The U.S. Treasury and Federal Reserve bailed out the failed Silicon Valley Bank and the venture capital ecosystem over the weekend, guaranteeing uninsured deposits and offering loans to other banks so they don’t have to lose money on their fixed-income assets.
While regulators and Biden officials have been telling the U.S. that the economy is robust and there is 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 Wall Street Journal editorial board wrote in a March 12 opinion piece.
Silicon Valley Bank collapsed Friday and its assets were seized by the Federal Deposit Insurance Corp (FDIC) after it failed to raise more than $2 billion in capital to cover losses on a massive bond sale, spooking depositors and investors who made a run on the bank. The bank tried to sell itself but those talks failed.
Silicon Valley and Wall Street freaked out over the weekend, demanding that the Fed and Treasury intervene to bail them out.
Treasury Secretary Janet Yellen and President Joe Biden said there will be no “bailout” for SVB, setting off a debate over what exactly the Fed is doing if it’s not bailing out SVB.
“No losses will be borne by the taxpayers,” Biden said Monday at the White House. “”Let me repeat that, no losses will be borne by the taxpayers. “Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund.”
Yellen on Sunday ruled out the possibility of a bailout for the bank’s owners and investors, saying that happened during the 2008 banking crisis and “we’re not going to do that again.” Many viewed the 2008 bailout as the government rewarding executives and shareholders for irresponsible banking and investment practices.
When the Fed flooded the world with dollar liquidity in the wake of the covid pandemic, venture capital flooded into startups, which formed the customer base of SVB. The bank’s deposits skyrocketed — “far beyond what it could safely lend,” WSJ reported. Nearly half of all U.S. venture-backed tech startups in the United States depend on SVB, Nobel economics laureate Joseph E. Stiglitz wrote for Project Syndicate.
While the Fed kept interest rates near zero for years, SVB was putting the money in long duration fixed-income assets seeking a higher return. After the 2008 crisis, regulators deemed these Treasury bonds and mortgage-backed securities nearly risk-free for the purpose of measuring bank capital. If regulators say they’re risk-free, banks and depositors may be less careful.
But as the Fed started hiking interest rates quickly to curb inflation, those securities declined in value. SVB faced huge capital losses if it was forced to liquidate those assets before maturity. That’s what happened as SVB customers made a run on the bank.
“The San Francisco Fed regulates SVB and somehow missed this rising vulnerability,” WSJ reported. “The Fed and Treasury will try to blame the bankers, but they are as much if not more culpable.”
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The Fed is prepared to provide liquidity — emergency access to cash — to financial markets and institutions in several ways. These include temporary changes to open market operations, lending through the “discount window” to eligible banks, and operating special lending facilities for other financial institutions. This is why the Fed and other central banks are known as “lenders of last resort,” according to the Federal Reserve Bank of San Francisco.
Beyond providing liquidity, however, “the Fed is going further and offering one-year loans to banks against collateral of Treasurys and other fixed-income assets,” WSJ reported. “The Fed will value these assets at par, which means banks don’t have to sell their assets at a loss.
“The Fed is essentially guaranteeing bank assets that are taking losses because banks took duration risk that Fed policies encouraged. This too is a bailout…our guess is that the Treasury, FDIC and Fed will look to guarantee uninsured deposits across the banking system. The Fed will want to avoid institutional blame for financial damage, and President Biden will do anything to avoid letting a financial panic affect the overall economy as he prepares to run for a second term next year.”
The FDIC created an entity to protect SVB’s insured depositors up to the legal limit of $250,000. However, 85 percent-to 90 percent of SVB’s deposits are uninsured, according to estimates in a recent regulatory filing. The concern is that depositors in other banks will now take their money and run.
The feds said they will guarantee even uninsured deposits at SVB and at Signature Bank in New York. When a bank fails, depositors typically get their money back less 15-to-20 percent.
“We’re very aware of the problems that depositors will have,” Yellen said. “Many of them are small businesses that employ people across the country, and of course this is a significant concern and [we’re] working with regulators to try to address these concerns.”
Some speculate that a universal uninsured deposit guarantee will be next, amounting to an admission that “the regulatory machinery established in 2010 by Dodd-Frank failed,” WSJ reported. “… a nationwide guarantee for uninsured deposits, even for a limited time, means this will become the default policy any time there is a financial panic.”
The FDIC created a “transaction account guarantee” program during the 2008 panic, but Congress let it expire in Dodd-Frank.
“Congress set the $250,000 insured limit to protect average Americans, not venture investors in Silicon Valley” the WSJ editorial board said.
More than the failure of a single bank, SVB shows deep failures in the conduct of both regulatory and monetary policy, Stiglitz wrote. “Like the 2008 crisis, it was predictable and predicted…We need stricter regulation, to ensure that all banks are safe. All bank deposits should be insured. And the costs should be borne by those who benefit the most: wealthy individuals and corporations, and those who rely most on the banking system, based on deposits, transactions, and other relevant metrics.”
Ordinary depositors are not supposed to be managing bank risk Stiglitz continued. “They should be able to rely on our regulatory system to ensure that if an institution calls itself a bank, it has the financial wherewithal to pay back what is put into it.”
If the Biden administration guarantees deposits without Congressional approval, it could feed populist anger. Democrats and the media may try to blame bankers or the Trump administration, “but these are political diversions,” WJ reported. “You can’t run the most reckless monetary and fiscal experiment in history without the bill eventually coming due. The first invoice arrived as inflation. The second has come as a financial panic, with economic damage that may not end with Silicon Valley Bank.”
Wall Street Journal reader Murray Honig commented on potential political fallout: “With the critical vulnerability of our entire banking and financial system laid bare, what exactly will Republicans propose to do about it? Lower taxes? …Reduce regulation even further?”
Reader Todd Hinrichs commented, “…the Republican response to this crisis will be to continue to push for banking industry deregulation, just like they always have. Trump promised to roll back banking regulation when he was running for President and he did so in 2018 when he rolled back Dodd-Frank. Republicans never met a regulation that they didn’t want to get rid of. Then you get derailed trains and derailed banks.”
Howard H wrote, “The Fed resorted to ‘we can’t let the tech bros that spin our narratives collapse, and we certainly can’t afford to lose Newsom as a replacement for Biden.'”
Images: Marc Andreessen, co-founder and general partner of Silicon Valley venture capital firm Andreessen Horowitz, at Pando Monthly in SF, Oct. 3, 2013 by JD Lasica
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Jason Calcanis at at LAUNCH Festival 2016, by Preshdineshkumar
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Garry Tan, president and CEO of Y Combinator at Web Summit 2022, Nov. 2, 2022, by Harry Murphy/Web Summit via Sportsfile, https://www.flickr.com/photos/websummit/
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Ben Horowitz, co-founder of the venture capital firm Andreessen Horowitz at TechCrunch Disrupt,March 3, 2023
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