September 25, 2023 • 29 mins
Dr. Dan Sutter, of the Manuel Johnson Center for Political Economy, hosts EconVersations, a program that explores the role of free markets in promoting prosperity through conversations with Manuel Johnson Center faculty and guests. In this episode, Dr. Sutter interviews Peter Earle of the American Institute for Economic Research, as they discuss What Happened to Silicon Valley Bank?
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(00:00):
the opinions expressed on
this programrepresent the viewpoints
of individual authorsor contributors,
and do not necessarily reflectthose of Troy University.
This is E Conversations,
a joint production of TroyTrojan Vision and Emmanuel H.
Johnson Centerfor Political Economy.
(00:20):
Now here's your host, Dr.
Dan Sutter.
Hello and welcome to E!
Conversations.I'm your host, Dr.
Dan Sutter of the Johnson Center
for Political Economy at TroyUniversity.
Banks occasionallyfail in the United States,
but the failure of SiliconValley Bank in March
2023 created a wave of concernin financial markets.
(00:41):
What went wrong at SVB anddid the bank receive a bailout?
What are the costs when banksor depositors get bailed out?
And why do investorsand financial markets
get so rattledwhen banks are in trouble?
Joining me in conversationtoday to discuss this is Mr.
Peter Earle of the AmericanInstitute for Economic Research.
Peter holds a bachelor'sin engineering from West
(01:04):
Point and master's degreesin economics and finance.
And he worked on Wall Streetas a trader
and an analystfor over 20 years.
He now researches and writesabout financial markets for air.
Welcome back to the show, Pete.
Great to be back.
Well, so let's get started here.
Before we get into anythingmore, tell us a little bit.
(01:24):
How is it that a bankactually fails in this case?
Because, you know,as depositors, we think of it
as like is a placewe have our money in.
But a bankalso is a business with
some capital being contributed.
So tell us a little bit
what it means for a bank to failas as we begin.
Sure.
(01:44):
So so the failure of a bankcan occur for several reasons.
The main manifestation of bank
failure is when the marketvalue of its assets
fall below the marketvalue of its liabilities.
What that meansis that the bank's ability
to cover the withdrawalof deposits is impaired.
Okay.
(02:05):
And then that's what happenedto the Silicon Valley Bank.
Well, before we get into thesome of the details of that,
the SPV was describedas a regional bank.
And some people point out that,like regional banks, weren't
subject to the same levelof scrutiny in the aftermath
of Dodd-Frankas some of the largest banks.
(02:26):
Now, what is meantby a regional bank
and what's the differencebetween that
and some of the largestnational banks?
So a regional bankis essentially
a bank that specializesin local lending.
The theory goes back to a lesstechnologically advanced
era when lendingwas more of a personal business
and the banker would knowthe local area.
(02:48):
They know the people.
They would probably knowwhat sort of businesses
were likely to succeed,which weren't.
But today,there's a regulatory definition
of the Federal Reserve,which is a bank regulatory
regulator,in addition to the agency,
which plans and executesmonetary policy,
defines a regional bankas one with between ten
and $100 billion in assets.
(03:09):
All right.
So is sort of like the mediumsized banks, although SBB
got up to be, I think, the 16thlargest bank in the country
when it failed so well,we're one thing that happens.
One reason markets get jitterywhen banks are in trouble is
we can have somethingcalled a bank run.
And you you hinted at thisbecause we were saying that
(03:33):
if a bank loses some of themarket value of its assets,
it may not be able to meetall of the depositors
demands or if they should wantto withdraw their money.
So tell us a little bit whatwhat goes on with a bank run
and then how sometimeseven like a sound bank could
fail due to a bank run.
Right.
So a run on a bankis when depositors are suspect
(03:57):
or actually find out that a bankin which their deposits
is either unable or likelyto be unable to make them whole.
In other words,if I have $100 in a bank
and someone tells meI figured out
that the bank's assetsmay be dwindling or even gone,
I'm going to go to the bankin a hurry
and probably try to withdrawmy hundred dollars.
Mm hmm.
The problem here is that owingto fractional reserve banking
(04:19):
banks are rarely liquid enoughto cover the full amount
of their liabilitiesinstantaneously.
So they can'tthey couldn't technically
pay out all their depositsimmediately if there was,
you know, a rush toto demand those those balance.
So, you know,
they may have 50 billionin assets,
40 billion in liabilities,
but say only 10 to 20 billionin liquid in cash.
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So that's why rumors can bereally devastating for banks,
because a rumor
that a bank is in troublecan start a run,
which quickly becomesa self-fulfilling prophecy.
And if any of the viewers of
this show are planningon going to grad school,
I'd recommendlook at the diamond dip bottle,
which sort of illustrates
the way liquid assetsand or illiquid assets and
liquid liabilities can play outwhen it comes to banks.
(05:03):
Yeah.
And, you know, duringthe Great Depression, I mean, a
bank runs where we're causing
led or
we're the primary cause
of almost a quarterof the nation's banks failing
and a complete collapse ofour financial institutions then.
But we did that duringthe Great Depression in 1933.
We introduced deposit insuranceto help counter this.
(05:27):
And so you might think that nowthat we have deposit insurance,
we should face this.
But tell us a little bithow the deposit insurance works,
because we'll have to come backto this later on
because this is all part of thisthis story.
But tell us,first of all, what's involved
with the deposit insuranceand how it normally works.
Right.
(05:47):
So deposit
insurance is essentiallya government program,
although there areprivate programs.
But usually we're talkingabout the
the FDIC, that's the FederalDeposit Insurance Corporation.
And they promise thatif you have a certain balance
in a bankaccount up to a certain level,
you'll be made wholefor that amount.
Often, very quickly,if a bank fails.
Now, if you have as littleas a penny,
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this is theoretically now,of course,
if you have as little as a pennymore than the balance
which is in which your accountbalance is not covered,
you could lose it.
So the current FDIC insurancecoverage limit is $250,000
per depositor, per bank,per ownership category.
So if you had technically, say,$250,001 in such an account,
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you may lose a dollar.
In the case of SBP, though, it'smuch more than that.
But I don't think we want to
get ahead of ourselvesat this point.
That's how deposit insuranceworks here.
Okay, so
now let's try to start to getinto the problems that we had.
That SVP ran into.
It was relatedto interest rates.
And of course,
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the Federal Reserve herewas raising interest rates
starting back in 2022to help control inflation.
But that that ended upcausing problems for our Silicon
Valley bank.
So tell us a little bithow how that panned out.
So the failure of Silicon ValleyBank had to do with
what's called the duration gap,and that's basically
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an asset liability mismatchcaused by interest rates
in banking,
short term liabilities,that's deposit accounts
and CDs and that sort of thing,fund long term assets.
So deposits
are used to make loans
to purchase securitiesand that sort of thing.
The problem is that short termliabilities have variable rates
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and deposits are on demand,so they can leave the bank
in any moment.
And those are fundingthese assets to end to be things
like Treasury bonds, long termaging securities,
all that sort of thing.
So those long term assetstend to pay a fixed rate.
So you've got
sort of liquid shortterm assets with variable rates,
(07:53):
funding long term assetswhich are pretty illiquid
and pay fixed rates.
That'sessentially what happened.
And while this is what well,this event we can get more into
it is what killed SiliconValley Bank.
I would note that right now,you know, months later, U.S.
banks are still sitting onsomething
like $650 billionworth of unrealized losses
(08:14):
because of these mismatches.
So, you know,
it was fatal for a few banks,but there are many
that are still having troublebecause of it.
And so the problem being is
if you've got likeespecially loans that are out
to a fixed interest rateand then that
rate thatyou have to pay on deposits,
because if you're not paying itas one bank,
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somebody can take their moneyand put it somewhere else
to try to get that better rate.
At the very least, it'sgoing to squeeze your profits.
And but in Silicon Valley's
case, it actually led to themhaving some losses
from Treasury bonds.
So it tell us a little bit likehow is it that
that if you're holdingTreasury bonds
at one interest rate
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in an environment of risinginterest rates, you could end up
sufferinglosses on those Treasury bonds?
Sure.
So so the Fed
controls really the first yearor so of the yield curve.
Right.
So as the Fed beganraising rates,
they beganraising rates very aggressively.
And when these rates wererising, they range from, say,
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quarter a half of a percentby 375 basis by moves.
You're already talkingabout the target rate
of interest rates being suddenlyin a few months between
I guess it was two and a quarterand two and a half percent.
Now, originally
SiliconValley Bank was paying out,
let's say half
to three quarters of 1%
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and what it was receiving on itslong end from the agency
and long term Treasury bondswas, let's say
I'm going to guess two,two and a quarter percent,
which is a good business.
You know,
if you're borrowingat a quarter, a half percent
and then you're being paidat another rate,
that sounds, you know,that's a good business.
What happened was overin a short amount of time,
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the short endwhere they had to pay out
to depositors more to keep them,
you know, investin their accounts
and not looking forother forms of return
was higher
than the agency
and treasury rates they'rereceiving on the long end.
So suddenly you're losing money
and you have you know,
you're losing money
in terms of taking in lessthan you're paying out.
But also you have a loss ofdeposits that are going into now
(10:17):
more competitive investmentslike some certain bonds,
maybe into CDs, maybe into otherbanks deposit accounts.
So it's a problem.
That's that'show everything started.
And so then if you had a Treasur
multi-year
duration where itwas going to pay like two or 3%
and interest rates start to riseall of a sudden, like nobody
(10:38):
really sort of wantsto hold a bond that's paying 2%
when interest rates have gone upto five or six or 7%
because there's nota very attractive bond anymore.
Right. Right.
And the other thing is thatthat end of the the yield curve,
those really long dated agencyand U.S.
Treasury securities,is extremely illiquid.
It's one thingto buy those bonds.
(10:59):
It's another thing to sell them.
Usually you only get maybesome Treasury dealers buying
selectively or insurancecompanies out there.
So it's very illiquid.
So if you were to say,
as SiliconValley Bank did at some point
try to sell a coupleof billion dollars
worth of long term treasuries,you're
going to have a lot of marketimpact.
You're going to haveto basically sell
lower in the marketthan you would want to
(11:19):
in order to get somebodyto to buy your holdings.
But I don'tto get ahead of ourselves.
But basically that'swhat happened, is
the bank determinedthat its its liabilities,
the deposits were leaving
at a ratewhich eventually might have
impaired its ability to pay.
So what he decided to dois try to liquidate
some of its treasury holdingsand in so doing
it tooksome pretty heavy losses.
(11:41):
Now, you'veexplained to me before,
so let's see if we get into thisset that other banks didn't
all fail from this this problem.
And there there is somethingtechnically
it's a bit of a technical thing
because I wasn'tcompletely familiar with it
until you were explaining itto me. Right.
But there is somethingcalled an interest rate swap
that could be usedto help protect your
(12:04):
protect your positionon these Treasury bonds.
So you've got a bond
and the interest ratesare going up
and that bond'snot going to be very attractive.
And you're looking at eithertaking a loss on it
or you could do somethingelse, too, prior to have hedged.
Your your position, I guess, isone way to describe it.
So tell us about this.
(12:25):
Sure.
So I should also mention herethat a lot of these bonds
were purchased,these Treasury bonds,
and some of these agencysecurities were purchased
when interest rateswere very low.
So the price and the priceof a bond
and the interest ratemove inversely.
So when interest rateswere very low,
the prices of these bondswere near record highs.
So essentially a lot ofthese banks top took the market.
(12:46):
They paid,
you know,
the highest of the high pricesthat they could have over,
say, a 20 yearperiod for these bonds.
And the minute
that interest rates
started to rise,the price began to fall
and they began to lose onthe principal basis on the face.
But there's a few waysthat banks can can can hedge
against reverse interestrate moves.
One way is to just tryto diversify
as much as possible, to try tobuy bonds of varying maturities
(13:09):
such that they have exposurein the 1 to 5 year, 5 to 7, year
9 to 11 and then so on.
So they're pretty muchequally rated
based upon what they think.
You know,there's a there's an element of
of forecasting and speculationhere based upon what they think
the future of monetary policyand interest rates is.
But that's difficultfor a regional bank,
although what
what what banksand other firms can do is
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they can swap out their interest
rate exposureusing an interest rate swap,
which means for a fee,
a firm like Silicon
Valley Bank
would would go toan investment bank
and some sort offinancial institution,
and they would basically payto receive a variable rate
and swapand swap out their fixed rate.
So somewhere out there
there's a firmthat has variable rates
that would liketo have fixed rates.
(13:50):
And so what an investmentbank would do
is findthe other side of that trade
and basically say,okay, Silicon Valley Bank,
we've set this up.
So as you receivedfixed payments,
those are going to go somewhereelse.
And as this bank
or this otherfinancial institution
you may not even know
receives variable payments,those will get paid to you.
And what that meansis that you're going to have
a flow of income.
Your end,
(14:10):
your interest is going to floatwith interest rates
instead of being stuckat a level where you are,
where you're, you know,
constantly falling shortof where inflation actually is.
So yeah, so yeah, risinginterest rates
would cause a problem.
But again, it is oftenthere is in financial markets
there is some way to to sort of
protect your positionand not take as big
(14:32):
a lossas you would have otherwise.
I mean, you
would have to pay some moneyto get one of those swaps, but.
Right.
You wouldn't loseas much as you would
if you werein a unprotected position.
Yeah.
At the time.
So the thing is,
with a lot of these hedgesand things,
you want to have them onbefore you're in trouble.
If you go to an investment bankand to another, you know,
(14:53):
large financial institution,you try to put these on
when there's a lot of volatility
and when there's a lot of stressin the market,
you're going to paya higher amount.
Now, of course,I would rather pay
a higher amount to go,you know, that become insolvent,
But it would have been costlyto put on an interest rate
swap in March or April of 2022,but it probably
would have saved the bank.
Who can say
there's another thingthat a bank could do,
(15:13):
and that's calledimmunizing the book.
And all that means is
is enteringinto a series of trades
which shiftthe weighted average maturity
of the of the bond holdings.
So if SCB,
which was really heavy in long
term bonds,
had undertakena series of trades
whichalso might have been costly,
they could have swapped out.
I shouldn't usethe word swap in this context.
They could have traded away
(15:34):
some of their, say, 20to 30 year exposure in exchange
for, say, 10 to 20 year10 to 15 year exposure,
and that wouldhave reduced their exposure
even.
That's questionable, though,because, again, markets
have become very illiquidand there's a lot of volatility.
But still,
these are things that they couldhave done and hopefully or not
even hopefully.
But I expect some banksactually did this at the time
(15:56):
and that's whywe had a limited number of true,
you know, failures and and banksin distress at that time.
Yeah.
And you were mentioning that,you know,
although these are thingsI wasn't familiar with,
if you're in the industry,if you're in finance,
you know what these things are.
And there's some level of sortof like
malfeasanceon the part of the people
(16:17):
running Silicon Valley bankthat they didn't
they didn't take someof these steps.
Yeah. I mean,
there's a lot I can say about
malfeasancemight be a little strong, but
it wasn't like this,that this is
somethingnobody else would know about.
Yeah.
So, I mean, there's a few issueswe can talk about.
(16:38):
Distractions from the businessof running a bank later,
if you'd like.
Another thing is that
without becoming too condemning,I would say that, you know,
a lot of people rise to the topin financial institutions,
maybe not by being the bestat what they do,
but by sort ofoutshining their opponents.
So I don't knowif this is the case
(16:58):
with Silicon Valley Bank,but I certainly saw
in the financial markets
in my timethere that a lot of times
the people who are runningbanks are running trading desks.
We're not necessarilythe best traders,
but maybe they werethe most politically adept
or maybe they were justthe ones who had,
you know, avoided controversyeven when there was a good
you know,
you know, when there's somethingto be controversial about or,
you know, raisean unpopular opinion, too.
So there's a lot of reasons whythey might not have had these
(17:20):
these swaps on.
And actually, another thing,Dan, if you don't mind,
we have to remember thatwe haven't had
inflation like this since that'syou and I were kids.
So, you know,this is a lot of knowledge
in financeand economics is cyclical
and it's not cumulative.
So many of these people,even if they entered
the business in, say, 1985,
they were never aroundthis type of inflation
(17:41):
and this type of interestrate volatility.
So one could understand howthis might not have been right.
You know, at the front of theirbook of strategy,
as things began to getmessy in the spring of 2022.
So we mentioned
deposit insurance.
And yeah, so Silicon ValleyBank was taking some losses.
(18:02):
I know.
And normallythat wouldn't necessarily
cause all the depositors to run
and get their money out
of the bank because if you know,you've got deposit insurance,
you're going to be protected onthat. You wouldn't have to.
But that wasn't the casewith most of the Silicon
Valley Bank customers.
I mean, they wereyou mentioned this $250,000
(18:23):
limit for deposit insurance.
They were well and many of themwere well over that, right?
Yeah.
I think the average accountbalance
was something like $5 Million.
And what that meansis that for the entire bank,
about 95% of the actual depositswere statutorily uncovered.
Yeah, they were.
They, those those dollars,it should have been lost,
but they weren't.
(18:43):
The FDIC decided to step in
and not only make their fundsavailable
because sometimes these bank
resolutionstake months and years to do,
but also to make the full amount
of their of their depositsavailable to them.
So it was a good timeto be a Silicon Valley bank.
Sure. Of that
depositor at that time.
Yeah, because, you know,
(19:03):
because, you know, we want toget into this question,
was this a bailout?
And I mean, certainly youyou have to be careful here
because,
yes, there was a change madethat helped some people out.
But as the depositors
and not the owners of the bankyou were mentioning before,
the owners of the bankwere have been wiped out.
(19:26):
Yeah. So
the price per share of SiliconValley Bank
was something like $250at the start of 2023
by February,and it reached $333.
And this morning,in anticipation of this
of this interview, I took a lookin currently Silicon Valley,
Silicon Valley Bankstock is trading at $0.09
(19:47):
per share,
and it's actually
I mean, that's just a start
because the firmwas actually taken over,
I should say taken under by Jpmorgan.
So, yeah, equity shareholderswere essentially wiped out.
So there's no moral hazardin that respect.
Now, we could argue thatperhaps there's
an element of moral hazardfelt or experienced by the
by the depositors who were nottaught a pretty harsh
(20:09):
lesson about the limitsof federal deposit insurance.
But yeah, I mean, that'sthat's a different issue.
Any moral hazardto out to shareholders
is absolutely marginalif if any at all.
And in 2008,the bailout came in and helped
a lot of the owners of at riskfinancial institutions.
(20:30):
So this was a very differentthing.
How you want to use the termbailout.
You know, I guessyou can always debate that.
But this wasn't a bailoutof the owners of the bank.
They lostand I think they had about
20,000,000,000billion with a B in
capitalinvested and in Silicon Valley
Bank, like you said, thatbasically was completely they
(20:52):
they lost all of that moneyand it's 99.9% wiped out.
Yeah.
And so you mentioned the termmoral hazard.
So if you can explain to us
what moral hazard means withregard to our banking system
and then we'll talk about
whether this worsenedmoral hazard.
Sure.
So so the basic definitionof moral hazard is it's a
(21:16):
it's a set of circumstances
where individuals
have the opportunityto take an action
and they choose to do sobecause the consequences
are likely to fall uponanother party.
So, for example,
if the decision makersat a financial institution know
that there are
that they are workingat a systemically important
and thus likely to be rescuedinstitution,
(21:37):
if they suffer severe lossesto become insolvent,
You know,there's a game theoretic
that comes into play of hedgeI when tells you lose
there's no reasonnot to swing for the fences
and incur what would otherwisebe catastrophic losses
if someone else is going to footthe bill
and or cover those losses.
So that's essentiallyhow moral hazard manifests.
And certainly, you know,
(21:58):
in the aftermath of the bailoutsof to 2008, people have
and the fact that many banks
were declared to be too bigto fail, that that has led
to a lot of a moral hazardgoing forward.
And that would bereally problematic
because now they actually knowfor sure they could take
(22:18):
very risky investments.
And one of the things is,okay, if
if if it pays off,you get the money.
And if if the risky investmentdoesn't pay out,
you have losses,you would be bankrupt.
But you know,you're going to get bailed out
by the government.
That's really not a gamethat we want
our banks to be playingbecause we'll lose as taxpayers.
(22:38):
And it'salso bad for our economy.
Yeah, I mean, there's that.
And also it's just this ideathat it quashes the, you know,
sort of the incentiveto innovate,
you know, for who's who's who,
who wants to start a bankor a large financial firm.
You know, when when it's knownthat there are a number
that sort ofhave the have the Fed or the
(22:59):
or or the Departmentof the Treasury on speed dial.
Right.
I mean, sothere's less incentive for that.
There's also just it'salso just it's bad for it's
bad for the economyin terms of systemic risk.
There's a laundrylist of problems that come from
moral hazard and and
you get you tend to get betteroutcomes for the for the country
(23:19):
and for the economy if there'smore skin in the game.
That's somethingthat's been written about a lot
is making surethe decision makers
are on thehook for their own decisions.
And sothen let's get into, you know,
at the time, a few months agowhen this was happening,
there was a number of concerns,a number of commentators
raising concernsthat this would make
(23:41):
we just worse.
This bail out of the depositors
would make the moral hazardproblem worse. But,
you know,I guess my feeling on that
at the time it is not changedis that this is
not a huge changein terms of the moral hazard.
Do you wish we had $20 billion?
We had the owners of that banklose $20 billion.
(24:02):
I assume they didn'twant to lose that money.
I assume that they weremotivated to monitor exactly
what the people running the bankwere doing with their money
and not to not go out thereand lose their money for them.
And but, you know,
so the only effectwhere you could say,
well, you know, perhaps theselarge depositors could have been
(24:22):
riding herdon the people running the bank.
And and
but you really would have to tryto say
that you neededboth the large depositors
and the owners of the bankto to try to control the
the peoplemaking decisions for the bank.
And I knowit might work out that way,
but it seems to methat's rather a kind of a
very marginal increasein moral hazard.
(24:43):
Yeah,I generally agree with that.
Yeah, I think if there wasa concern, it's that the
the deposits of that bankwere really heavily dominated.
It was a very narrow to
a depositor base,which means it was very limited
in terms of its diversification.
You had mostly tech firmsand also some of the northern
Marin County,California winemakers
(25:05):
and that sort of thing.
So I think the concern was
if a huge number, you know,thousands of small tech
firms were suddenly unableto reach their
their their cash, were only ableto access their bank accounts
that could send the economyof California into a tailspin.
And then the U.S.
So it's not systemicrisk in the same sense
that, say, Lehman Brothersor AIG financial products
(25:26):
might have been.
But it's systemicrisk in another way. Still,
you know, the bank was a rescue,but the shareholder,
the the depositors, rather,
were savedfrom the error of their ways.
So, you know, I guess
we'll have to see over timeif there are any,
you know, long termimplications of that.
Mm Yeah.
And it does seem like Silicon
Valley Bankhad this very unusual.
(25:48):
They were very biginto venture capital
and like you said,
they had these tech firmsthat were and again,
you know, simply if there were,
if those firms money had beentied up for a year or so,
you know,
they might eventually they mighthave eventually gotten all
or most of their money back byjust having a tied up for a year
could mean that theythey can't make payroll.
(26:09):
They can't do
do the other things they need todo to run their businesses.
Yeah.
I mean, at that time, there wasa lot of uncertainty, right?
Nobody knewexactly how far and wide,
you know, these bank issuesmight go,
whether, you know,what the state of the economy
was going to beseveral weeks later.
So I understand I understand whywhat the incentives were
for the governmentto make those decisions.
(26:29):
I may not agree with them,but I understand, you know,
they were facinga lot of uncertainty themselves.
Well,
the Silicon Valley Bankwas very prominent
and was a very prominent
spokespersonfor what's called ESG investing.
And yeah, for a bank,
they were quite vocalabout what they were doing. S.G.
Tell us very briefly, you know,what is your ESG
(26:50):
and could that havehad any impact on this value?
Yeah.
So ESG is essentially a
frameworkfor running institutions
like firms and all that
that stands for environmental,social and governance.
And it espousesa whole series of
of ways that some people thinkbusinesses should be run
(27:12):
in terms of their consciousnessof the environment
and all that.
And I was actually snoopingaround the SBB website
earlier this year,and they had page after page
about be SVP of ESGinformation on the bank,
which I thoughtwas kind of strange
because it's a bank,you know, banks are really
aren't really knownfor their carbon footprint.
There's not a a coal plantor something like that.
(27:32):
So I would argue that timeand human resources
are human capitalbeing resources.
Even if a
small portion of the effortthat went into those extensive
ESG reporting and observanceefforts
were directed at mitigation,
that duration gapand the interest rate problems,
yeah, the firmmight have been around today.
I think
even a small single interestrate swap might have helped,
(27:55):
you know, a lot of them mitigate
a lot of the issuesthat eventually felled them.
And it probably wouldn'thave taken much away
from their ESGintensive efforts.
Well, and that's,you know, like you say,
not only is time and effort
limited,the time you spend on one thing,
you can't spend onsomething else.
We also have the question of
if you have people who thinkthat the main
point of running a bankis to make society
(28:15):
better through ESG investing,
they might not think thatlike the details of like
covering your interest rateposition is very important.
Well well thanks forthat's probably more it's
probably more funto write about.
Oh, sorry.
I think it's more fun to writeabout carbon footprints
than to write about creditinterest rate swaps.
Could be.
Well, thanks so much for comingon to talk about this with us.
(28:37):
And thank youall for joining us.
Join us again next timefor another E Conversations.
This has been e conversations,a joint production
of Joy, Torture Divisionand the Manuel H.
Johnson Center for PoliticalEconomy at Troy University.
the opinions expressed on
this programrepresent the viewpoints
of individual authorsor contributors,
and do not necessarily reflectthose of Troy University.
This is E Conversations,
a joint production of TroyTrojan Vision and Emmanuel H.
Johnson Centerfor Political Economy.
(00:20):
Now here's your host, Dr.
Dan Sutter.
Hello and welcome to E!
Conversations.I'm your host, Dr.
Dan Sutter of the Johnson Center
for Political Economy at TroyUniversity.
Banks occasionallyfail in the United States,
but the failure of SiliconValley Bank in March
2023 created a wave of concernin financial markets.
(00:41):
What went wrong at SVB anddid the bank receive a bailout?
What are the costs when banksor depositors get bailed out?
And why do investorsand financial markets
get so rattledwhen banks are in trouble?
Joining me in conversationtoday to discuss this is Mr.
Peter Earle of the AmericanInstitute for Economic Research.
Peter holds a bachelor'sin engineering from West
(01:04):
Point and master's degreesin economics and finance.
And he worked on Wall Streetas a trader
and an analystfor over 20 years.
He now researches and writesabout financial markets for air.
Welcome back to the show, Pete.
Great to be back.
Well, so let's get started here.
Before we get into anythingmore, tell us a little bit.
(01:24):
How is it that a bankactually fails in this case?
Because, you know,as depositors, we think of it
as like is a placewe have our money in.
But a bankalso is a business with
some capital being contributed.
So tell us a little bit
what it means for a bank to failas as we begin.
Sure.
(01:44):
So so the failure of a bankcan occur for several reasons.
The main manifestation of bank
failure is when the marketvalue of its assets
fall below the marketvalue of its liabilities.
What that meansis that the bank's ability
to cover the withdrawalof deposits is impaired.
Okay.
(02:05):
And then that's what happenedto the Silicon Valley Bank.
Well, before we get into thesome of the details of that,
the SPV was describedas a regional bank.
And some people point out that,like regional banks, weren't
subject to the same levelof scrutiny in the aftermath
of Dodd-Frankas some of the largest banks.
(02:26):
Now, what is meantby a regional bank
and what's the differencebetween that
and some of the largestnational banks?
So a regional bankis essentially
a bank that specializesin local lending.
The theory goes back to a lesstechnologically advanced
era when lendingwas more of a personal business
and the banker would knowthe local area.
(02:48):
They know the people.
They would probably knowwhat sort of businesses
were likely to succeed,which weren't.
But today,there's a regulatory definition
of the Federal Reserve,which is a bank regulatory
regulator,in addition to the agency,
which plans and executesmonetary policy,
defines a regional bankas one with between ten
and $100 billion in assets.
(03:09):
All right.
So is sort of like the mediumsized banks, although SBB
got up to be, I think, the 16thlargest bank in the country
when it failed so well,we're one thing that happens.
One reason markets get jitterywhen banks are in trouble is
we can have somethingcalled a bank run.
And you you hinted at thisbecause we were saying that
(03:33):
if a bank loses some of themarket value of its assets,
it may not be able to meetall of the depositors
demands or if they should wantto withdraw their money.
So tell us a little bit whatwhat goes on with a bank run
and then how sometimeseven like a sound bank could
fail due to a bank run.
Right.
So a run on a bankis when depositors are suspect
(03:57):
or actually find out that a bankin which their deposits
is either unable or likelyto be unable to make them whole.
In other words,if I have $100 in a bank
and someone tells meI figured out
that the bank's assetsmay be dwindling or even gone,
I'm going to go to the bankin a hurry
and probably try to withdrawmy hundred dollars.
Mm hmm.
The problem here is that owingto fractional reserve banking
(04:19):
banks are rarely liquid enoughto cover the full amount
of their liabilitiesinstantaneously.
So they can'tthey couldn't technically
pay out all their depositsimmediately if there was,
you know, a rush toto demand those those balance.
So, you know,
they may have 50 billionin assets,
40 billion in liabilities,
but say only 10 to 20 billionin liquid in cash.
(04:40):
So that's why rumors can bereally devastating for banks,
because a rumor
that a bank is in troublecan start a run,
which quickly becomesa self-fulfilling prophecy.
And if any of the viewers of
this show are planningon going to grad school,
I'd recommendlook at the diamond dip bottle,
which sort of illustrates
the way liquid assetsand or illiquid assets and
liquid liabilities can play outwhen it comes to banks.
(05:03):
Yeah.
And, you know, duringthe Great Depression, I mean, a
bank runs where we're causing
led or
we're the primary cause
of almost a quarterof the nation's banks failing
and a complete collapse ofour financial institutions then.
But we did that duringthe Great Depression in 1933.
We introduced deposit insuranceto help counter this.
(05:27):
And so you might think that nowthat we have deposit insurance,
we should face this.
But tell us a little bithow the deposit insurance works,
because we'll have to come backto this later on
because this is all part of thisthis story.
But tell us,first of all, what's involved
with the deposit insuranceand how it normally works.
Right.
(05:47):
So deposit
insurance is essentiallya government program,
although there areprivate programs.
But usually we're talkingabout the
the FDIC, that's the FederalDeposit Insurance Corporation.
And they promise thatif you have a certain balance
in a bankaccount up to a certain level,
you'll be made wholefor that amount.
Often, very quickly,if a bank fails.
Now, if you have as littleas a penny,
(06:07):
this is theoretically now,of course,
if you have as little as a pennymore than the balance
which is in which your accountbalance is not covered,
you could lose it.
So the current FDIC insurancecoverage limit is $250,000
per depositor, per bank,per ownership category.
So if you had technically, say,$250,001 in such an account,
(06:29):
you may lose a dollar.
In the case of SBP, though, it'smuch more than that.
But I don't think we want to
get ahead of ourselvesat this point.
That's how deposit insuranceworks here.
Okay, so
now let's try to start to getinto the problems that we had.
That SVP ran into.
It was relatedto interest rates.
And of course,
(06:49):
the Federal Reserve herewas raising interest rates
starting back in 2022to help control inflation.
But that that ended upcausing problems for our Silicon
Valley bank.
So tell us a little bithow how that panned out.
So the failure of Silicon ValleyBank had to do with
what's called the duration gap,and that's basically
(07:11):
an asset liability mismatchcaused by interest rates
in banking,
short term liabilities,that's deposit accounts
and CDs and that sort of thing,fund long term assets.
So deposits
are used to make loans
to purchase securitiesand that sort of thing.
The problem is that short termliabilities have variable rates
(07:32):
and deposits are on demand,so they can leave the bank
in any moment.
And those are fundingthese assets to end to be things
like Treasury bonds, long termaging securities,
all that sort of thing.
So those long term assetstend to pay a fixed rate.
So you've got
sort of liquid shortterm assets with variable rates,
(07:53):
funding long term assetswhich are pretty illiquid
and pay fixed rates.
That'sessentially what happened.
And while this is what well,this event we can get more into
it is what killed SiliconValley Bank.
I would note that right now,you know, months later, U.S.
banks are still sitting onsomething
like $650 billionworth of unrealized losses
(08:14):
because of these mismatches.
So, you know,
it was fatal for a few banks,but there are many
that are still having troublebecause of it.
And so the problem being is
if you've got likeespecially loans that are out
to a fixed interest rateand then that
rate thatyou have to pay on deposits,
because if you're not paying itas one bank,
(08:34):
somebody can take their moneyand put it somewhere else
to try to get that better rate.
At the very least, it'sgoing to squeeze your profits.
And but in Silicon Valley's
case, it actually led to themhaving some losses
from Treasury bonds.
So it tell us a little bit likehow is it that
that if you're holdingTreasury bonds
at one interest rate
(08:55):
in an environment of risinginterest rates, you could end up
sufferinglosses on those Treasury bonds?
Sure.
So so the Fed
controls really the first yearor so of the yield curve.
Right.
So as the Fed beganraising rates,
they beganraising rates very aggressively.
And when these rates wererising, they range from, say,
(09:15):
quarter a half of a percentby 375 basis by moves.
You're already talkingabout the target rate
of interest rates being suddenlyin a few months between
I guess it was two and a quarterand two and a half percent.
Now, originally
SiliconValley Bank was paying out,
let's say half
to three quarters of 1%
(09:35):
and what it was receiving on itslong end from the agency
and long term Treasury bondswas, let's say
I'm going to guess two,two and a quarter percent,
which is a good business.
You know,
if you're borrowingat a quarter, a half percent
and then you're being paidat another rate,
that sounds, you know,that's a good business.
What happened was overin a short amount of time,
(09:56):
the short endwhere they had to pay out
to depositors more to keep them,
you know, investin their accounts
and not looking forother forms of return
was higher
than the agency
and treasury rates they'rereceiving on the long end.
So suddenly you're losing money
and you have you know,
you're losing money
in terms of taking in lessthan you're paying out.
But also you have a loss ofdeposits that are going into now
(10:17):
more competitive investmentslike some certain bonds,
maybe into CDs, maybe into otherbanks deposit accounts.
So it's a problem.
That's that'show everything started.
And so then if you had a Treasur
multi-year
duration where itwas going to pay like two or 3%
and interest rates start to riseall of a sudden, like nobody
(10:38):
really sort of wantsto hold a bond that's paying 2%
when interest rates have gone upto five or six or 7%
because there's nota very attractive bond anymore.
Right. Right.
And the other thing is thatthat end of the the yield curve,
those really long dated agencyand U.S.
Treasury securities,is extremely illiquid.
It's one thingto buy those bonds.
(10:59):
It's another thing to sell them.
Usually you only get maybesome Treasury dealers buying
selectively or insurancecompanies out there.
So it's very illiquid.
So if you were to say,
as SiliconValley Bank did at some point
try to sell a coupleof billion dollars
worth of long term treasuries,you're
going to have a lot of marketimpact.
You're going to haveto basically sell
lower in the marketthan you would want to
(11:19):
in order to get somebodyto to buy your holdings.
But I don'tto get ahead of ourselves.
But basically that'swhat happened, is
the bank determinedthat its its liabilities,
the deposits were leaving
at a ratewhich eventually might have
impaired its ability to pay.
So what he decided to dois try to liquidate
some of its treasury holdingsand in so doing
it tooksome pretty heavy losses.
(11:41):
Now, you'veexplained to me before,
so let's see if we get into thisset that other banks didn't
all fail from this this problem.
And there there is somethingtechnically
it's a bit of a technical thing
because I wasn'tcompletely familiar with it
until you were explaining itto me. Right.
But there is somethingcalled an interest rate swap
that could be usedto help protect your
(12:04):
protect your positionon these Treasury bonds.
So you've got a bond
and the interest ratesare going up
and that bond'snot going to be very attractive.
And you're looking at eithertaking a loss on it
or you could do somethingelse, too, prior to have hedged.
Your your position, I guess, isone way to describe it.
So tell us about this.
(12:25):
Sure.
So I should also mention herethat a lot of these bonds
were purchased,these Treasury bonds,
and some of these agencysecurities were purchased
when interest rateswere very low.
So the price and the priceof a bond
and the interest ratemove inversely.
So when interest rateswere very low,
the prices of these bondswere near record highs.
So essentially a lot ofthese banks top took the market.
(12:46):
They paid,
you know,
the highest of the high pricesthat they could have over,
say, a 20 yearperiod for these bonds.
And the minute
that interest rates
started to rise,the price began to fall
and they began to lose onthe principal basis on the face.
But there's a few waysthat banks can can can hedge
against reverse interestrate moves.
One way is to just tryto diversify
as much as possible, to try tobuy bonds of varying maturities
(13:09):
such that they have exposurein the 1 to 5 year, 5 to 7, year
9 to 11 and then so on.
So they're pretty muchequally rated
based upon what they think.
You know,there's a there's an element of
of forecasting and speculationhere based upon what they think
the future of monetary policyand interest rates is.
But that's difficultfor a regional bank,
although what
what what banksand other firms can do is
(13:29):
they can swap out their interest
rate exposureusing an interest rate swap,
which means for a fee,
a firm like Silicon
Valley Bank
would would go toan investment bank
and some sort offinancial institution,
and they would basically payto receive a variable rate
and swapand swap out their fixed rate.
So somewhere out there
there's a firmthat has variable rates
that would liketo have fixed rates.
(13:50):
And so what an investmentbank would do
is findthe other side of that trade
and basically say,okay, Silicon Valley Bank,
we've set this up.
So as you receivedfixed payments,
those are going to go somewhereelse.
And as this bank
or this otherfinancial institution
you may not even know
receives variable payments,those will get paid to you.
And what that meansis that you're going to have
a flow of income.
Your end,
(14:10):
your interest is going to floatwith interest rates
instead of being stuckat a level where you are,
where you're, you know,
constantly falling shortof where inflation actually is.
So yeah, so yeah, risinginterest rates
would cause a problem.
But again, it is oftenthere is in financial markets
there is some way to to sort of
protect your positionand not take as big
(14:32):
a lossas you would have otherwise.
I mean, you
would have to pay some moneyto get one of those swaps, but.
Right.
You wouldn't loseas much as you would
if you werein a unprotected position.
Yeah.
At the time.
So the thing is,
with a lot of these hedgesand things,
you want to have them onbefore you're in trouble.
If you go to an investment bankand to another, you know,
(14:53):
large financial institution,you try to put these on
when there's a lot of volatility
and when there's a lot of stressin the market,
you're going to paya higher amount.
Now, of course,I would rather pay
a higher amount to go,you know, that become insolvent,
But it would have been costlyto put on an interest rate
swap in March or April of 2022,but it probably
would have saved the bank.
Who can say
there's another thingthat a bank could do,
(15:13):
and that's calledimmunizing the book.
And all that means is
is enteringinto a series of trades
which shiftthe weighted average maturity
of the of the bond holdings.
So if SCB,
which was really heavy in long
term bonds,
had undertakena series of trades
whichalso might have been costly,
they could have swapped out.
I shouldn't usethe word swap in this context.
They could have traded away
(15:34):
some of their, say, 20to 30 year exposure in exchange
for, say, 10 to 20 year10 to 15 year exposure,
and that wouldhave reduced their exposure
even.
That's questionable, though,because, again, markets
have become very illiquidand there's a lot of volatility.
But still,
these are things that they couldhave done and hopefully or not
even hopefully.
But I expect some banksactually did this at the time
(15:56):
and that's whywe had a limited number of true,
you know, failures and and banksin distress at that time.
Yeah.
And you were mentioning that,you know,
although these are thingsI wasn't familiar with,
if you're in the industry,if you're in finance,
you know what these things are.
And there's some level of sortof like
malfeasanceon the part of the people
(16:17):
running Silicon Valley bankthat they didn't
they didn't take someof these steps.
Yeah. I mean,
there's a lot I can say about
malfeasancemight be a little strong, but
it wasn't like this,that this is
somethingnobody else would know about.
Yeah.
So, I mean, there's a few issueswe can talk about.
(16:38):
Distractions from the businessof running a bank later,
if you'd like.
Another thing is that
without becoming too condemning,I would say that, you know,
a lot of people rise to the topin financial institutions,
maybe not by being the bestat what they do,
but by sort ofoutshining their opponents.
So I don't knowif this is the case
(16:58):
with Silicon Valley Bank,but I certainly saw
in the financial markets
in my timethere that a lot of times
the people who are runningbanks are running trading desks.
We're not necessarilythe best traders,
but maybe they werethe most politically adept
or maybe they were justthe ones who had,
you know, avoided controversyeven when there was a good
you know,
you know, when there's somethingto be controversial about or,
you know, raisean unpopular opinion, too.
So there's a lot of reasons whythey might not have had these
(17:20):
these swaps on.
And actually, another thing,Dan, if you don't mind,
we have to remember thatwe haven't had
inflation like this since that'syou and I were kids.
So, you know,this is a lot of knowledge
in financeand economics is cyclical
and it's not cumulative.
So many of these people,even if they entered
the business in, say, 1985,
they were never aroundthis type of inflation
(17:41):
and this type of interestrate volatility.
So one could understand howthis might not have been right.
You know, at the front of theirbook of strategy,
as things began to getmessy in the spring of 2022.
So we mentioned
deposit insurance.
And yeah, so Silicon ValleyBank was taking some losses.
(18:02):
I know.
And normallythat wouldn't necessarily
cause all the depositors to run
and get their money out
of the bank because if you know,you've got deposit insurance,
you're going to be protected onthat. You wouldn't have to.
But that wasn't the casewith most of the Silicon
Valley Bank customers.
I mean, they wereyou mentioned this $250,000
(18:23):
limit for deposit insurance.
They were well and many of themwere well over that, right?
Yeah.
I think the average accountbalance
was something like $5 Million.
And what that meansis that for the entire bank,
about 95% of the actual depositswere statutorily uncovered.
Yeah, they were.
They, those those dollars,it should have been lost,
but they weren't.
(18:43):
The FDIC decided to step in
and not only make their fundsavailable
because sometimes these bank
resolutionstake months and years to do,
but also to make the full amount
of their of their depositsavailable to them.
So it was a good timeto be a Silicon Valley bank.
Sure. Of that
depositor at that time.
Yeah, because, you know,
(19:03):
because, you know, we want toget into this question,
was this a bailout?
And I mean, certainly youyou have to be careful here
because,
yes, there was a change madethat helped some people out.
But as the depositors
and not the owners of the bankyou were mentioning before,
the owners of the bankwere have been wiped out.
(19:26):
Yeah. So
the price per share of SiliconValley Bank
was something like $250at the start of 2023
by February,and it reached $333.
And this morning,in anticipation of this
of this interview, I took a lookin currently Silicon Valley,
Silicon Valley Bankstock is trading at $0.09
(19:47):
per share,
and it's actually
I mean, that's just a start
because the firmwas actually taken over,
I should say taken under by Jpmorgan.
So, yeah, equity shareholderswere essentially wiped out.
So there's no moral hazardin that respect.
Now, we could argue thatperhaps there's
an element of moral hazardfelt or experienced by the
by the depositors who were nottaught a pretty harsh
(20:09):
lesson about the limitsof federal deposit insurance.
But yeah, I mean, that'sthat's a different issue.
Any moral hazardto out to shareholders
is absolutely marginalif if any at all.
And in 2008,the bailout came in and helped
a lot of the owners of at riskfinancial institutions.
(20:30):
So this was a very differentthing.
How you want to use the termbailout.
You know, I guessyou can always debate that.
But this wasn't a bailoutof the owners of the bank.
They lostand I think they had about
20,000,000,000billion with a B in
capitalinvested and in Silicon Valley
Bank, like you said, thatbasically was completely they
(20:52):
they lost all of that moneyand it's 99.9% wiped out.
Yeah.
And so you mentioned the termmoral hazard.
So if you can explain to us
what moral hazard means withregard to our banking system
and then we'll talk about
whether this worsenedmoral hazard.
Sure.
So so the basic definitionof moral hazard is it's a
(21:16):
it's a set of circumstances
where individuals
have the opportunityto take an action
and they choose to do sobecause the consequences
are likely to fall uponanother party.
So, for example,
if the decision makersat a financial institution know
that there are
that they are workingat a systemically important
and thus likely to be rescuedinstitution,
(21:37):
if they suffer severe lossesto become insolvent,
You know,there's a game theoretic
that comes into play of hedgeI when tells you lose
there's no reasonnot to swing for the fences
and incur what would otherwisebe catastrophic losses
if someone else is going to footthe bill
and or cover those losses.
So that's essentiallyhow moral hazard manifests.
And certainly, you know,
(21:58):
in the aftermath of the bailoutsof to 2008, people have
and the fact that many banks
were declared to be too bigto fail, that that has led
to a lot of a moral hazardgoing forward.
And that would bereally problematic
because now they actually knowfor sure they could take
(22:18):
very risky investments.
And one of the things is,okay, if
if if it pays off,you get the money.
And if if the risky investmentdoesn't pay out,
you have losses,you would be bankrupt.
But you know,you're going to get bailed out
by the government.
That's really not a gamethat we want
our banks to be playingbecause we'll lose as taxpayers.
(22:38):
And it'salso bad for our economy.
Yeah, I mean, there's that.
And also it's just this ideathat it quashes the, you know,
sort of the incentiveto innovate,
you know, for who's who's who,
who wants to start a bankor a large financial firm.
You know, when when it's knownthat there are a number
that sort ofhave the have the Fed or the
(22:59):
or or the Departmentof the Treasury on speed dial.
Right.
I mean, sothere's less incentive for that.
There's also just it'salso just it's bad for it's
bad for the economyin terms of systemic risk.
There's a laundrylist of problems that come from
moral hazard and and
you get you tend to get betteroutcomes for the for the country
(23:19):
and for the economy if there'smore skin in the game.
That's somethingthat's been written about a lot
is making surethe decision makers
are on thehook for their own decisions.
And sothen let's get into, you know,
at the time, a few months agowhen this was happening,
there was a number of concerns,a number of commentators
raising concernsthat this would make
(23:41):
we just worse.
This bail out of the depositors
would make the moral hazardproblem worse. But,
you know,I guess my feeling on that
at the time it is not changedis that this is
not a huge changein terms of the moral hazard.
Do you wish we had $20 billion?
We had the owners of that banklose $20 billion.
(24:02):
I assume they didn'twant to lose that money.
I assume that they weremotivated to monitor exactly
what the people running the bankwere doing with their money
and not to not go out thereand lose their money for them.
And but, you know,
so the only effectwhere you could say,
well, you know, perhaps theselarge depositors could have been
(24:22):
riding herdon the people running the bank.
And and
but you really would have to tryto say
that you neededboth the large depositors
and the owners of the bankto to try to control the
the peoplemaking decisions for the bank.
And I knowit might work out that way,
but it seems to methat's rather a kind of a
very marginal increasein moral hazard.
(24:43):
Yeah,I generally agree with that.
Yeah, I think if there wasa concern, it's that the
the deposits of that bankwere really heavily dominated.
It was a very narrow to
a depositor base,which means it was very limited
in terms of its diversification.
You had mostly tech firmsand also some of the northern
Marin County,California winemakers
(25:05):
and that sort of thing.
So I think the concern was
if a huge number, you know,thousands of small tech
firms were suddenly unableto reach their
their their cash, were only ableto access their bank accounts
that could send the economyof California into a tailspin.
And then the U.S.
So it's not systemicrisk in the same sense
that, say, Lehman Brothersor AIG financial products
(25:26):
might have been.
But it's systemicrisk in another way. Still,
you know, the bank was a rescue,but the shareholder,
the the depositors, rather,
were savedfrom the error of their ways.
So, you know, I guess
we'll have to see over timeif there are any,
you know, long termimplications of that.
Mm Yeah.
And it does seem like Silicon
Valley Bankhad this very unusual.
(25:48):
They were very biginto venture capital
and like you said,
they had these tech firmsthat were and again,
you know, simply if there were,
if those firms money had beentied up for a year or so,
you know,
they might eventually they mighthave eventually gotten all
or most of their money back byjust having a tied up for a year
could mean that theythey can't make payroll.
(26:09):
They can't do
do the other things they need todo to run their businesses.
Yeah.
I mean, at that time, there wasa lot of uncertainty, right?
Nobody knewexactly how far and wide,
you know, these bank issuesmight go,
whether, you know,what the state of the economy
was going to beseveral weeks later.
So I understand I understand whywhat the incentives were
for the governmentto make those decisions.
(26:29):
I may not agree with them,but I understand, you know,
they were facinga lot of uncertainty themselves.
Well,
the Silicon Valley Bankwas very prominent
and was a very prominent
spokespersonfor what's called ESG investing.
And yeah, for a bank,
they were quite vocalabout what they were doing. S.G.
Tell us very briefly, you know,what is your ESG
(26:50):
and could that havehad any impact on this value?
Yeah.
So ESG is essentially a
frameworkfor running institutions
like firms and all that
that stands for environmental,social and governance.
And it espousesa whole series of
of ways that some people thinkbusinesses should be run
(27:12):
in terms of their consciousnessof the environment
and all that.
And I was actually snoopingaround the SBB website
earlier this year,and they had page after page
about be SVP of ESGinformation on the bank,
which I thoughtwas kind of strange
because it's a bank,you know, banks are really
aren't really knownfor their carbon footprint.
There's not a a coal plantor something like that.
(27:32):
So I would argue that timeand human resources
are human capitalbeing resources.
Even if a
small portion of the effortthat went into those extensive
ESG reporting and observanceefforts
were directed at mitigation,
that duration gapand the interest rate problems,
yeah, the firmmight have been around today.
I think
even a small single interestrate swap might have helped,
(27:55):
you know, a lot of them mitigate
a lot of the issuesthat eventually felled them.
And it probably wouldn'thave taken much away
from their ESGintensive efforts.
Well, and that's,you know, like you say,
not only is time and effort
limited,the time you spend on one thing,
you can't spend onsomething else.
We also have the question of
if you have people who thinkthat the main
point of running a bankis to make society
(28:15):
better through ESG investing,
they might not think thatlike the details of like
covering your interest rateposition is very important.
Well well thanks forthat's probably more it's
probably more funto write about.
Oh, sorry.
I think it's more fun to writeabout carbon footprints
than to write about creditinterest rate swaps.
Could be.
Well, thanks so much for comingon to talk about this with us.
(28:37):
And thank youall for joining us.
Join us again next timefor another E Conversations.
This has been e conversations,a joint production
of Joy, Torture Divisionand the Manuel H.
Johnson Center for PoliticalEconomy at Troy University.
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