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Remember George Bailey from It’s A Wonderful Life? The plot revolves around Bailey Bros. Building & Loan being on the precipice of bankruptcy after Uncle Billie forgetfully drops an overnight deposit of $8,000–about $123,000 in today’s dollars–on the lap of mean Mr. Potter. Having a guardian angel named Clarence seemed more believable to me than the idea that the town’s most popular bank could be one deposit away from doom.
Then came the collapse of Silicon Valley Bank (SVB) and Signature Bank. Instead of grateful townspeople lining up to rescue George with buckets of money, the “heroes” of this drama were Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell and FDIC Chairman Martin Gruenberg. Some might say Powell and Yellen deserve credit for helping to shape the story through their policies around interest rates and the money supply. Near-zero interest rates and rapid rate hikes didn’t help.
Whatever role they played in the walkup to the crisis, their mission after it happened was clear: Contain the problem, curb the chaos and make sure the panic doesn’t spread to other banks. Instead of rallying around the leaders of these cash-strapped banks, our stern defenders kicked them to the curb, shut down their banks and assured panicked depositors that the rules would be relaxed so that they would be made whole. Stay calm, everyone, our venture-capital brethren will be okay. (Could somebody please find Peter Thiel a speaking role so he can share what he thinks? And get a Kardashian to teach government officials how to counter fear-mongering on social media? Hint: try “Taylor Swift”)
To understand the decisions that got us here and the consequences that could follow, here are insights from Steve Forbes, the Chairman and Editor-in-Chief of Forbes Media. (a.k.a. my boss)
The Flash-Mob Bank Run
Like a flash mob, a bank run can happen fast. You don’t need to watch old movies to know that your deposits are being lent to someone you don’t know at a higher rate than the bank is paying you. It’s a ledger with a series of IOUs that can keep flipping as long as you don’t have to pay everyone back at once.
That could explain why some of the main characters in this drama seemed oddly clueless to the fate that awaited them this week. Signature Bank’s departing CEO Joseph DePaolo sounded proud when passing the torch to COO Eric Howell last month, stating “the future of the bank is in Eric’s good hands.” Board member and former U.S. Congressman Barney Frank added that he felt “assured Signature Bank will continue to thrive.” (Never mind that the legislation he’d helped put in place after the 2008 banking crisis had been watered down to the point where Signature Bank didn’t have to adhere to it.) Here’s an explainer on what happened to make this bank collapse.
The star in all this is SVB, a brand that built its wealth and reputation on being a banker to the cool kids of tech. On SVB’s cryogenically frozen website, CEO Greg Becker is still being hailed as a “champion of the innovation economy”—just below a cryptic note stating that the bank he once ran is now in government hands and open for business. Stumbling across that cultural artifact feels less like a Frank Capra movie than Planet of the Apes. (I’ll let Charlton Heston express the sentiment of SVB shareholders)
The speed of the demise of these two banks doesn’t mean the boards and leaders didn’t make dubious decisions over many months that contributed to their downfall. SVB’s Becker could claim that he had no idea that dark clouds were forming when selling $3.6 million of company stock two weeks before his bank’s collapse. But he certainly wasn’t oblivious to what was happening when doling out company-wide bonuses after announcing losses that helped spark a stock crash, bank run, and the death of the firm. Becker had also lobbied to loosen regulations on banks of his size and lacked a chief risk officer during a risky period. Establishing culpability is a matter for Congressional hearings or a judge as the lawsuits begin.
And let’s not forget the chief financial officer. As guardians of the coin, fiduciaries and the C-suite leaders who talk to Wall Street and others about their companies’ financial health, CFOs are often the first targets of scrutiny when companies fail. Thanks to the Sarbanes Oxley Act, a law forged in yet another crisis about 20 years ago, CFOs and CEOs are also held accountable. for the numbers they present to indicate the financial health of their companies.
That doesn’t mean the CFO has done something wrong when their companies go down, or that they acted alone if human factors are at play. Here’s a look at the myth of the rogue CFO. Former SVB CFO Daniel Beck sold shares on the same day as his boss and is named in the latest shareholder suit. Meanwhile, Signature’s CFO Stephen Wyremski came to the bank after building the governance process within the Federal Reserve regulatory reporting function for AIG – which was rescued and deemed too big to fail during the 2008 crisis.
We’ll let pundits weigh in on the role of politicians. Some accuse President Joe Biden of spurring inflation with his spending policies. Whether you think tighter banking oversight is a peril or a plus, meanwhile, it’s clear that former President Donald Trump relaxed the risk rules for banks like SVB with his 2019 Economic Growth, Regulatory Relief and Consumer Protection Act. Here’s how deregulation may have sowed the seeds for SVB’s demise. Meanwhile, the SEC and Justice Department are set to investigate SVB’s collapse.
A Heartwarming Camp Story
This crisis has already given us reminders that good guys sometimes win. Much like the people of Bedford Falls rallied around a distraught George Bailey in Capra’s film, the customers of experiential retailer CAMP came out in force to support founder and CEO Ben Kaufman when it looked likely that much of company’s cash would disappear as SVB went down.
When news of the bank’s collapse became public, Kaufman sent out a desperate email to clients. That was followed by a funny Instagram post that featured a “BANKRUN” promo code of 40% off and a photo of a sad-eyed child amid assertions like “I never liked the bay area” and “this sucks.” Humor aside, Kaufman told me yesterday that he was genuinely worried about his company’s fate – and deeply moved by the customer response.
“In the early days of CAMP, Silicon Valley Bank was the only bank willing to extend us a line of credit,” says Kaufman. “And one of the stipulations of having a line of credit with them—which by the way, we no longer had—was that you had to keep all your deposits there.” To see the full video interview, click here.
Suffice to say that it has a happy ending. “Many of them didn’t even use the promo code,” says Kaufman, who has since thanked his customers for showing support and - yes - even love. An angel might not have earned some wings through this exercise but it appears a lot of parents bought a kit for their kids to make their own. For a man who felt his company’s existence was at stake just days ago, that sounds wonderful to me.
And if you can't find love from others, just remember that sometimes it’s enough just to love yourself. While investors may be fleeing banking stocks out of fear of a ripple effect, several bank CEOs are using this moment in time to aggressively buy their own stocks. For those who could use the kind of emotional support that a discount stock can’t provide, here are some tips on making friends as an adult. Have a wonderful week.
