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By Robert Reich
On Friday, bank regulators closed Silicon Valley Bank, based in Santa Clara, California. Its failure was the second largest in U.S. history and the largest since the financial crisis of 2008.
On Sunday, regulators closed New York-based Signature Bank.
As they rushed to contain fallout, officials at the Federal Reserve, Treasury, and Federal Deposit Insurance Corporation announced in a joint statement on Sunday that depositors in Silicon Valley Bank would have access to all of their money starting Monday. They’d enact a similar program for Signature Bank.
They stressed that the bank losses would not be borne by taxpayers, but who will bear them? What the hell happened? And what lessons should be learned?
The surface story of the Silicon Valley Bank debacle is straightforward. During the pandemic, startups and technology companies enjoyed heady profits, some of which they deposited in the Silicon Valley Bank. Flush with their cash, the bank did what banks do: It kept a fraction on hand and invested the rest — putting a large share into long-dated Treasury bonds that promised good returns when interest rates were low.
But then, starting a little more than a year ago, the Fed raised interest rates from near zero to over 4.5 percent. As a result, two things happened. The value of the Silicon Valley Bank’s holdings of Treasury bonds plummeted because newer bonds paid more interest. And, as interest rates rose, the gusher of venture capital funding to startup and tech companies slowed, because venture funds had to pay more to borrow money. As a result, these startup and tech companies had to withdraw more of their money from the bank to meet their payrolls and other expenses.
But the bank didn’t have enough money on hand.
There’s a deeper story here. Remember the scene in It’s a Wonderful Lifewhere the Jimmy Stewart character tries to quell a run on his bank by explaining to depositors that their money went to loans to others in the same community, and if they’d just be patient, they’d get their deposits back?
In the early 1930s, such bank runs were common. But the Roosevelt administration enacted laws and regulations requiring banks to have more money on hand, barring them from investing their depositors’ money for profit (in the Glass-Steagall Act), insuring deposits, and tightly overseeing the banks. Banking became more secure, and boring.
That lasted until the 1980s, when Wall Street financiers, seeing the potential for big money, pushed to dismantle these laws and regulations — culminating in 1999, when Bill Clinton and Congress repealed what remained of Glass-Steagall.
Then, of course, came the 2008 financial crisis, the worst collapse since 1929. It was the direct result of financial deregulation. Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, called it “a once-in-a-century credit tsunami,” but pressed by critics, Greenspan acknowledged that the crisis had forced him to rethink his free market ideology. “I have found a flaw,” he told a congressional committee. “I made a mistake … I was shocked.”
Shocked? Really?
Once banking was deregulated, such a crash was inevitable. In the 1950s and ’60s, when banking was boring, the financial sector accounted for just 10 to 15 percent of U.S. corporate profits. But deregulation made finance exciting and exceedingly profitable. By the mid-1980s, the financial sector claimed 30 percent of corporate profits, and by 2001 — by which time Wall Street had become a gigantic betting parlor in which the house took a big share of the bets — it claimed a whopping 40 percent. That was more than four times the profits made in all U.S. manufacturing.
When the bubble burst in 2008, the Bush administration moved to protect investment banks. Treasury Secretary Hank Paulson, former CEO of Goldman Sachs, and Timothy Geithner, president of the New York Fed, arranged a rescue of the investment firm Bear Stearns but allowed Lehman Brothers to go under. The stock market crashed. AIG, an insurance giant that had underwritten hundreds of billions’ worth of credit on the Street, faced collapse. So did Citigroup (to which Robert Rubin, Clinton’s former Treasury secretary, had moved after he successfully pushed for the Glass-Steagall repeal), which had bet heavily on risky mortgage-related assets.
Paulson asked Congress for $700 billion to bail out the financial industry. He and Fed Chair Ben Bernanke insisted that a taxpayer bailout of Wall Street was the only way to avoid another Great Depression.
Obama endorsed the Wall Street bailout and appointed a team of Clinton-era economic advisors (led by Geithner, who became Obama’s Treasury secretary, and Lawrence Summers, who became director of the National Economic Council). These were the same people who, working under Rubin in the 1990s, had prepared the way for the financial crisis by deregulating Wall Street. Geithner, as chair of the New York Fed, had been responsible for overseeing Wall Street in the years leading up to the crisis.
In the end, the Obama administration rescued Wall Street, but at enormous cost to taxpayers and the economy. Estimates of the true cost of the bailout vary from half a trillion dollars to several trillion. The Federal Reserve also provided huge subsidies to the big banks in the form of virtually free loans. But homeowners, whose homes were suddenly worth less than the mortgages they owed on them, were left hanging in the wind. Many lost their homes.
Obama thereby shifted the costs of the bankers’ speculative binge onto ordinary Americans, deepening mistrust of a political system increasingly seen as rigged in favor of the rich and powerful.
A package of regulations put in place after the financial crisis (called Dodd-Frank) was not nearly as strict as the banking laws and regulations of the 1930s. It required that the banks submit to stress tests by the Fed and hold a certain minimum amount of cash on their balance sheets to protect against shocks, but it didn’t prohibit banks from gambling with their investors’ money. Why not? Because Wall Street lobbyists, backed with generous campaign donations from the Street, wouldn’t have it.
Which brings us to Friday’s failure of the Silicon Valley Bank. You didn’t have to be a rocket scientist to know that when the Fed raised interest rates as much and as fast as it did, the financial cushions behind some banks that had invested in Treasury bonds would shrink. Why didn’t regulators move in?
Because even the thin protections of Dodd-Frank were rolled back by Donald Trump, who in 2018 signed a bill that reduced scrutiny over many regional banks and removed the requirement that banks with assets under $250 billion submit to stress testing and reduced the amount of cash they had to keep on their balance sheets to protect against shock. This freed smaller banks — such as Silicon Valley Bank (and Signature Bank) — to invest more of their deposits and make more money for their shareholders (and their CEOs, whose pay is linked to profits).
Not surprisingly, Silicon Valley Bank’s own chief executive, Greg Becker, had been a strong supporter of Trump’s rollback. Becker had served on the San Francisco Fed’s board of directors.
Oh, and Becker sold $3.6 million of Silicon Valley Bank stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. There’s nothing illegal about corporate trading plans like the one Becker used, and the timing could merely have been coincidental. But it smells awful.
Will the failure of Silicon Valley Bank be as contagious as the failures of 2008, leading to other bank failures as depositors grow nervous about their safety? It’s impossible to know. The speed with which regulators moved over the weekend suggests they’re concerned. The Wall Street crisis of 2008 began with one or two bank failures, as did the financial crisis of 1929.
Four lessons from this debacle:
- The Fed should hold off raising interest rates again until it has done a thorough appraisal of the consequences for smaller banks.
- When the Fed rapidly raises interest rates, it must better monitor banks that have invested heavily in Treasury bonds.
- The Trump regulatory rollbacks of financial regulations are dangerous. Small banks can get into huge trouble, setting off potential contagion to other banks. The Dodd-Frank rules must be fully reinstated.
- More broadly, not even Dodd-Frank is adequate. To make banking boring again, instead of one of the most profitable parts of the economy, Glass-Steagall must be reenacted, separating commercial from investment banking. There’s no good reason banks should be investing their depositors’ money for profit.
Robert B. Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center for Developing Economies, and writes at robertreich.substack.com. Reich served as Secretary of Labor in the Clinton administration, for which Time Magazine named him one of the ten most effective cabinet secretaries of the twentieth century. He has written fifteen books, including the best sellers "Aftershock", "The Work of Nations," and"Beyond Outrage," and, his most recent, "The Common Good," which is available in bookstores now. He is also a founding editor of the American Prospect magazine, chairman of Common Cause, a member of the American Academy of Arts and Sciences, and co-creator of the award-winning documentary, "Inequality For All." He's co-creator of the Netflix original documentary "Saving Capitalism," which is streaming now.
Pensions Lose Millions After Bank Collapse
BY KATHERINE FUNG ON 3/13/23
Fallout Of Silicon Valley Bank Collapse Explained
The collapse of Silicon Valley Bank has caused pension funds around the world to lose millions of dollars.
The California Public Employees Retirement Fund and the California State Teachers' Retirement System had invested in the bank, as did Korea's National Pension Service and Sweden's Alecta pension fund.
The Federal Reserve has promised depositors that their money is safe, but this has done little to ease concerns about the stability of the banking system.
Pensions across the globe have lost millions of dollars due to the collapse of Silicon Valley Bank (SVB).
In the wake of SVB's Friday closure, several pension funds in the U.S. and two overseas have confirmed that they had investments in SVB stock that will likely be at a loss now that the bank has been shut down by federal regulators.
Just before the weekend, a bank run sent the San Fransisco-based financial institution plunging into crisis as depositors made mass withdrawals. After it was handed over to the Federal Deposit Insurance Corporation (FDIC), another smaller bank in New York, Signature Bank, was closed down by regulators on Sunday. The collapses marked the second- and third-worst bank failures in U.S. history, trailing only Washington Mutual's 2008 crisis.
The closures are likely to bleed into the rest of the American banking system, despite federal authorities' plans to put a stop to the fallout. That includes into pension systems, whose investments in SVB may be small in comparison to their portfolios, but which will collectively total to millions of dollars.
A man on Monday passes Silicon Valley Bank headquarters in Santa Clara, California. Pensions across the globe have lost millions due to the bank's collapse.NOAH BERGER/AFP
For example, the California Public Employees Retirement Fund (Cal PERS), which manages the largest public pension fund in the country with more than 1.5 million members, had $67 million invested into SVB and around $11 million into Signature at the time of their failures. With more than $440 billion in assets at the end of the last fiscal year, these investments make up a mere fraction of Cal PERS' portfolio.
"Those will be assets at risk, likely at a loss, but in the grand scheme of things a small percentage of our overall portfolio," spokesperson for Cal PERS told Newsweek. "We'll continue to monitor the situation in the upcoming days and weeks and continue to be strategic, agile and patient as a long-term investor."
The California State Teachers' Retirement System, which is the nation's largest teachers retirement fund, also told Newsweek that as of last Thursday, the pension held $11 million in SVB stock, with no bonds. As of January 31, its assets total $311.5 billion.
It also has banking and lending exposures through its partners and advisers, but the pension said it was "encouraged" by the Federal Reserve's promise that all depositors will be protected.
The Fed has vowed to bank customers that their money is "safe" and has reassured Americans that they should have confidence in the system, despite growing concerns among those in the financial sector. Many have speculated that other midsized banks could soon fall as depositors rush to withdraw more money.
READ MORE
U.S. bank collapse could spark global crisis: "Dr. Doom" Nouriel Roubini
There are also pensions in other states that have invested in SVB.
The Employee Retirement System of Rhode Island, which benefits thousands of retired state and municipal workers, had just over $2.6 million invested in SVB, Signature and two other banks at risk of collapse: First Republic and Silvergate Capital. Those investments represent a small percentage of the overall fund, which is valued at more than $10.3 billion.
In the Indo-Pacific, Korea's National Pension Service (NPS)—which manages the world's third-largest public pension fund with $800 billion in assets—owns some 100,000 shares in SVB, which were valued at around $23.2 million as of late 2022. Local media reports that NPS is looking for ways to respond to the incident at this time.
Across the Atlantic, Sweden's largest pension fund Alecta, which oversees more than $104 billion in assets, has around $848.7 million invested in SVB, and $282.9 million in Signature.
However, the fund said in a statement, "For individual pension savers at Alecta, the impact of this investment on future occupational pension payments is very small."
Markets plunge on Silicon Valley Bank fallout
Irish bank shares slump in line with European lenders
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Traders work on the floor of the New York Stock Exchange as stocks slumped on Monday with key indices markedly lower amid worries over the banking system following the collapse of Silicon Valley Bank and shuttering of Signature Bank. Photograph: Timothy A Clary/AFP
Mon Mar 13 2023 -
European stocks logged their steepest one-day fall this year on Monday on continued drag from banking stocks even as authorities stepped in to limit the fallout from the sudden collapse of Silicon Valley Bank. Shockwaves were sent across the UK and Europe despite HSBC swooping in to buy the bank’s UK arm and reassuring firms that banking services would continue as normal.
Dublin
The Dublin market was down 3.35 per cent to 8,103 on Monday evening, as banking shares slumped in line with the wider European trends amid the shock waves from the SVB collapse which continued to put pressure on financial stocks. Bank of Ireland slid more than 6.5 per cent over the session, closing at €9.23, while AIB was down 7.3 per cent to €3.54 by the close. Permanent TSB was 2.79 per cent off.
Elsewhere, Kingspan lost almost 3.5 per cent, and CRH was down 4.5 per cent by the close of the session. Smurfit Kappa lost 2.44 per cent, while Ryanair fell 2.43 per cent and Flutter Entertainment shed 2.6 per cent. The Paddy Power owner ended the day at €155.10.
London
More than £50 billion was wiped off the UK’s biggest stock market on Monday after the second- and third-biggest bank failures in US history spooked investors across the globe.
The FTSE 100 closed 199.72 points lower as it suffered bigger declines than seen in the aftermath of September’s mini-budget.
HSBC saw its share price decline by more than 4 per cent despite announcing it had acquired SVB’s UK business in the all-important rescue deal. Europe’s biggest bank said it paid just £1 for the troubled firm, indicating that regulators were confident it could easily take on any risk from SVB UK’s customers.
However, its share price closed 4.1 per cent lower as the stock was caught up in investor jitters over the wider banking sector.
Meanwhile, insurer Direct Line admitted its 2022 results were “disappointing” and that the group did not navigate the challenges of inflation and regulatory reform as effectively as it would have liked.
The group reported a full-year pretax loss of £45 million against sharp claims inflation, particularly across its motor arm. Its share price closed 4.8 per cent lower.
Europe
The pan-European Stoxx 600 index closed the day 2.3 per cent lower, with banks, financials and insurer stocks, along with energy stocks, bearing the brunt of selling pressure.
European banking stocks dropped 5.7 per cent, notching their worst two-day sell-off since the Russia-Ukraine war broke out early last year.
The wider risk-off moves sent Credit Suisse shares down 9.6 per cent to a fresh record low.
Germany’s Commerzbank slumped 12.7 per cent, France’s Société Générale and Spain’s Sabadell fell 6.2 per cent and 11.4 per cent, respectively.
However, euro-zone banking supervisors saw limited consequences for the region’s banks from the collapse of the US lenders, while Moody’s Investors Service noted that Europe’s banks were unlikely to get hit by bond portfolio losses.
New York
The positive effect from the American regulators’ overnight support actions in the banking system quickly evaporated on Monday morning, with stocks signalling that fallout from the incident is far from over.
Turmoil continued to engulf First Republic Bank, whose shares plunged more than 60 per cent in US premarket trading even after the lender moved to try to quell concern about its liquidity after the failure of SVB. PacWest Bancorp lost more than 30 per cent, while Columbia Banking System fell about 5 per cent.
While US regulators introduced a new backstop for banks that Federal Reserve officials said was big enough to protect the nation’s deposits, the surprise announcement that New York’s Signature Bank was being shuttered reminded investors that further turmoil, at least among regional banks, was still possible. A senior US Treasury official said some institutions had issues similar to the failed Silicon Valley Bank.
Most large US banks also erased earlier gains in US premarket trading, with JPMorgan Chase, Bank of America and Wells Fargo all trading lower.
– Additional reporting: PA, Bloomberg, Reuters
BY KATHERINE FUNG
Fallout Of Silicon Valley Bank Collapse Explained
The collapse of Silicon Valley Bank has caused pension funds around the world to lose millions of dollars.
The California Public Employees Retirement Fund and the California State Teachers' Retirement System had invested in the bank, as did Korea's National Pension Service and Sweden's Alecta pension fund.
The Federal Reserve has promised depositors that their money is safe, but this has done little to ease concerns about the stability of the banking system.
Pensions across the globe have lost millions of dollars due to the collapse of Silicon Valley Bank (SVB).
In the wake of SVB's Friday closure, several pension funds in the U.S. and two overseas have confirmed that they had investments in SVB stock that will likely be at a loss now that the bank has been shut down by federal regulators.
Just before the weekend, a bank run sent the San Fransisco-based financial institution plunging into crisis as depositors made mass withdrawals. After it was handed over to the Federal Deposit Insurance Corporation (FDIC), another smaller bank in New York, Signature Bank, was closed down by regulators on Sunday. The collapses marked the second- and third-worst bank failures in U.S. history, trailing only Washington Mutual's 2008 crisis.
The closures are likely to bleed into the rest of the American banking system, despite federal authorities' plans to put a stop to the fallout. That includes into pension systems, whose investments in SVB may be small in comparison to their portfolios, but which will collectively total to millions of dollars.
A man on Monday passes Silicon Valley Bank headquarters in Santa Clara, California. Pensions across the globe have lost millions due to the bank's collapse.NOAH BERGER/AFPFor example, the California Public Employees Retirement Fund (Cal PERS), which manages the largest public pension fund in the country with more than 1.5 million members, had $67 million invested into SVB and around $11 million into Signature at the time of their failures. With more than $440 billion in assets at the end of the last fiscal year, these investments make up a mere fraction of Cal PERS' portfolio.
"Those will be assets at risk, likely at a loss, but in the grand scheme of things a small percentage of our overall portfolio," spokesperson for Cal PERS told Newsweek. "We'll continue to monitor the situation in the upcoming days and weeks and continue to be strategic, agile and patient as a long-term investor."
The California State Teachers' Retirement System, which is the nation's largest teachers retirement fund, also told Newsweek that as of last Thursday, the pension held $11 million in SVB stock, with no bonds. As of January 31, its assets total $311.5 billion.
It also has banking and lending exposures through its partners and advisers, but the pension said it was "encouraged" by the Federal Reserve's promise that all depositors will be protected.
The Fed has vowed to bank customers that their money is "safe" and has reassured Americans that they should have confidence in the system, despite growing concerns among those in the financial sector. Many have speculated that other midsized banks could soon fall as depositors rush to withdraw more money.
READ MORE
U.S. bank collapse could spark global crisis: "Dr. Doom" Nouriel Roubini
There are also pensions in other states that have invested in SVB.
The Employee Retirement System of Rhode Island, which benefits thousands of retired state and municipal workers, had just over $2.6 million invested in SVB, Signature and two other banks at risk of collapse: First Republic and Silvergate Capital. Those investments represent a small percentage of the overall fund, which is valued at more than $10.3 billion.
In the Indo-Pacific, Korea's National Pension Service (NPS)—which manages the world's third-largest public pension fund with $800 billion in assets—owns some 100,000 shares in SVB, which were valued at around $23.2 million as of late 2022. Local media reports that NPS is looking for ways to respond to the incident at this time.
Across the Atlantic, Sweden's largest pension fund Alecta, which oversees more than $104 billion in assets, has around $848.7 million invested in SVB, and $282.9 million in Signature.
However, the fund said in a statement, "For individual pension savers at Alecta, the impact of this investment on future occupational pension payments is very small."
Traders work on the floor of the New York Stock Exchange as stocks slumped on Monday with key indices markedly lower amid worries over the banking system following the collapse of Silicon Valley Bank and shuttering of Signature Bank.
Mon Mar 13 2023 -
European stocks logged their steepest one-day fall this year on Monday on continued drag from banking stocks even as authorities stepped in to limit the fallout from the sudden collapse of Silicon Valley Bank. Shockwaves were sent across the UK and Europe despite HSBC swooping in to buy the bank’s UK arm and reassuring firms that banking services would continue as normal.
Dublin
The Dublin market was down 3.35 per cent to 8,103 on Monday evening, as banking shares slumped in line with the wider European trends amid the shock waves from the SVB collapse which continued to put pressure on financial stocks. Bank of Ireland slid more than 6.5 per cent over the session, closing at €9.23, while AIB was down 7.3 per cent to €3.54 by the close. Permanent TSB was 2.79 per cent off.
Elsewhere, Kingspan lost almost 3.5 per cent, and CRH was down 4.5 per cent by the close of the session. Smurfit Kappa lost 2.44 per cent, while Ryanair fell 2.43 per cent and Flutter Entertainment shed 2.6 per cent. The Paddy Power owner ended the day at €155.10.
London
More than £50 billion was wiped off the UK’s biggest stock market on Monday after the second- and third-biggest bank failures in US history spooked investors across the globe.
The FTSE 100 closed 199.72 points lower as it suffered bigger declines than seen in the aftermath of September’s mini-budget.
HSBC saw its share price decline by more than 4 per cent despite announcing it had acquired SVB’s UK business in the all-important rescue deal. Europe’s biggest bank said it paid just £1 for the troubled firm, indicating that regulators were confident it could easily take on any risk from SVB UK’s customers.
However, its share price closed 4.1 per cent lower as the stock was caught up in investor jitters over the wider banking sector.
Meanwhile, insurer Direct Line admitted its 2022 results were “disappointing” and that the group did not navigate the challenges of inflation and regulatory reform as effectively as it would have liked.
The group reported a full-year pretax loss of £45 million against sharp claims inflation, particularly across its motor arm. Its share price closed 4.8 per cent lower.
Europe
The pan-European Stoxx 600 index closed the day 2.3 per cent lower, with banks, financials and insurer stocks, along with energy stocks, bearing the brunt of selling pressure.
European banking stocks dropped 5.7 per cent, notching their worst two-day sell-off since the Russia-Ukraine war broke out early last year.
The wider risk-off moves sent Credit Suisse shares down 9.6 per cent to a fresh record low.
Germany’s Commerzbank slumped 12.7 per cent, France’s Société Générale and Spain’s Sabadell fell 6.2 per cent and 11.4 per cent, respectively.
However, euro-zone banking supervisors saw limited consequences for the region’s banks from the collapse of the US lenders, while Moody’s Investors Service noted that Europe’s banks were unlikely to get hit by bond portfolio losses.
New York
The positive effect from the American regulators’ overnight support actions in the banking system quickly evaporated on Monday morning, with stocks signalling that fallout from the incident is far from over.
Turmoil continued to engulf First Republic Bank, whose shares plunged more than 60 per cent in US premarket trading even after the lender moved to try to quell concern about its liquidity after the failure of SVB. PacWest Bancorp lost more than 30 per cent, while Columbia Banking System fell about 5 per cent.
While US regulators introduced a new backstop for banks that Federal Reserve officials said was big enough to protect the nation’s deposits, the surprise announcement that New York’s Signature Bank was being shuttered reminded investors that further turmoil, at least among regional banks, was still possible. A senior US Treasury official said some institutions had issues similar to the failed Silicon Valley Bank.
Most large US banks also erased earlier gains in US premarket trading, with JPMorgan Chase, Bank of America and Wells Fargo all trading lower.
Silicon Valley Bank’s crash ‘poses risk to UK start-ups’
Jeremy Hunt has pledged the government will do ‘everything to protect’ British technology companies caught up in the collapse of Silicon Valley Bank.
The chancellor warned its failure posed a ‘serious risk to our technology and life sciences sectors’ – although he said there was no risk to the UK’s financial system as a whole.
Urgent talks to ‘come up with a solution’ were held over the weekend between Mr Hunt, prime minister Rishi Sunak and Bank of England governor Andrew Bailey.
Regulators closed the bank – led for the last 12 years by CEO Greg Becker – on Friday amid struggles in the tech sector as higher interest rates squeezed out investors. Its UK arm was put into insolvency yesterday.
Mr Hunt said: ‘We want to find a way that minimises or, if we possibly can, avoids all losses to those incredibly promising companies.
‘What we will do is bring forward very quickly a plan to make sure that they can meet their operational cash flow requirements.’ But he did not say whether the government will guarantee deposits companies had with the lender or step in with taxpayers’ money.
Labour said the start-up industry must not ‘pay the price’ for the bank’s failure.
OakNorth Bank – founded by a former Conservative donor and advised by the former chancellor Lord Hammond – is in talks to buy the stricken bank’s UK operation, Sky News reported last night.
Labour’s shadow chancellor Rachel Reeves said: ‘I would urge the government to do more than offer warm words, but come forward with specific plans.’
Who Broke The Silicon Valley Bank And What Now – OpEd
By Alex Gloy*
On Friday, March 10, California-based Silicon Valley Bank (SVB), was forced to close. SVB was among the top 20 US banks by assets. Its collapse was the second-largest bank failure in US history. Who could have caused SVB’s collapse?
Let us examine the potential culprits one by one.
The Federal Reserve
In an interview with YouTube channel Blockworks Macro, Chris Whalen, an investment banker and author, puts the blame for SVB’s failure at the footsteps of the Federal Reserve, the US central bank. He argues that long periods of near-zero interest rates forced management to venture into longer-dated securities to find acceptable yields without compromising the quality of assets. The speed of subsequent increases in rates, the fastest of the past six cycles, led to steep losses on longer-duration bonds.
While this is certainly true, it is doubtful a central bank should take individual positioning into consideration when deciding on its monetary policy. Unfortunately, rising interest rates usually create casualties, especially after long periods of low rates. Should the fight against inflation, which affects every individual, trump the wish to protect certain institutions against financial harm?
Whalen predicted that the Federal Reserve would cut interest rates in an emergency meeting before financial markets open on Monday morning or face the risk of contagion. Whether that happens or not, it seems Whalen is not entirely right in blaming the Fed for SVB’s collapse.
The Management
Over the past ten years, client funds at SVB grew almost tenfold from $38 billion in 2012 to $375 billion in 2022. Inflows in 2021 alone amounted to $137 billion. From a bank’s perspective, client money inflows represent an increase in liabilities. The bank has to do a corresponding transaction on the asset side of its balance sheet, preferably earning an interest rate higher than the one owed to its clients.
During the period of largest inflows, yields in securities considered risk-free, such as 3-months Treasury Bills, ranged between 0.02% and 0.16%. Management could have chosen to relax standards for loan approvals in order to increase lending to customers. This would have been a recipe for increased credit losses in the future. Low interest rates forced management to venture into bonds with longer maturities in order to achieve acceptable yields on their assets.
Despite such pressures, management does not seem to be able to escape entirely scot-free.Moody’s has severely downgraded SVB, citing “significant interest rate and asset liability management risks and weak governance.” In hindsight, purchasing hedges against a rise in interest rates would have been beneficial. However, those hedges would have eaten further into margins. Management could be forgiven for dismissing the necessity of hedging after experiencing a decade of interest rates below 2.5%. Yet it is worth investigating shortcomings in governance.
The Customers
Social media are rife with comments demanding “no taxpayer bailout for rich clients” or blaming customers for not being aware of the $250,000 limit of Federal Deposit Insurance Fund (FDIC) insurance per account. Many of SVB’s clients were start-ups in the technology and healthcare sectors. Their deposits at SVB often consisted of capital raised from venture capital firms—money intended to carry them through the first loss-making years. These funds are needed for payroll, rent and other current expenses. Losing them would most likely result in the start-up closing down and laying off all employees.
A bank customer should not be required to study the bank’s balance sheet or be familiar with implications of monetary policy decisions on duration risk. During the 2008-09 financial crisis, the FDIC managed to protect all depositors of almost 500 failed banks without using a single tax-payer dollar. The same is expected at SVB, especially given the losses incurred seem manageable in relation to its assets.
The Rating Agencies and the Regulators
A news article by Reuters titled “Silicon Valley Bank’s demise began with downgrade threat” describes how an imminent downgrade in credit ratings by Moody’s derailed a plan by SVB to raise $1.75 billion in fresh capital. For legal reasons, investors need to be made aware of significant developments when purchasing newly issued securities. While the news of a looming downgrade certainly scared off any potential investors, it would be unfair to blame rating agencies for the demise of the bank.
Following the 2008-09 crisis, banking supervision has become stricter. Bankers regularlycomplain how stringent regulation hampers their operations. “Where Were The Regulators When SVB Crashed” asks the The Wall Street Journal. The article raises valid questions yet it is important to note that regulations require banks to hold a certain percentage of assets in so-called “High Quality Liquid Assets.” These can be quickly turned into cash if depositors want to withdraw funds, which is exactly what SVB did. Its losses did not stem from bad credits or investments in low quality assets, but from unrealized losses on high-quality bonds.
Regulations cannot foresee every business decision any bank might take. Banking is already one of the most regulated industries and more regulations do not seem to be the answer.
The Crypto Bros and the Short Sellers
Bitcoin advocates were quick to celebrate the demise of SVB as a sign the current fiat money system was about to collapse. Meanwhile, Circle Internet Financial, the issuer of stablecoin USDC, confirmed having $3.3 billion out of $40 billion dollars of its reserves stuck at SVB. This revelation led to turmoil in the market of stablecoins, with USDC breaking its $1 peg. It is not without irony that crypto still depends on traditional banking—the system it seeks to liberate its followers from—only to get caught with funds in said system, leading to a bank run on its stablecoin.
Stablecoin reserves are hard to manage since withdrawal could be required in a short period of time. Many banks refuse deposits from stable coin operators for exactly this reason apart from legal considerations.
As usual, short sellers are blamed for driving down the stock price of a failed company. However, short sellers analyze companies in depth and are well informed. Rising short interest (number of shares sold short) is often an indication of trouble brewing. According to an online service, as of February 15, around 6% of SVB shares outstanding were sold short. This is only a slightly elevated figure. If short sellers had any impact on SVB’s share price, it would have been relatively minor.
SVB was Unique
The business model of banking is to borrow short (at low rates) and to lend long (at higher rates). Otherwise, there is no way to accept deposits and make a profit. Net interest margins are slim. It would not make sense to run a bank without leverage. The business model has inherent risks, but those risks are not to be borne by depositors. The depositors themselves are a risk, should they decide to withdraw funds all at once. This is discouraged via the FDIC’s deposit insurance, which has worked very well in the past.
The combination of rapid deposit growth during a low-yield period, lack of lending opportunities, high share of non-insured deposits, and rapidly rising interest rates led to an unfortunate shortfall in risk-bearing capital. Calls on start-ups to withdraw their funds were individually rational, but they led, in aggregate, to a bank run and the irrational outcome of the bank being closed.
Containing contagion is important: the stock prices of other regional banks have suffered. Investors are now concerned about unrealized losses on long-duration bonds at other institutions too. In order to prevent increasing mistrust becoming a self-fulfilling prophecy, the Federal Reserve might be forced to stop the fire from spreading by lowering rates or lending against collateral. The fight against inflation might have to take a backseat.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
*About the author: Alexander Gloy is an independent investment professional with over 35 years of experience in financial markets. He worked in Equity Research and Sales, both in Investment and Private Banking for Deutsche Bank, Credit Suisse, Sal. Oppenheim and Lombard Odier Darier Hentsch. He focuses on macroeconomic research, analyzing the impact of global debt and derivatives on the stability of our monetary system. His interest in crypto-currencies from the perspective of monetary theory led him to become a member of the Central Bank Digital Currency Think Tank. He has taught classes at colleges and universities.
Source: This article was published by Fair Observer
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Yes, The Latest Bank Bailout Is Really A Bailout: And You Are Paying For It – OpEd
By MISES
Silicon Valley Bank (SVB) failed on Friday and was shut down by regulators. It was the second-largest failure in US history and the first since the global financial crisis. Almost immediately, the calls for bailouts started to come in. (Since Friday, First Republic Bank has failed, and many other banks are facing stress.)
In fact, on March 9, even before SVB failed, billionaire investor Bill Ackman took to Twitter to insist a federal “bailout should be considered” if the private sector could not save the bank. Hours after SVB officially failed, Ackman was still at it, and in a 646-word panicky screed, he demanded that the federal government “guarantee SVB deposits” and essentially backstop the entire banking industry to keep failing, inefficient, and poorly managed banks afloat.
Now, many readers might be saying to themselves, “I thought bank deposits were insured!” That, of course, is correct, but deposits are only legislatively insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Given that most normal people keep less than this in their bank accounts, that means the majority of bank users are not going to lose any of their money should their banks fail. Moreover, it is extremely easy to acquire deposit insurance on much more than $250,000 by simply keeping money at more than one bank. That $250,000 limit applies to the deposits at each bank where a depositor keeps funds. For customers with high liquidity needs, the financial sector offers tools for dealing with the risk of exceeding FDIC limits.
In an illustration of the laziness and arrogance that so characterizes our modern financial class, however, many of the wealthiest depositors at Silicon Valley Bank couldn’t be bothered with managing their deposits, and they essentially ignored the deposit-insurance rules that even a ten-year-old understands when opening his first bank account.
As a result, many venture capitalists and other wealthy SVB customers stand to a lot of money. At least, theystood to lose a lot of money before Sunday evening, when the Federal Reserve announced its new “Bank Term Funding Program” (BTFP), which promises to flood the banking system with new money and shore up the personal finances of wealthy depositors.
This is part of a two-pronged effort to both make banks appear more financially sound, and to greatly expand FDIC payouts to depositors who have their funds in these banks.
The official propaganda coming out of the administration, and from the usual Fed fanboys, is that none of this is a bailout. That’s a lie. The new steps being taken by the Fed and by the Treasury Department’s FDIC are indeed ultimately bailouts for billionaires and other wealthy depositors. Moreover, this new program will require at least a partial return of quantitative easing. There’s no way to guarantee such huge sums of money without having to fall back on inflationary monetary policy yet again. This also means price inflation won’t be going away. Here is why.
Propping Up Asset Prices with New Money
The first indication that this is a bailout comes from the text of the press release on the creation of the BTFP. It states that the new program will be
offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities [MBS], and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.
The key phrase is “These assets will be valued at par.” That’s important because these banks are facing huge unrealized losses on assets whose market prices plummeted as interest rates rose. In other words, the Fed has decided to live in an imaginary world in which banks have assets far more valuable than is the case in real life, and it will now allow banks to use worthless and near-worthless assets as collateral. According to the FDIC, these losses are huge:
Moreover, the terms of these loans reiterate how these are loans designed to hand money to banks for little in return. According to the Fed, “there are no fees associated with the Programs” and there is no penalty for prepayment. Foreign banks are also eligible, by the way. And, of course, “the Department of the Treasury . . . [will] provide $25 billion as credit protection.” If history is any guide, we can expect that Treasury backstop to get a lot bigger. If and when some of these banks default on the loans, the collateral won’t come close to covering the value of the loans. The banks are essentially getting free money.
Where will the money to provide these loans come from? It will be printed, of course. The Fed is already bankrupt and has no extra money lying around. The Fed can’t just start selling off its $8.5 trillion hoard of Treasurys and MBS to get cash. That would drive down the prices of those assets even further, and this would make balance sheets at banks—who also own Treasurys and MBS—even worse. So, new loans and guarantees will have to come from new money. Another phrase for that is “monetary inflation.”
The FDIC Will Need a Bailout
The second prong of the bailout is the FDIC’s promise to cover all depositors at troubled banks, rather than just those with deposits up to the usual limit. The not-a-bailout narrative claims that the new promised expansion of insurance will all be funded by FDIC fees and imposes no costs on taxpayers. “The banks will pay for it,” we are told.
That’s not how it will actually work. In this three-minute video, Peter St. Onge explains the real problem:
St. Onge notes that the FDIC fund available for backstopping deposits is less than $130 billion. Yet deposits in US banks total approximately $22 trillion. The FDIC fund is equal to about 0.6 percent of all the deposits. And it appears that even at the banks with the highest proportion of FDIC-covered accounts, only 42 percent of deposits are covered by insurance. So, clearly, extending FDIC coverage to all deposits means the FDIC will have nowhere near the funds it needs to cover potential depositor losses. The FDIC was never intended to insure rich people with deposits well in excess of FDIC insurance maximums. Yet that is exactly what is now happening.
When the FDIC runs out of money, what happens? The FDIC runs to the US Treasury to get a bailout. Where does the money to bail out the FDIC come from? It comes either from current tax revenues or from borrowed money. Either way, the taxpayers are on the hook. Moreover, if the Fed intervenes to buy up some of that new government debt—to keep federal interest obligations low, of course—then taxpayers will also pay via the inflation tax.
When we consider all this, we can see how the grift works: the Fed or the Treasury Department creates a “fund” and claims that it will be financed by fees and other nontax revenue sources. Thus, when the FDIC or the Fed rush to bail out banks, the politicians can claim the taxpayers will pay nothing. That is only true if the programs themselves receive no backstopping from the Treasury or from monetary inflation. But if we’ve learned anything since 2008, it’s that these programs all enjoy implicit guarantees of taxpayer backing, and that any “caps” on these amounts can be increased at any time.
Expect More Price Inflation
In any case, the ordinary taxpayer will certainly feel the pain in terms of ongoing price inflation. Current bailout efforts are inflationary and are thoroughly opposed to the Federal Reserve’s recent attempts at “quantitative tightening.” The whole point of the bailouts, after all, is to loosen financial conditions for banks. So the Fed will almost certainly be backing off whatever it had planned in terms of raising the target interest rate and reducing its portfolio at the next Federal Open Market Committee meeting. Now the Fed will be looking at whatever strategy it can find to increase the flow of dollars to banks, and that will mean more money creation, even if the Fed’s official position remains ostensibly hawkish. Put another way, get ready for more entrenched price inflation. But don’t forget that the primary focus of all of this is to bail out wealthy depositors and bankers. On top of it all, there’s no guarantee that it will even work. There’s a reason the financial technocrats are in panic mode. They don’t know what will happen next.
About the author: Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first. Ryan has a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He was a housing economist for the State of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
Source: This article was published by the MISES Institute
MISES
The Mises Institute, founded in 1982, teaches the scholarship of Austrian economics, freedom, and peace. The liberal intellectual tradition of Ludwig von Mises (1881-1973) and Murray N. Rothbard (1926-1995) guides us. Accordingly, the Mises Institute seeks a profound and radical shift in the intellectual climate: away from statism and toward a private property order. The Mises Institute encourages critical historical research, and stands against political correctness.
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