held in accounts smaller than that limit. Each of those persons are, or should have been, capable of assessing the closely related risk from the degree of concentration of those large accounts in the hands of a relative few account holders and so the risk of any one of those holders withdrawing all of their money.

The presence of a CRO on the payroll and on duty would have been the one to concentrate on those risks, freeing the rest of SVB’s management team to concentrate on other areas, but management, for one reason or another chose not to employ one for those critical eight months. And that management team failed to pay attention, chose not to pick up the slack.

An Attack on Workers’ Rights

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Hypocritically, it’s by the Progressive-Democratic Party, which runs Michigan’s government. That’s the party that claims to champion the rights of America’s workers.

[State] Senate Democrats voted along party lines in support of repealing the decade-old “right-to-work” law in a state long considered a pillar of organized labor.

The State’s House already had passed a substantially similar bill, now the two go to conference to reconcile the differences, then the result will be voted up in both houses and sent to Governor Gretchen Whitmer (D) to be signed into law.

Michigan’s workers, for the last decade, had been able to speak for themselves, to join or not join unions, to not pay dues to unions to which they didn’t belong.

The Michigan government is telling those workers they have no voice, and their wishes have no importance. Oh, and pay up, suckers.

So much for workers’ rights when Progressive-Democrats reign in Michigan.

What Are They Teaching?

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Matthew Wielicki, University of Alabama Assistant Professor of Geological Science, is on the right track, but he’s in a vanishing minority.

We’re literally moving away from the foundations of academia. If professors have any hesitancy in their speech, if students are hesitant to ask questions, if there is a decrease in dialogue because of a fear of retribution—that’s the fundamental principles that universities were founded on.

Unfortunately, he says, professors have precisely that hesitancy to speak freely. And this regarding a December 2022 poll by the Foundation for Individual Rights and Expression that found that

[m]ore than half of the nearly 1,500 college faculty members…were afraid of losing their jobs or reputations because of their words being used against them, even if unfairly. About a third said they don’t feel they can freely express their opinions.
“I definitely experienced that,” Wielicki said.

Even more unfortunately, destructively to our nation’s ability to grow following generations of inquisitive children and adults, these self-censoring “professors,” instead of teaching their subject matter, are teaching two critical and pernicious things. They’re teaching, by example—modeling, in the precious lexicon—cowardice. And they’re teaching that morals don’t matter; it’s better to put career, to put personal gain, ahead of morality.

“Banking System is Safe”

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That’s what President Joe Biden (D) claims after the Silicon Valley Bank collapse.

Americans can rest assured that our banking system is safe. Your deposits are safe. Let me also assure you that we will not stop at this. We will do whatever is needed.

But that’s true only if regulators do their job and enforce the rules in place—as they chose not to do in the runup to SVB’s failure—and if risks are well-known and left to the responsibility of the risk-takers in a free market rather than laid off to us taxpayers to make those taking the risks whole.

That last just transfers the risks to us and leaves the risk-takers entirely free of risk. That last, also, is what concerns Senator Tim Scott (R, SC), even though Biden claims that taxpayers won’t cover the losses. Yes, we will. SVB doesn’t have enough book value, even were its liquidation not done at fire sale prices, to cover the billions of investor—venture capitalists, startups, bond holdings, and on and on—losses that will occur. Scott’s concerns:

We just heard recently that they’re going to really have the greatest form of corporate cronyism that we’ve seen in a very long time. They’re going to insure all the deposits, even the ones over the $250,000 limit, which means that the most sophisticated investors are now going to have the insulation of the federal government. That is problematic. It sends a very negative statement to the marketplace….

Scott’s concerns are well-founded. Here’s what Treasury Secretary Janet Yellen, Fed Chairman Jerome Powell, and FDIC Chairman Martin Gruenberg said in their Sunday joint statement

Today we are taking decisive actions to protect the US economy…providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

That bailout is destructive of our banking system and of our economy at large.

I’ll have more on that last tomorrow.