Silicon Valley Bank, ESG, and Political Favoritism

Last weekend we all saw the beginnings of what has now become a major meltdown for Silicon Valley Bank. The bank was quickly closed by the California Department of Financial Protection and is now under the receivership of the Federal Deposit Insurance Corporation. My colleagues John Berlau and Wayne Crews had a statement out Monday in reaction to the joint policy announcement by the Federal Reserve, U.S. Treasury, and FDIC that was made on March 12^th. John and Wayne were not, generally speaking, fans of that response. John, the Competitive Enterprise Institute’s Senior Fellow and Director of Finance Policy, said:

“This broad bailout will create expectations that will likely lead to future risky bank practices and ensuing bailouts as even wealthy depositors have less incentive to perform due diligence on banks they deal with and assume everything will be covered by the government.

“Meanwhile, prudent banks suffering the fallout from SVB should not be punished by a flood of counterproductive red tape. The Consumer Financial Protection Bureau’s proposed price controls on credit card late fees and curtailing of optional overdraft services will sap revenue from community and regional banks working to maintain financial stability.”

Wayne, CEI’s Fred L. Smith, Jr. Fellow in Regulatory Policy, also weighed in, urging policymakers not to overreact, as they have in previous crises:

“Panic makes for terrible policymaking, which means the urge to rush into the Silicon Valley Bank failure with quick ‘fixes’ could saddle the industry and consumers with bad policies for years to come. This is the fourth financial shock of the 21st century, each of which resulted in a permanent expansion of government. That’s why the time is now to stop Congress from exploiting crises, current and future, in a way that does more to grow government than help people out of a jam. Congress needs to be proactive, not reactive. Now more than ever we need an Abuse-of-Crisis Prevention Act.”

A reporter asked me earlier this week what the environment, social, and governance (ESG) angle was to this story, in part because some critics have been suggesting that poor performance at financial firms like SVB can be the result of focusing too much on political and social topics rather than their core business of managing money. The biggest issue with SVB appears to have been a poorly hedged interest rate risk relating to big purchases long-term government bonds. That, on the surface, has little to do with ESG issues (though some commenters have suggested an ESG-themed connection to the collapse itself). Some prominent ESG skeptics, however, like Vivek Ramaswamy, are suggesting that SVB’s policy proclamations were their real hedge – which is to say, a political one. The same has been said about FTX and Sam Bankman-Fried – that is, that management of both firms employed a cynical surface-level enthusiasm for progressive policy goals in the hopes of avoiding political and regulatory scrutiny, even when such scrutiny would have otherwise been warranted by their operations.  

So, while this may not have been some kind of “get woke, go broke” scenario when it comes to their own operations, there is a potential ESG angle when it comes to the government response itself. Is the federal government rushing to help and not demanding stricter conditions because of the kind of politically trendy clients SVB had and the public pronouncements they made, including on climate change?

If it is true that the policy announced in this weekend’s Fed, Treasury, and FDIC letter was the result of political considerations rather than a neutral approach to risk management, that is a problem. If SVB is being favored by the Biden administration – which has a “whole of government” approach to climate change – because they have so many clients in the climate tech space, than that is a bad policy. Applying regulatory and fiscal policy based on which industry sectors happen to be politically popular at the moment is not something the federal government should be doing.

It would not necessarily be surprising, though. For example, Sarah Bloom Raskin, President Biden’s one-time nominee to be vice chair of supervision at the Federal Reserve, proposed in a May 2020 New York Times op-ed that oil and gas companies should be specifically excluded from economy-wide Covid recovery measures passed by Congress, with the explicit goal of driving them out of business and thereby helping advance a net-zero transition. That would not have been smart fiscal policy – that would have constituted weaponization of the powers of the federal government against its own citizens as shareholders, customers, and employees of those companies.

These two potential policies are just different sides of the same coin – either extending special favorable treatment to ESG-aligned firms or threatening non-aligned firms with exclusion from generally applicable support. The announcements from policymakers regarding SVB have, so far, not signaled that they are being coddled because of their ESG alignment, but that doesn’t mean that such a motive was absent from the calculus of federal policymakers. I wouldn’t expect the officials overseeing the bailout to publicly announce such a preference. I suspect members of Congress, however, in particular House Financial Services chairman Rep. Patrick McHenry (R-NC) and Oversight and Investigations Subcommittee chairman Rep. Bill Huizenga (R-MI), may have some pointed questions to ask on this topic.

Going forward, the SVB collapse could make people in the world of corporate finance more skeptical of firms with high-profile ESG commitments, since the positive halo from that affiliation can be seen as possibly hiding weakness in core areas of business. It should also raise the question among elected leaders of whether federal regulatory policy is, in fact, being influenced by this ESG halo effect or not. Would a bank with hundreds of clients in the world of heavy manufacturing rather than “clean tech” have received such favorable and expeditious federal assistance? Janet Yellen, Jerome Powell, and FDIC chairman Martin Gruenberg should be ready to answer that question in public. If, as I suspect, they insist that no such ESG-themed favoritism is going on, then they should be willing to pledge, as a matter of policy, to never doing so in the future either. We don’t want politically motivated finance regulation like Operation Choke Point sneaking in the back door again through bailout policy.