Executives at Silicon Valley Bank (SVB) and Credit Suisse took substantial risks. SVB proactively expanded the bank’s deposits, some might say excessively. These depositors were uninsured and undiversified. And back when interest rates were low, the bank invested significantly in US government bonds, which was fine at the time. But when there were signs that interest rates were rising and creating substantial interest rate risk, managers left this portfolio unhedged and unchanged. How come SVB managers took those risks? It seemed that they lacked “skin in the game”.
The risks taken by executives at Credit Suisse were of a different nature, but still substantial. By becoming involved in such companies as the now defunct Greensill and Archegos, the bank’s capital took a hit. The fines it has accrued after facing scandal after scandal have also bitten into its capital. It can be said that those involved also lacked skin in the game.
Their wages are pretty good, sure. But their fortunes are in stock in the bank. How much skin do you want them to have?
Let’s take the SVB example. After its failure, depositors were bailed out, and shareholders made to take losses. So far, so good. Except that some executives at the very top bore almost no losses at all – in fact, they made a profit. They sold their shares two weeks before failure, when there was no public information yet about the state of SVB, so its shares were still high. The problem is that they did this perfectly legally. Here’s how.
Quite, those shares were a significant part of their wage packets. That’s how they got them.