At 6:15 this evening, Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg announced that Secretary Yellen has signed off on measures to enable the FDIC to fully protect everyone who had money in Silicon Valley Bank, Santa Clara, California, and Signature Bank, New York. They will have access to all of their money starting Monday, March 13. None of the losses associated with this resolution, the statement said, “will be borne by the taxpayer.”
Graf 6: Corrected to read that only about $8 billion were LESS than the insured amount, not GREATER than. Sorry. Something always slips through.
And once again the federal government, under strong leadership, has played the role that it's supposed to play — and decisively so.
Can we somehow make today's letter required reading for Republicans in Congress? Do they not have a clue that the majority of voters would hold them forever responsible for tanking the economy if they don't raise the debt ceiling?
But of course come Monday some of the radical right GOP will try to blame Biden for the financial problems that Trump unleashed.
This morning I posted the following on Robert Hubbell's open comments:
This week we (once again) learned that "big" government does work.
A bit of history:
Between the stock market crash of 1929 and 1933, almost 9,000 banks closed, insolvent, unable to fund the return of their depositors cash. In other words, you couldn't withdraw money from your bank. The banks reserves and investments were insufficient to cover their customers’ deposits. You’ve probably probably seen the example of this in Frank Capra's famous movie "It's a Wonderful Life" where Jimmy Stewart, playing George Bailey, the owner of a Savings & Loan company, finds himself in the unfortunate position where his banking institution unable to fund his customers (and friends) withdrawals.
By March 3, 1933, many banking institutions, particularly in the West, had closed their doors, unable to fund their depositors' withdrawals.
On March 12, 1933, 90 years ago today, and only 8 days after being inaugurated as the 32nd president of the United States, Franklin Delano Roosevelt spoke to the Nation in the first of many his “Fire Side" chats.
In that speech only days after his inauguration, FDR sought to calm the Nation by explaining that the newly elected government would put in place new regulations that would protect the public from, what he called, "incompetent or dishonest" (a/k/a greedy) bankers who used depositors' money "in speculation and unwise loans.” I highly recommend listening to FDR’s address here:
On June 16, 1933 the "Glass-Steagall" Banking Act of 1933, signed by FDR .
The Act regulated banking and formed the Federal Deposit Insurance Company (FDIC). The FDIC was a new government agency funded entirely by the banking system to monitor the banking system and insure deposits in member banks. Here is more information about the FDIC: https://www.fdic.gov/
On this past Friday, March 10, 2023, Silicon Valley Bank (SVB) was deemed insolvent taken over by the Federal Deposit Insurance Company. The bank, which had funded huge loans to high tech start-up companies and venture capitalists, had invested it excess funds win bonds which, when interest rates climbed, lost value. In addition, when interest rates rose, funding for start-up companies dried-up so these companies started to withdraw their deposits in order to cover their expenses. One thing led to the next and the bank had to sell the now steeply discounted bonds at a $2B loss. Unable to meet its obligations to its depositor, the bank was closed by the State and taken over by the FDIC. Deposits up to $250,000 are insured so those funds will either be transferred to the new bank formed by the FDIC, The Bank of Santa Clara, or returned to the SVB’s customers.
Anyway, my point is that our federal government is there to protect us and assure stability. That government is under threat by a Republican Party that would end such regulation and government oversight in a heartbeat. It is up to us to remind Americans that our government is there to serve and protect us.
Later in the day, after posting that comment, I added to my post the following: -
The government announced it just closed Signature Bank, a bank that generally does business with law firms and hold large sums in escrow for banking clients. The federal government is using a "special assessment on banks" to protect "any losses to the Deposit Insurance Fund to support uninsured depositors."
Again, this is significant news. But for the quick actions of the Biden Administration, we could have be facing a banking calamity that would have been a direct result of Trump's and the Republican Congress' relaxation of banking oversight.
Interesting how losing money cuts through anti regulatory denial. Rules are the structural components of civilization
It's reassuring to see that Yellen, Powell, and Gruenberg stepped in so quickly to protect the uninsured depositors and keep these two banks afloat and the system intact. I'm trying to imagine the criticism that will ensue from those who understand little to nothing about how a potential catastrophe was just avoided. I' would like to believe that they'll be able to see how not paying our debts would be even more catastrophic, but I'm skeptical that any of the Freedom Caucus folks will care. They seem hellbent on being as destructive as possible to our economy, the global economy, and democracy in general. May my forebodings prove unwarranted.
Another lucid, compact summary. The best I have seen.
“…panic and fear over the collapse of just one major bank should make it clear that the Republicans’ threat to default on the U.S. debt, thus pulling the rug out from under the entire U.S. economy unless they get their way, is simply unthinkable.”
Since thinking is out of vogue among Republicans at the moment, doing the unthinkable is not a problem. In fact, it’s really quite easy; many do it every day.
I learned very long time ago that when you invest, you should, especially as a young person, put maybe 50% in bonds and the rest in stock. You are going to have some tumultuous years but things seem somewhat balanced. The younger you might be, the more volatility, you can take. Not so, for older folks like me now. We must have a steady income to keep up with inflation and for our everyday needs. It is always a balancing act. The bank of Silicon Valley got way ahead of itself and you can see the greediness. The government does not want legitimate companies to fail so it is willing to step in but banks like these should have stiff penalties to pay. The taxpayer should not be dragged into any of this and I believe Yellen and Biden will reiterate that government must impose regulations. They should just do it by executive order, if they can and not be bothered by the obnoxious selfish cries of the opposition. Thank you, Heather...you stirred me up!
One can't help but wonder whether the Fed's Rip Van Winkle snooze with interest rates at zero for years isn't a culprit in this. Had interest rates begun rising incrementally quite some time ago the shock of the virtually instant rises now wouldn't have set off this chain reaction which the smart guys should have foreseen. Older folks with modest retirement nest eggs have taken it on the chin for years trying to find reasonable fixed income returns that would support a reasonable retirement lifestyle. Instead, the Fed robbed them of this, all to the benefit of corporate interests who've found cheap money the drug of choice. Now the picnic's coming to an end, but the Fed and Treasury seemed to have overlooked to likely fall out. In the end, we find that humans are basically terrible at managing the complexities of very large systems we create. We saw that in 2008. We will doubtless see more of this in 2022-23. We love complex systems. Trouble is we can't seem to manage them when they become out of kilter.
Thanks for this very clear and helpful explanation, Heather. I don't understand why there was such a huge amount of money in uninsured accounts. Couldn't customers/clients have deposited that surplus in insured accounts in other banks?
Robert Reich had a good explanation of the financial crisis this morning. Trump was only the latest perpetrator of rollbacks: the Bush, Clinton, and Obama administrations also eased restrictions. The profits in the financial sector of the economy would have been unthinkable during the New Deal. I am for protecting ordinary wage earners and retirees. Let’s make banking boring again!
Thanks, Heather, for casting the SVB failure in a perspective that makes sense. I'm curious that Congress didn't have to weigh in here - Matt Gaetz preemptively stated that he would never vote to bail out depositors, so he must have thought he'd have a say.
I guess this is the right thing to do, though it galls me a bit to think we're creating a precedent here that may encourage bankers to be irresponsible (is that an internal contradiction?) You do make a very strong point about the effect that default on the national debt would make SVB's going under look like a pebble dropped in a puddle.
Thank you for your clarity. You always shed light.
Anti-regulation Silicon Valley libertarians met the same fate as their small town counterparts in Grafton NH who took over the village, shut down services and were eventually overrun by bears feasting on the uncollected garbage.
These are just two examples why the world has never seen a truly libertarian country rise to prominence, much less a village. In the absence of government, greed is not an acceptable substitute to maintain anything.
What’s happened with the Silicon Valley Bank (SVB) truly sucks and highlights the fragility of the American banking system.
SVB was an ‘elite’ bank that serviced high-tech companies and executives. It had a massive proportion of non-FDIC insured deposits ($165 billion out of $173 billion). SVB management chose to offset these deposits with short-term T bills and longer-term Treasury bonds.
As inflation soared, the value of these debt instruments dropped sharply. When large depositors became nervous and started cashing out, SVB could not generate the cash to pay out. That, in late February, the SVB CEO personally sold $3,500,000 in stock and SVB’s chief finance officer sold $560,000 in stock, suggested rats jumping off a sinking ship.
Personally, I consider it unconscionable that Silicon Valley fat cats, who are supposed to be sophisticated in financial matters, should have their uninsured deposits compensated. In capitalism, there is the risk of success or failure. This does not include an uninsured homeowner, while his house is burning, calling his insurance agent for a home insurance policy.
HOWEVER, the poor fiscal management at SVB puts in peril much of America’s banking system.
Especially with regional banks (those with $50-250 billion in deposits), a similar run on these banks could cause a liquidity crisis similar to what occurred in 2008. It could become a cascade of falling dominos.
Once I was Executive Vice President at Moody’s Investors Service, responsible for the credit rating of corporate and sovereign debt globally. Personally, I refused to rate the long-term debt of many institutions, because the risk seemed excessive. Only a week ago the major rating agencies had an A (good-very good) rating on SVB debt.
After 2008 the Fed/Treasury established much tighter risk management criteria for banks. These have been maintained for the largest banks. In the Trump administration, these were significantly weakened for ‘regional banks.’
I am not certain that there is any sure fire way to avoid frightening runs on banks. When this occurred during the Hoover/FDR presidential transition, FDR ordered all banks closed for five days. Such would be a disaster today.
My instinct is that Treasury Secretary Yellen and Federal Reserve Chairman Powell are endeavoring to pursue the ‘least worst alternative’ to keep our creaky financial system functioning. They state that uninsured depositors ($165 billion at SVB) will be reimbursed, but that this will not cost taxpayers a nickel. (Currently banks are being charged a fee that goes into a federal account established to cover such situations. Yellen says that banks will be charged a higher insurance fee).
Certainly the Treasury and the Federal Reserve should resurrect and tighten the oversight rules for regional banks that were weakened by the Trump administration. Moreover, this current fiscal crisis highlights the imperativeness of meeting out national debt obligations by June/July.
If the Republicans seek to screw this up with their ‘social expenditures’ blackmail, the financial muck up we are witnessing today could seem a trickle compared to the avalanche that could be triggered by a national debt default.
HCR, Thank you for your last paragraph linking another Fear-Driver, the Republican Seditionists' threat to to default on U.S.debt as "unthinkable" self harm.
The SVB run took place rapidly over 7 calendar days as several accurate Tick-Toks have been published: one at NYT (Sorkin, et al), an explainer at Vox & Others. Several potent accelerators sped SVB's demise. As many posted last Friday, true, SVB was a huge player in Tech Start-ups but, also inthe budding Life Sciences ventures impacting bio payrolls, general partners & financial stability in Bio Centers. Update Monday in England: HSBC-UK has purchased SVB's UK arm for 1 English pound. I think I need a "cuppa".
Bank runs generate generalized, unfocused economic fears even among Baya Area, CA residents & businesses with no direct risk-- virtually no risk at all. All of this at time when our Country needs investments & budgeting for the next generation after coming out of the Pandemic.
TIme for a New Deal 2.0.
I recall reading somewhere in the past, someone who had been saved from his own mistakes, and who had apparently experience something akin to a near-death experience as a consequence, would henceforth intentionally treat his benefactor with supreme indifference and monumental ingratitude. Whether my recollection is accurate or not, that is exactly what I expect from the people who ran both Silicon Valley Bank and Signature Bank. Rather than expressing appreciation to those rescuing them from the ice water bath that they had drawn for themselves, they're going to treat Treasury Secretary Yellen, Fed Chairman, and FDIC Chairman Gruenberg with the same contempt that they reserved for President Biden, Senate Democrats, and every other right-thinking person in the US of A. Why should tomorrow be any different from last Thursday. If it were up to me, I would have Secretary Yellen bar those individuals from ever getting closer to a bank than an ATM machine. These people should be exiled from the financial services industry permanently, with no recourse; and anyone in the banking industry who hires them will also suffer the same fate. This is the same mistake that we made in 2008 when we rescued the banks, and the bankers. Let them go work at Starbucks as baristas for 18 bucks an hour, plus tips.