Bank executives blame panicked depositors, but senators blame them

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NEW YORK (AP) Top executives from Silicon Valley Bank and Signature Bank largely avoided taking responsibility for their banks’ dramatic failures during a Senate hearing on Tuesday, instead using their time to lay blame on events which they said was largely beyond their control.

The arguments had little success with senators on both sides of the aisle. Democrats and Republicans on the Senate Banking Committee criticized executives for taking risky steps or missing the obvious issues that directly led to their banks’ demise, while still accepting lucrative compensation and bonuses, even in the days and weeks preceding the failures.

“You were paying bonuses until literally hours before regulators seized your assets,” said Sen. Sherrod Brown, Democratic chairman of the Senate Banking Committee. “For most Americans, a lack of Wall Street accountability follows their entire experience of our economy. Workers face the consequences; frames leave at sunset.

More than a handful of senators have asked if executives would consider returning some of their compensation, since bank failures are handled by the Federal Deposit Insurance Corporation and other banks in the system. Each of the three testifying leaders objected.

Greg Becker, the former CEO of Silicon Valley Bank, took the brunt of the criticism from committee members, although Scott Shay, the former chairman and co-founder of Signature Bank, also faced criticism. Signing chairman Eric Howell also appeared.

Becker used his testimony and his responses to senators’ questions to say that Silicon Valley Bank fell victim to a confluence of factors, including a social media rush. Regulators said customers withdrew $42 billion in deposits from Silicon Valley Bank on March 9, a day after the bank announced it needed to raise capital.

“You say you took risk management seriously. I find it hard to believe that comment,” said Sen. Tim Scott, the most Republican on the committee.

A number of senators have criticized leaders for failing to hedge against the impact of rising interest rates. The Federal Reserve rapidly raised rates from March last year, which reduced the value of large loans the bank issued as well as Treasury bills the bank bought when rates were much lower. .

An exasperated Senator John Kennedy, R-Louisiana, pointed out that Silicon Valley Bank had even sold financial contracts, known as hedges, that could have mitigated some of the impact of rising rates. He called the bank’s interest rate management “deeply, to the core, stupid.”

Becker has been repeatedly criticized for leaving the bank’s interest rate risk issues to a committee instead of being more directly involved, as well as the fact that Silicon Valley Bank has repeatedly been deemed deficient. in several parts of its business by banking regulators. He was also criticized for traveling to Hawaii immediately after his bank failed.

The senators also used the hearing to address executive compensation and whether top executives in the United States are rewarded more for short-term gains like rising stock prices than for ensuring the long-term health of their businesses.

Silicon Valley Bank and Signature Bank executives were paid millions of dollars during their tenures until their banks failed, with the bulk of the compensation in the form of company stock . That stock is now largely worthless, but CEOs still pocketed millions from expected sales of their stocks before the banks collapsed.

Becker received compensation valued at around $9.9 million in 2022 and also sold shares of the company just weeks before its bankruptcy. Joseph DePaolo, CEO of Signature Bank, also sold shares of the company in the years before its collapse. DePaolo did not appear before the Senate on Tuesday due to health issues.

Sen. Elizabeth Warren, D-Massachusetts, asked both Becker and Shay if they would give up some of their compensation to the Federal Deposit Insurance Corp., which covered their banks’ deposits after they went bankrupt. .

The executives said they would not give their money to the FDIC.

Warren called their answer “simply wrong”, adding “if we don’t fix the problem, every CEO of these multi-billion dollar banks will continue to take risks and blow up banks and everyone will have to pay for it. that. .”

The anger over CEO pay echoes that of about 15 years ago, when the 2008 financial crisis led to taxpayer-funded bailouts of big banks. CEOs and top bankers were still receiving millions in salary and bonuses, including at the near-bankrupt insurance conglomerate American International Group.

The clawback of CEO pay has drawn bipartisan attention despite fierce divisions between the two political parties. Four senators, two Democrats and two Republicans introduced legislation that would give the FDIC the power to claw back any salaries paid to executives in the five years before a bank failed. Warren is one of the sponsors of the bill.

Executives at large companies tend to receive most of their salary each year in company stock. That means CEOs and other insiders have a lot to gain if the company’s stock goes up. Shareholders generally agree that tying a CEO’s compensation to the share price better aligns their interests with those of shareholders.

But executives also have a lot to gain if they can sell their shares before the stock price plunges. In his testimony, Becker said his stock sale in February was a planned sale.

Since 2000, the Securities and Exchange Commission has given CEOs and other company insiders a way to defend themselves against accusations of buying or selling stock using information not available to others, an illegal practice known as insider trading.

The method, known as the 10b5-1 rule, allows insiders to enter into written plans to buy and sell stocks in the future. The goal was to let insiders trade, but not when they have their hands on material information not available to the public.

Over the years, complaints have grown about insiders abusing certain loopholes in Rule 10b5-1. In December, the SEC announced amendments to fill in the gaps.

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