Fair Process Fail: Anger About Silicon Valley Bank is Lingering Resentment from 2008

Ordinary people never recovered from their anger that bankers were bailed while their less connected counterparties weren't.

I’m an American living in France, working as a research fellow at INSEAD. Down the street from campus is the Château Fontainebleau, the summer palace of French royalty. It’s older than the more elaborate Versailles but with over 1500 rooms can’t be mixed up with a summer cabin.

Soon after starting here, I learned the difference between a castle and a palace. Castles have reinforcements: they are, to some extent or other, military forts royals live in. Palaces do not have reinforcements, only gates built to keep out animals rather than repel raging armies.

The difference matters because, by building a palace rather than a castle, royals implicitly announced they were not worried about a foreign army. By living in a palace, you telegraphed to friends and enemies alike that your army was so powerful nobody could threaten you.

Despite this, the palace down the street is empty and has been for quite a while. Prior inhabitants included virtually all the kings and queens of France. Louis XIV, the Sun King, sunned there as did Queen Regent Catherine de Medici, mother of multiple kings. Eventually, it wasn’t a foreign army that breached the walls but angry French livid about economic imbalance. King Louis XVI and his wife, Marie-Antoinette, were the last genuine royalty to hang down the street (Napolean and his wife, Empress Joséphine also lived there after the revolution though they’re from a different bloodline).

Which brings us to Silicon Valley Bank and the financial crisis. The sting of those 2008-era bailouts — where bankers were insulated from their poor decisions while their counterparty borrowers held to account — never left. Bailing out one side of a gamble while taking the homes and livelihoods of the other under the guise of market discipline isn’t capitalism. Yet this is exactly what happened and nobody involved ever admitted much less tried to make it right. This understandably left people livid to this day.

Silicon Valley Bank wasn’t the reckless greed-fest of yore: it was a bank run. The bank bought long-term securities to fund short-term liabilities and, rather than call Goldman Sachs or Morgan Stanley for help with liquidity issues, tried to fix the problem itself. Sensing trouble, venture capitalists ran to get out their money and that of their portfolio companies. Soon after, the bank failed as banks tend to do after bank runs.

Because the bailout only made depositors whole, at no cost to the government, the bailout shouldn’t have been especially noteworthy much less controversial. Yet social media was oiling up the digital guillotines. Why? Because people are still livid from the vastly less justifiable bailouts that ruined the financial lives of too many people.

Countless people remember the greed, misery, and abject hypocrisy from the Great Recession. Much like the French went on a head-chopping spree after their Revolution, Americans are still angry as hell. Silicon Valley Bank almost suffered the same fate as Joséphone Beauharnais's first husband, a minor royal largely sympathetic to the revolutionaries beheaded because he seemed like the people they didn’t like.

This lingering resentment illustrates how a lack of fair process leadership has long-lasting detrimental effects on an organization. Fair process, the idea, doesn’t mean the result is always fair but, rather, the process leading to it is perceived as fair. A well-refereed football game played by two wildly unmatched teams has a fair process even if the game itself is unbalanced. When fans walk away saying “that was a predictable disaster” they’re often in the mood to drink their sorrows away with fans of the other team. In contrast, when referees are clearly biased to the point they changed the outcome of a game, there’s anger that’s likely to linger.

A lack of fair process during the great financial crisis and resulting foreclosure crisis left lingering anger and resentment fifteen years later against the recent bank bailouts. Many people are livid despite the more recent bailouts cost taxpayers nothing, likely saved countless jobs, protected innocent small businesses, and were caused largely by the Federal Reserve misstating guidance.

Much of this resentment is left over from the 2008-era bank bailouts. While arguably necessary, these were never explained nor perceived by much of the general public as either fair or following any type of objective process. Those bailouts were quickly arranged and left many bankers - who made loans - relatively whole. Meanwhile countless ordinary people – far less informed borrowers who took out the same loans - lost their homes, businesses, and livelihoods.

A lack of fair process stings for a long time. In this case, it lingers 15 years later and shows no signs of tapering off.

Obviously, the lack of fair process related to the foreclosures was partly perception: people who did not pay would eventually lose their homes. But they felt the process was rigged, if not the outcome, and there is a large amount of truth to that perception.

Working with reporters and other Florida lawyers, I witnessed 30-second "trials," called the rocket docket, where borrowers were refused an opportunity in court to speak and quickly lost their cases. Several banks hired crooked lawyers to forge paperwork and outright lie; the lawyers were disbarred but the banks suffered no consequences. Government labeled borrowers irresponsible for taking out the loans but the more knowledgeable bankers never received the same derogatory label.

This was an all-around breach of any semblance of fair process leadership.

Eventually, a switch to fair process practices – in part via a quiet pilot I worked on with one of the large banks, copied by several others – helped end the crisis and put a floor on the US housing market. But the justifiable anger was still there and remains.

As an academic ensconced in a top business school, I understand that anger. I have an allegedly autographed photo of Lenin in my home office. It’s not out of admiration — he was a barbaric butcher — but as a reminder of what happens when market equilibrium is upset. Attaching a weight to steer Adam Smith’s invisible hand in favor of one’s friends is going to leave behind the taint of process violation.

Fair process is a vital element of effective leadership, and — as this recent crisis illustrated — a lack of fair process will cause lingering problems for a very long time.