Don’t let incompetent bank executives derail the Fed’s inflation battle
Democratic U.S. Sen. Elizabeth Warren thinks she knows who to blame for the collapse of Silicon Valley Bank, and the financial fallout that followed.
The bank’s chief executive officer? Its board of directors?
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They have some culpability, for sure. But the liberal senator from Massachusetts mostly delights in faulting Federal Reserve Chair Jerome Powell, who, she said in a tweet, “directly contributed” to the bank’s failure.
The political blame game over the banking industry’s latest belly flop is in full swing, with Democrats pointing the finger at Powell and his role in deregulation under ex-President Donald Trump, while the GOP is even more far-fetched in blaming progressive sustainability policies for the “woke” San Francisco bank’s failure.
Powell has had to keep the economy moving despite dysfunction on Capitol Hill and a worldwide reckoning after two decades of easy-money policies, followed by excessive amounts of pandemic relief, sent inflation soaring. And while this latest financial disaster shines a spotlight on broader economic problems, it has become obvious that Silicon Valley Bank was its own worst enemy.
The blame ought to be placed where it belongs: The bank’s leaders blew it. This high-flying institution, which rode the wave of big-money tech startups, would still be around had it taken to heart the lessons that turned Chicago’s financial markets into world beaters, beginning in the 1980s.
Our city’s exchanges pioneered the use of sophisticated financial products for managing interest-rate risk. Working together with the swaps industry, its Treasury and eurodollar contracts made it easy and affordable for banks and other institutions to hedge against big swings in rates. Essentially, the exchanges sold insurance for the day when interest rates moved against fixed-income investments. Many banks routinely use these and related financial products to protect their portfolios.
Silicon Valley Bank had invested in Treasuries and highly rated mortgage-backed securities that are generally viewed as safe. But when rates go up, even high-quality bonds stand to decline in value. As the Fed launched its campaign against inflation, rapidly sending rates higher to cool down prices, the obvious move for the bank was to beef up the hedge on its vulnerable holdings. A comprehensive insurance plan would have saved it, and the bank had more than a year to get its act together.
Its leaders instead rolled the dice, evidently deciding to pocket the money that would have gone to hedging, while leaving the bank dangerously exposed. What happened next was predictable, at least to the Chicago market savants who coincidentally gathered this week for an annual industry conference.
Speaking at the Futures Industry Association confab on Tuesday, Terry Duffy, chairman and CEO of Chicago’s CME Group, echoed a common sentiment among the participants: “Banks need to manage their risk just like farmers need to manage their crops,” he said. “We just did not see that.”
Rather, Duffy said, he saw “a complete failure” of risk management from an institution that could “easily” have averted the crisis. “People need to make sure they’re mitigating and managing risk.”
The only good news, from Duffy’s perspective, was that CME and other financial markets performed smoothly even as panicky sellers sent trading volumes soaring. The markets passed a stress test with flying colors.
— Chicago Tribune Editorial Board
