Of Course They Did

EY is Ernst & Young

Is anyone surprised that McKinsey & Company was advising Silicon Valley Bank on how to enter the banking big leagues at the time of their implosion.

This is classic McKinsey:

Three years before its epic collapse, highflying Silicon Valley Bank was preparing to join the big boys of the banking world as it neared $100 billion in assets. But SVB needed help to make the leap.

“Immediately they decided to hire consultants,” one former SVB employee recalled, speaking on the condition of anonymity to describe internal decision-making. “Plug the gap with consultants.”

Among the consultants that SVB turned to was McKinsey & Co., the blue-chip management consulting group with a global roster of corporate and government clients. McKinsey was hired to identify gaps in SVB’s capital and risk management programs — a job that might have spotted problems with the bank’s investment strategy long before the bank’s failure.

But it didn’t work out that way.

Actually, it did.  You don't hire McKinsey to fix your problems, you hire McKinsey to justify papering over your problems.

McKinsey’s work for SVB in 2020 and 2021 — which has not been previously reported — was sharply criticized by the Federal Reserve in its sweeping report on what caused the second-largest U.S. bank collapse since 2008. The Fed found that McKinsey had “failed to design an effective program” for assessing SVB’s problems and produced a report filled with “weaknesses.”

………

After SVB’s failure in early March, the bank was taken over by the Federal Deposit Insurance Corporation and sold to First Citizens Bank & Trust. The Post detailed how SVB executives pushed ahead with a strategy of relying on longer-term investments in 2020 even as it ran afoul of a key risk metric and then changed its internal models to downplay the devastating impact of higher interest rates on those investments — decisions that foreshadowed the bank’s crash.

The Fed published a 102-page report on what went wrong at SVB. The review, conducted by Michael Barr, the Fed’s vice chair for supervision, placed the bulk of the blame for the bank’s crash on lax oversight by regulators and mismanagement by executives.

But the Fed report also noted the outsize role of consultants at the Santa Clara, Calif.-based bank.

………

In August 2020, McKinsey was given the task of completing an “EPS gap assessment” — a measure of the bank’s ability to meet the “enhanced prudential standards” for capital reserves, liquidity and risk management faced by the nation’s largest financial institutions, according to the consulting firm and the government official.

With McKinsey, SVB was seeking out expertise from one of the most influential consulting firms in the world — and a company that has come under increasing scrutiny for the advice it provides.

………

After SVB filed for bankruptcy in March, McKinsey found itself among the bank’s many unsecured creditors.

According to a court filing, McKinsey was still owed $2,397,491 for its advice.

I don't want to imply that McKinsey does not do its job, it's just that its job is to provide justification for unethical and destructive practices at the companies that hire it.