Here we go again—bank failures followed by government bailouts. So many of us said this would happen, and it did. We told Congress to resist the siren call of Silicon Valley and Wall Street, but they didn’t. And now, here we are.
What happened this weekend with SVB is a bailout. I will not adopt the Orwellian newspeak pushed by beneficiaries, nor should you. Sophisticated businesses chose to deposit funds well above the FDIC-insured limit at a poorly managed bank. And, yet, now they are getting the safety net of the taxpayer-backed deposit insurance fund instead of having to take any losses.
When times were good, executives who banked with SVB drew big salaries. Now they beg the government to help, and to gain sympathy, they gesture toward loyal employees who might not otherwise get paid. As the saying goes, the rich privatize their profits and socialize their losses. Just like there are no atheists in foxholes, there are no capitalists in bank collapses.
The feds are managing this process and footing the bill. Yes, by law, any losses suffered by the FDIC are supposed to be paid back by a future “special assessment on banks.” Who knows when or if that will happen? During the 2010 debate over Dodd-Frank, many of us tried to establish a special assessment of $150 billion paid in advance into a fund for just such an occasion, but we were shot down.
While I would prefer that uninsured depositors suffer partial losses instead of getting the benefit of the deposit insurance fund, that is unlikely because the banking system is still rigged. Banks that were considered too-big-to-fail lobbied their way out of special oversight. In 2018, Donald Trump signed a law rolling back critical protections in Dodd-Frank. Whereas the law automatically subjected bank holding companies with over $50 billion in assets to enhanced Federal Reserve supervision, today, banks with assets under $250 billion escaped. This deregulation got them out of stress tests and obligations to be less dependent on debt and have more liquid assets. With the stroke of Trump’s pen, 25 of the top 38 largest banks in the United States were deregulated.
Naturally, SVB had lobbied for that change. Signature Bank, with $110 in assets, the second bank the government shut down over the weekend, also benefited from that 2018 law. In 2016, I testified before the Senate Banking Committee opposing easing up on capital and liquidity requirements even for mid-size banks.
What caused the SVB failure, and where will this all end? At the end of 2022, SVB owed about $175 billion in customer deposits. I use the word “owed” here because a deposit is essentially a loan to the bank. On the other side of its balance sheet, SVB owned $209 billion in assets. On paper, that might seem like a decent cushion should depositors demand their money. But, good on paper is not good enough.
Here’s why. First, SVB ballooned from 2018-2021, riding a wave of deregulation and the explosion of crypto and venture capital firms. As SVB grew, it bought a ton of long-term Treasury bonds and mortgage-backed securities when interest rates were very low, and the bank recorded them on its books at the purchase price. Those bonds were, in theory, safe, but with the Fed jacking up interest rates, they were a landmine. When interest rates go up, bond prices go down. And these cratered in value. In less than a year, these losses grew to billions of dollars, but current Fed rules allow banks to pretend on paper that those bonds were still holding their initial values. With a sale, though, the pretending would end.
Losses have to be recorded on sale, and a significant loss would erode the cushion, requiring the bank to seek capital. And then, the world would know. The only way not to fail amid rising interest rates is to hold those bonds to maturity. But that strategy is risky because it’s not within the bank’s control. Selling assets would be required if too many depositors withdrew their money at once. On March 6, days before the run on SVB, FDIC Chairman Martin Gruenberg cautioned that these “unrealized losses” across the banking sector total over $620 billion.
Where were the regulators, you might wonder. “This was an utter failure by San Francisco Fed,” Tyler Gellasch, a former Senate aide who now runs Healthy Markets Association, told me by phone. “The San Francisco Fed should have been demanding SVB hedge the risks and sell the positions as the losses were mounting. They have that ability.” There’s plenty of blame to go around. As Senator Elizabeth Warren wrote on Twitter, “These bank failures were entirely avoidable if Congress & the Fed had done their jobs and kept strong banking regulations in place since 2018.” Specifically, she contended that Fed Chair Jerome “Powell’s actions directly contributed to these bank failures.”
Most SVBs deposits came from businesses, not retail customers, whose deposits are always stickier. A shocking 90 percent of the deposits were uninsured. Uninsured deposits are known as “hot money.” And as Gellasch explains, “SVB had some of the hottest, given that much of its uninsured corporate deposits were from the ultra-online companies, including crypto companies. The bank and regulators should have been asking questions about the bank’s extreme reliance on fickle funding.”
On March 8, just over a week after SVB CEO Gregory Becker sold $3.6 million of his own stock, SVB announced it had engaged in a fire sale of $20 billion of securities at a loss of $1.8 billion. Its cushion was too thin, so the parent company planned to raise $1.75 billion by offering new shares of common and preferred stock. Understandably, depositors freaked out. Peter Thiel, the Trump-supporting billionaire, was among the panic sellers. He withdrew everything his Founders Fund had and put out the Bat-Signal advising everyone else to run from the bank.
Throughout March 9, SVB’s shares plummeted, and the fears bled over to much of the banking sector. On March 10, California regulators seized the bank and put the Federal Deposit Insurance Corporation in charge. But, just a few hours before the bank closed, human resources managed to pay out bonuses, likely ranging, according to NBC, between $14,000 each for associates to $140,000 for managing directors. The FDIC announced that it had moved insured deposits to a new entity so customers could get their money on Monday. The uninsured would be left to make claims to the FDIC, likely getting less than their total deposits, as has happened in numerous bank failures before.
On Sunday, New York regulators closed crypto-focused Signature Bank and put the FDIC in charge. Then, at 6:15 pm, the Treasury Department, Federal Reserve, and the FDIC jointly announced that all depositors of SVB—insured and uninsured—would be protected and have access to their money by Monday. This is a fundamental change in banking policy, rewarding undue risk. Banks paid insurance premiums to the FDIC for accounts up to $250,000, and they didn’t pay the FDIC to get insurance coverage on the more than $8 trillion of uninsured deposits in our banking system.
At the same time, however, regulators declared that “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” Who will pay? According to the statement, “any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.” The regulators also announced similar plans for depositors in Signature Bank.
Even more stunning was the Fed’s announcement that it had created a new Treasury-backed facility to bail out still more banks. Essentially, the new Bank Term Funding Facility will let the Fed give banks loans in the amounts of the “par values” of securities that are no longer worth anything close to their “par values.” The government is now joining the banks’ make-believe.
Will the bailout work? Some are skeptical. Gellasch offered this: “We have a handful of banks that are very dependent on hot money and at the same time have not been doing the basic banking business, which is managing their interest rate risk. But this was just one problem. Others include allowing banks to ignore valuation changes for assets on their books. And the Fed not demanding diversifying funding.” Given how many banks were permitted to fund themselves with undiversified hot money, not manage their interest rate risk and mark down assets that have declined in value, we should expect more failures.
