SVB’s Collapse Is A Lesson In Personal And Corporate Greed

In the wake of the spectacular collapse of Silicon Valley Bank, regulators, investors, and depositors are all seeking answers. How could an institution that had so recently been lauded fail so suddenly? While at SVB there were clearly problems with risk management (the standard practice of calculating and hedging risks at banks and financial institutions) — it even operated for months last year without a chief risk officer — it’s really a symptom of a more serious, underlying issue: The banking system hasn’t learned the hard lessons from the 2008 financial crisis.

In 2008, one of the greatest companies in the world, Merrill Lynch (the institution where I got my start in business and worked from 1984 to 2001), blew up because of greed and a lack of accountability. Not one executive had to give back a dime! It shouldn’t have happened then, and it shouldn’t have happened again, but it just did with SVB. We are fortunate that SVB’s collapse doesn’t seem like it’s going to endanger the global financial system, however, the executives who made money even as risk management broke down should still face serious consequences, including clawing back bonuses.

Why Did SVB Collapse?

Executives on Wall Street, and at banks generally, get bonuses. Most people on Wall Street and in the financial industry are not driven by greed, but those who are tend to make decisions that are in their own best interest, not necessarily in the long-term best interest of their employees, clients, and shareholders. They want to earn more money. On top of that, it’s also a competitive industry where people, executives, and institutions are always looking at the other guy. There’s pressure from shareholders — and from people seeking bonuses — to double-down on strategies that make money and seem “safe.” Growing greed leads people to take on increased risk.

Of course, risk is a necessary part of investing. Without risk, there’s no return. The problem is when people allow their greed to interfere with their risk tolerance.

Good Risk Vs. Bad Risk

You never want to take on existential risk. Investors and bank executives must always examine their investments, how they could turn against them, and how much damage would be done if those investments went the wrong way. Unfortunately, when people think something is safe — and they’re making a ton of money from it — greed starts to undermine their ability to think clearly. When investors get greedy, something that may have been only moderately risky at a low level of investment — meaning that you would take a hit if it collapsed but would still be able to fight another day — can easily grow to a level where it could undermine the whole institution if something goes wrong.

This is what happened during the 2008 financial crisis. Investors were earning huge amounts of money on mortgage backed securities. Since they were considered safe, they kept piling in without thinking about what fissures in the housing market would mean for their institutions.

A similar dynamic seems to have played out at SVB. The institution grew its deposits dramatically as the tech industry boomed in recent years, from $102 billion at the end of 2020 to $189 billion by the end of 2021. Those deposits were piled into Treasury and mortgage bonds, seemingly without questioning how much risk they faced if interest rates began to rise or how they would respond to a bank run. (This is risk management 101 for banks! Perhaps they would have known this, except that from October 2022 until January 2023, there was no chief risk officer at SVB. At a minimum, that’s a failure of good succession planning.)

Yet, since deposits continued to surge — and interest rates had been at historic lows for years — they didn’t consider the existential risk they might be taking on until it was too late. They let greed get the better of them and crowd out sober analysis of risk. On top of the $9.9 million in total compensation former SVB CEO Greg Becker earned last year, he sold $3.6 million of stock just days before the bank collapsed. Executives like him were making huge amounts of money, but they were doing it without sound risk management practices.

The implosion of SVB is a big problem, and it speaks to serious issues within the financial world. Unfortunately, you don’t just get a problem solved overnight. First you must understand what exactly the problem is and then define a specific regulatory fix for it. If a bank is having difficulty, there should be a forensic investigation of how much money they made from those practices during the previous few years. Executive bonuses from that period should be on the chopping block.

Risk-taking is a good thing when it is calculated, and the best investors understand how much risk is appropriate for themselves and their institutions. But when greed gets in the way, problems inevitably arise, and risk becomes an existential matter. It’s time for the financial industry — and regulators — to take this seriously.