Governor's connection to Silicon Valley Bank failure
One unnoticed aspect of the failure of Silicon Valley Bank is the change to California law in 2020 that increased political control of statechartered financial institutions.
In the chaos of the first year of the pandemic emergency, at a time when the Legislature was working remotely, or not at all, Gov. Gavin Newsom had the idea to change financial regulation in California.
Don't take my word for it. Straight from the horse's mouth is this “background” from the website of the Department of Financial Protection and Innovation (DFPI):
“In an effort to strengthen consumer financial protections in California, Governor Gavin Newsom proposed an initiative to modernize and revamp the current Department of Business Oversight (DBO), including an increase in staff and authority, to enhance its regulatory scope and become a national model for consumer protections.”
The change occurred with the enactment of Assembly Bill 1864 and Assembly Bill 107, signed into law by the governor in September 2020. The new DFPI retained the powers of the previous agency and added a “consumer outreach team engaging vulnerable populations,” and “an Office of Financial Technology Innovation that will engage with new industries and consumer advocates to encourage consumer friendly innovation and job creation in California.”
The department was placed under the supervision of a commissioner appointed by the governor and empowered “to bring administrative and civil actions, and to prosecute those civil actions before state and federal courts,” as well as “to hold hearings and issue publications, results of inquiries and research, and reports that may aid in effectuating the purposes of this law.”
This adds up to a formula for greater political control of financial institutions in California. It means the regulatory terrorism familiar to so many other businesses in the state could now be applied to banks that failed to meet certain goals of “encouraging” innovation or “engaging” identified communities.
At the same time, the new laws opened the opportunity for some banks to curry favor with politicians by funding “innovation” that non-political numbercrunchers had already rejected as a bad bet.
And so was born the venture capital boom in new “innovation” to combat climate change.
“Silicon Valley Bank Collapse Threatens Climate Start-Ups,” headlined The New York Times, reporting that “the bank had relationships with more than 1,500 companies working on technologies aimed at curbing global warming.”
In California, banks could face administrative penalties from the regulatory agency run by an appointee of the governor if they fail to meet their obligation to “encourage” innovation and “engage” vulnerable communities.
By coincidence, or maybe not by coincidence, immediately after the DFPI's new regulatory powers became effective on Jan. 1, 2021, Gov. Newsom asked Silicon Valley Bank to donate to the nonprofit California Partners Fund founded by his wife, Jennifer Siebel Newsom.
The bank didn't say no. The first $25,000 payment was made on Jan. 8, 2021. Three more payments of $25,000 each followed before the end of the year.
The issue here is that the new law empowered politicians to pressure regulated financial institutions into making lending decisions that were heavily influenced by factors other than credit-worthiness, technological feasibility or prospects for success. The other side of that coin is the obvious incentive for politicians to make sure their appointees use kid gloves, or blinders, when regulating certain financial institutions.
In a March 10 order taking possession of Silicon Valley Bank, the Department of Financial Protection and Innovation stated that the commissioner “finds” that despite the bank announcing a $1.8 billion loss on March 8 and desperately seeking to raise more capital, SVB was “in sound financial condition prior to March 9.” That “finding” probably has some legal significance that will become clear when no one is held accountable for anything.
On March 12, in a joint statement, the Treasury, Federal Reserve and Federal Deposit Insurance Corporation announced a “systemic risk exception” to remove the $250,000 FDIC limit on insurance of bank deposits. So the depositors who held many millions of dollars, uninsured, in their Silicon Valley Bank checking accounts will get all their money back.
Taxpayers, and bank customers who will see higher fees to pay higher charges from the FDIC, will not be so lucky.