The excellent Kim Strassel of the WSJ has an interesting take on the SVB debacle -- that is, it was writing "basically subprime business loans." (Yikes!)
Here's the piece:
Opinion | Did ESG Help Sink SVB?
Kimberley A. Strassel
March 16, 2023 6:20 pm ET
One entrepreneur says the bank was offering ‘basically subprime business loans.’
If government funds it, they will come. That’s an overlooked story line in the collapse of Silicon Valley Bank. If Washington wants to point fingers, it should aim the biggest digit at itself.
Let’s talk about what actually imploded over the past week. If the name wasn’t already a giveaway, SVB was the lender of choice for tech dreamers. It claims to have banked nearly half of all U.S. venture-backed tech and healthcare startups. Yet in recent years those clients have skewed ever more in one direction. “We serve those creating positive environmental change,” SVB’s website brags, noting that the bank worked with some 1,550 companies in the “climate technology and sustainability sector.”
Most of these companies weren’t filling some vital market need. Rather, as the Journal reported, SVB was beloved for its willingness to offer “banking services to startups that often weren’t profitable, in some cases didn’t have a product, and would otherwise have a hard time getting a line of credit or a loan from a larger bank.” One tech entrepreneur provided law.com a more scathing description of SVB’s products: “They’re basically subprime business loans. You’re talking about companies that have no credit profile, they’re burning cash and are unlikely to raise the same type of capital because of interest rates. . . . It was basically social credit.”
What inspires a bank to disregard risk and shower money on products or services that nobody is clamoring to buy? One answer is easy money and misguided regulation, which washed dollars into the economy even as it pushed banks like SVB to load up on sovereign debt, lulled by a Federal Reserve-fed belief that interest rates would stay near zero forever. The other? Washington handouts, via President Biden’s effort to engineer a climate industry that otherwise wouldn’t exist.
Congress’s $1.2 trillion 2021 “infrastructure” bill was a starting gun for a clean-tech frenzy. The bill made available hundreds of billions for new “technologies” for electrical grid modification, solar, carbon capture, battery storage, electric-vehicle charging infrastructure, geothermal, “smart community” widgets, microgrids, CO2 transport, hydro, wind, fuel cells, waste management and efficiency gains. Last year’s so-called Inflation Reduction Act threw yet more dollars at would-be green innovators, while also extending billions in household tax credits in an attempt to lure Americans to buy these government-fueled concoctions.
The Biden bills were a supercharged version of Barack Obama’s 2009 stimulus, which produced Solyndra’s federal loan guarantees and other green embarrassments. Yet Washington is adept at repeating mistakes. The feds did this time largely off-load responsibility to the state and local authorities or industrial players that apply for grants and pass the money on from there. But the message was still the same: A honey pot of hundreds of billions sits waiting to be taken. Cue the clean-tech scramble.
While the main reason SVB failed was its decision to buy bonds at the top of the market (it got hit when it had to sell), it had also in the past few years further stretched itself by sizably increasing its loans and lines of credit to subprime firms. How much of that would have happened if not for the Biden pot of gold at the end of the green-tech rainbow? A Washington Post story acknowledged that SVB’s weekend collapse initially meant that “many major clean tech companies faced insolvency.” It even accidentally admitted Washington’s role when it noted that many investors were nonetheless hopeful “the infusion of hundreds of billions of dollars in public money” from Washington legislation would “blunt the fallout from the bank collapse.”
The politics doesn’t end there. Even a junior banking regulator should have picked up on SVB’s distress, but that’s apparently a grade above San Francisco Federal Reserve President Mary Daly. She and her team have spent more time of late focused on hypothetical climate risk than the real risk of bank failures. What woke overseer wants to clamp down on the darling of clean-tech banking?
And as for that “infusion” of government dollars, it turns out investors don’t have to wait for grant bucks. SVB had relatively few depositors, but most exceeded the federal deposit-insurance limit of $250,000. Had this been a regional bank in Texas specializing in oil and natural-gas ventures, those depositors would surely be out of luck. But the Biden administration immediately swooped in with an SVB bailout, promising to make all those clean-tech companies whole. Subsidy money, a regulatory blind eye, and bailout bucks—talk about a favored industry. This, while most every other company in the country faces a bevy of hostile Biden regulators and lawsuits.
Some Republicans are blaming the SVB meltdown on distraction—claiming the bank was overly focused on turbofunding climate and social-engineering causes. That’s a bit too convenient. SVB and its clients were doing exactly what Washington invited them to do—chase the money. And one big lesson is that no good ever comes from D.C. attempts to micromanage markets.
Write to
kim@wsj.com.
Plus the graphs are both informative and pretty compelling.