It Wasn't Just Trump Who Caused The Bank Collapse-- It Was The Entire Conservative Movement

Republicans + Conservative Democrats Should Be Held Accountable By The Voters

On Friday, the same day the the Silicon Valley Bank (16th largest in the country) collapsed and was taken into Federal Deposit Insurance Corporation receivership, David Dayen predicted that it “will surely trigger calls for its well-heeled tech and venture capital clients to get a bailout.” This is a big deal; It’s the second-largest bank collapse in U.S. history. Overwhelmingly the deposits “are business accounts, mostly from tech and bioscience startups, as well as personal accounts for founders and executives of those companies. While the typical bank has something between 40 and 60 percent of assets above the $250,000 limit for FDIC insurance, at SVB it was an incredible 93 percent, meaning that over $150 billion is not government-guaranteed.”

SVB was mostly invested in long-term government bonds, which are normally pretty safe. (They also had a large batch of those mortgage-backed securities, which you might remember from 2008.) The bank really succumbed to the wild swings in the tech industry, which soared in the immediate aftermath of the pandemic but has plummeted recently, as rising Federal Reserve interest rates put cheap money out of reach. SVB grew massively in 2020 and 2021, but with tech startups suffering, its customers pulled their money, and because of the interest rate spike, those government bonds were worth less. When SVB conducted a fire sale of some of those assets to cover the depositor losses, it came up $2 billion short.

In total, the bank was underwater by around $15 billion, according to the Financial Times. The bank run from the startup world forced the realization of some of those losses.

There are a couple of important lessons here. First and foremost, the Fed’s rapid pivot on interest rates couldn’t help but spill over into the broader economy… Second, because the depositors holding the bag at SVB are Very Important People, there’s going to be intense pressure for a bailout. Hedge fund titan Bill Ackman is already calling for one. Larry Summers told Bloomberg that the financial system should be fine, as long as depositors get every penny of their money back, which would be a $150 billion bailout. The character of the depositors as “job creators” will be used to push this narrative, as Atrios points out.

The next day, Ben Eisen and Andrew Ackerman asked in the Wall Street Journal, Where Were The Regulators As SVB Crashed. The simple answer is right here— click the image to hear Trump condemning the economy:

Click on Trump to find out whose fault this is

Eisen and Ackerman went in a different direction to answer the question, of course. They called SVB’s failure “a simple misstep: It grew too fast using borrowed short-term money from depositors who could ask to be repaid at any time, and invested it in long-term assets that it was unable, or unwilling, to sell. When interest rates rose quickly, it was saddled with losses that ultimately forced it to try to raise fresh capital, spooking depositors who yanked their funds in two days. The question following the bank’s takeover Friday: How could regulators have allowed it to grow so quickly and take on so much interest-rate risk? And it wasn’t the only problem bank last week. Just days before SVB collapsed, Silvergate Capital Corp., one of the crypto industry’s biggest banks, said it would shut down. ‘The aftermath of these two cases is evidence of a significant supervisory problem,’ said Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm for the banking industry. ‘That’s why we have fleets of bank examiners, and that’s what they’re supposed to be doing.’ The Federal Reserve was the primary federal regulator for both banks. Notably, the risks at the two firms were lurking in plain sight. A rapid rise in assets and deposits was recorded on their balance sheets, and mounting losses on bond holdings were evident in notes to their financial statements.”

SVB and Silvergate both had less onerous liquidity rules than the biggest banks. In the wake of the failures, regulators may take a fresh look at liquidity rules, with an eye toward adjusting the requirements for holding high-quality liquid assets for banks whose funding sources go far beyond retail deposits, said Jaret Seiberg, an analyst at TD Cowen Washington Research Group, in a note.

…Timothy Coffey, associate director of depository research at Janney Montgomery Scott LLC, said regulators were aware that unrealized losses in banks’ securities portfolios could lead to trouble, but didn’t take specific steps to address the issue.

“This is something that’s been rolling through the industry for several months,” he said. “They did nothing to help this bank,” he added, referring to SVB.

Indeed, the two firms aren’t the only ones facing the risk posed by unrealized losses. The banking industry as a whole had some $620 billion in unrealized losses on securities at the end of last year, according to the Federal Deposit Insurance Corp., which began highlighting those late last year.

Another regulatory issue: accounting and capital rules that allow banks to ignore mark-to-market losses on some securities if they intend to hold them to maturity. At SVB, the bucket holding these securities— consisting largely of mortgage bonds issued by government-sponsored entities— is where the biggest capital hole is.

…Silvergate and SVB may have been particularly susceptible to the change in economic conditions because they concentrated their businesses in boom-bust sectors. With companies in those sectors now moving assets elsewhere in the financial system, the nature of those risks may shift, said Saule Omarova, a professor of law at Cornell University who was nominated to run the Office of the Comptroller of the Currency in 2021.

That suggests the need for regulators to take a broader view of the risks in the financial system. “All the financial regulators need to start taking charge and thinking through the structural consequences of what’s happening right now,” she said.

Yesterday, Jeff Stein and Tony Romm were emphasizing a bailout conundrum, that has ignited “a ferocious political debate over Washington’s role in tamping down potential threats to the broader U.S. financial sector. Tech executives, former government officials and at least two Democratic lawmakers called for safeguarding depositors with money at stake in the collapse if a buyer for the bank’s assets isn’t found by Monday, arguing that it’s the only way to limit a cascade of bigger problems.”

Rather than talking about bailing out the super-rich, the way this is being spun is in two other more palatable way:

1- “Companies that did business with Silicon Valley Bank are already warning that the bank’s failure may force thousands of layoffs or furloughs, and prevent many workers from receiving their next paycheck.”

2- “Some experts worry that large numbers of companies could move to transfer their money from regional banks similar to SVB to safer giant commercial banks Monday, leading to a fresh round of destabilization.”

The problem, of course, is that “A move to make Silicon Valley Bank’s depositors whole without a buyer would probably require Congress to pass legislation drawing on an insurance fund paid into by all banks and backed by U.S. taxpayers— a fund that typically only covers deposits up to the Federal Deposit Insurance Corp.’s limit of $250,000. But more than 90 percent of SVB’s accounts were over that limit. Critics of using the fund to help larger depositors argue that it would establish a troubling precedent, leading other banks in similar circumstances to expect federal authorities to swoop in and save them as well.”

That could lead to a backlash, in an echo of the fury directed at government rescue measures for Wall Street during the 2008 financial crisis. But this time taxpayers would be bailing out the would-be lords of tech rather than the lords of finance.

Another possibility is that larger Wall Street banks, fearing wider contagion, acquire what’s left of SVB and make all of its depositors whole. That could be a tricky bet, however, and bigger banks might ask for the federal government’s help before agreeing to a potentially unprofitable purchase.

“All the choices are bad choices,” said Simon Johnson, an economist at MIT who previously served as chief economist of the International Monetary Fund. “You don’t want to extend this kind of bailout to people. But if you aren’t doing that, you face a run of really big— and really hard to predict— proportions.”

Created during the Great Depression to provide a federal backstop on bank runs, the FDIC is meant to insure only a portion of customer deposits— both to reduce the risk to taxpayers and to encourage customers to perform due diligence and not put their deposits in banks that take irresponsible risks.

But officials at the FDIC— which, in a stunning move Friday, took over Silicon Valley Bank during normal trading hours— are facing some calls to go beyond giving smaller customers their money back.

On Friday, the FDIC said in a statement that everyone with an insured deposit— meaning accounts worth less than $250,000— would have full access to their money by Monday morning. The statement said that uninsured depositors— those with accounts exceeding $250,000— would get some of their money back, but it did not specify how much. Uninsured depositors make up the overwhelming majority of the bank’s customers.

…Brad Sherman (D-CA), said the government needed to “do everything possible so that payroll is met,” citing the financial blow to his tech-heavy home state if companies are not able to pay their workers promptly because they can’t access their deposits.

“The last thing I want to hear is 40 companies go under because they can’t make payroll … [and] they get it 40 weeks from now and their company is gone,” he said.

California Gov. Gavin Newsom (D) said in a statement Saturday that he’d been discussing the situation with the Biden administration: “Everyone is working with FDIC to stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy.”

Rep. Katie Porter (D-CA) said she had been in contact with Newsom, since state law requires employees to be paid within “so many days of work.” That, she said, raised the potential that payroll processors without access to their money come Monday could create a wave of “unnecessary layoffs.”

Porter said the easiest solution is for the bank to “find a buyer,” which could set the stage for even uninsured depositors to access their money. “I think we wait and see if that can happen. If it doesn’t, we can start to think about other kinds of ways … that the government can bridge [the gap],” she explained, noting the bank did hold “assets of real value.”

Unwinding the bank’s balance sheet will begin in the next few days if the FDIC can’t find another bank to take over all of SVB’s business. Customers who had uninsured deposits will receive some amount of money back by next week, the FDIC said, without specifying how much. The FDIC is expected to sell the bank’s remaining assets and use the proceeds to pay the uninsured depositors.

The FDIC has a fund paid into regularly by U.S. banks that is intended to protected insured depositors. That fund is ultimately backed by U.S. taxpayers. Congress would need to pass a law authorizing the FDIC to use the insurance fund to protect uninsured deposits, said Todd Phillips, who served as an attorney for the FDIC and is now a fellow at the Roosevelt Institute, a center-left think tank. That raises the prospect of special federal assistance for uninsured depositors, even though experts downplay the odds of that occurring.

“I think it’s unlikely that Congress will pass a law making these uninsured depositors whole,” Phillips said. “The $250,000 ceiling is really meant to cover real people, and Congress has not previously shown much of an interest in bailing out businesses that hold millions of dollars with banks. I don’t think it’s likely to start now, but stranger things have happened.”

…“We must make sure all deposits exceeding the FDIC $250K limit are honored. Banking is about confidence,” Rep. Eric Swalwell (D-CA) said on Twitter. “If depositors lose confidence on the safety of their deposits over 250k then we are in trouble.”

Rep. Ruben Gallego (D-AZ) also tweeted that the FDIC “must work to protect deposits exceeding the 250k limit and keep [Arizonans’] money protected.”

Garry Tan, chief executive of Y Combinator, one of the industry’s most influential start-up incubators, tweeted that failure to act could represent an “extinction level event” for start-ups and could set back innovation “by 10 years or more.” David Sacks, general partner of Craft Ventures and a longtime venture investor, also directly petitioned Yellen and Federal Reserve Chair Jerome Powell for help. “Where is Powell? Where is Yellen? Stop this crisis now. Announce that all depositors will be safe. Place SVB with a Top 4 bank,” Sacks tweeted. “Do this before Monday open or there will be contagion and the crisis will spread.”

Bill Ackman, a billionaire hedge fund manager, also predicted a run on all but the biggest banks Monday absent government intervention or the emergence of another bank to buy SVB, which he described as unlikely.

As soon as calls for intervention began, so did the outcry from the left and right against any potential bailouts.

Rep. Matt Gaetz (R-FL) tweeted, “I will NOT support a taxpayer bailout of Silicon Valley Bank.”

“Bailing out SVB would embolden banks to take irresponsible risks,” Max Ghenis, a policy analyst at PolicyEngine, wrote on Twitter. “A tiny, disproportionately rich share of US jobs are at stake. … How is this debatable.”

Reporting for Politico Sunday morning, Victoria Guida and Sam Sutton noted that “Battle lines are already being drawn over what caused SVB’s stunning demise. Progressives and some investors are blaming the Federal Reserve for its rapid interest rate hikes, which have burdened many lenders. Democrats say Republican-led deregulation of banks removed critical safeguards. Others say regulators failed to spot red flags in the bank’s investment portfolio and customer base. Many blame SVB itself… The crisis is also reigniting a fierce debate over the regulations that should be applied to large regional lenders— which are much smaller than megabanks like JPMorgan Chase and Bank of America but considerably bigger than most of the country’s nearly 5,000 banks. Congress voted in 2018 to loosen regulations on those institutions with bipartisan support. Sen. Elizabeth Warren (D-MA) is renewing calls for strengthening oversight and bolstering measures that reduce bank reliance on debt— something that Fed officials have identified as a top priority. Banks have launched a lobbying onslaught to resist those efforts. ‘Silicon Valley Bank’s collapse underscores the need for strong rules to protect the financial system,’ Warren tweeted. ‘Regulators must not buckle to pressure.’”

Infuriating lawmakers and other observers was a report yesterday that SVB paid out bobuses to top executives just hours before the bank was seized by the FDIC. On Face the Nation yesterday, Janet Yellen said there will be no bailout for the bank but seemed to indicate that depositors would be made whole. Utterly clueless, Meatball Ron went on Fox News with Maria Bartiromo yestreday and blamed "woke economics" and asserted that there are too many regulations, not too few.

UPDATE: Everyone's Being Bailed Out-- "Moral Hazard" Cancelled

The Deposit Insurance Fund, funded by other banks, will cover the deposits, not the taxpayers. Screaming on the right is just beginning. The Wall Street Journal late last night: "This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit— is that SVB’s failure is the bill coming due for years of monetary and regulatory mistakes." The politicians will be... shriller. On the left, people are noting that rising interest rates are hurting the banks' balance sheets (as well as everyone's lives). Powell is a Republican, but Biden's kind of Republican.