Silicon Valley Bank (SVB) Was Donald Trump’s Bailout
For some reason, I did not release this one on the 13th. Not sure why. I was at the eye doctor for sure and he was removing membrane from the retina. Never felt a thing. So far so good. It might just be me thinking it improved my right eye vision. I was able to read the chart which the NP said was positive. I was told many people could not after surgery.
Anyway, there are any number of good posts on different blogs you can read. This one by Dean Baker gets right to the point. Once again, the same as 2008, it is all about rescuing the big guys who have political pull. The rest of us were along for the ride.
SVB Was Donald Trump’s Bailout, Center for Economic and Policy Research (cepr.net), Dean Baker
There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):
- It was a bailout
- Donald Trump was the person responsible.
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.
We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.
If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.
This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken ten minutes to examine SVB’s financial situation, which was mostly a matter of public record.
For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the insurance that they did not pay for.
This brings us to the second point; this is Donald Trump’s bailout. The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.
This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.
Prior to the passage of this bill, a bank the size of SVB would have been subject to regular stress tests. A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB.
If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.
But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.
Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)
What happened in 2018 was effectively allowing SVB to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.
It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.
Anyhow, this bailout is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
Thoughts on Silicon Valley Bank: Why the FDIC plan isn’t (but also is) a bailout; and why systemic risk remains, New Deal democrat
(Great news about your eye surgery! Painless – I told you so!)
On the Banking Turmoil… US futures tumble, bank stocks slump around the world, Credit Suisse hit hard…
(AP-Boston Globe) U.S. futures tumbled Wednesday and bank stocks around the world slumped as anxiety over the health of the global banking system surfaced again with new potential troubles arising at Europe’s Credit Suisse.
Futures for the benchmark S&P 500 slid 1.7% and the Dow Jones Industrial Average fell 1.6% before the bell.
Large and mid-size banks in Europe and the U.S. sank sharply before U.S markets opened, particularly in Europe. Major European banks fell between 5% and 10%, though Switzerland’s Credit Suisse skidded nearly 25% to all-time lows. That decline comes after media reports that Saudi National Bank representatives said they could not shore up their investments in Credit Suisse, citing regulatory concerns. …
Liz Warren sends scathing letter to SVB CEO…
(Boston Globe) On Wednesday, the Massachusetts Democrat — who rose to national fame as an advocate for tougher rules for big banks following the 2008 crisis — sent a scathing letter to SVB’s former president and CEO, Gregory W. Becker, asking the former executive to detail his bank’s ultimately successful lobbying efforts to loosen regulations on midsize banks under the 2008 law known as Dodd-Frank.
“These rules were designed to safeguard our banking system and economy from the negligence of bank executives like yourself — and their rollback, along with atrocious risk management policies at your bank, have been implicated as chief causes of its failure,” Warren wrote. …
Liz Warren’s letter
Swiss Authorities Say They Will Back Credit Suisse After Shares Plunge
NY Times – March 15
The Swiss National Bank, the country’s financial regulator, said on Wednesday that it would financially support Credit Suisse, if necessary, after the bank’s stock price plunged to a record low a day after it had warned of problems in its financial reports.
A decline of about 24 percent in Credit Suisse’s shares raised new worries about the banking industry on a day when broader European stock markets suffered sharp losses. The price of its bonds dropped as much as 47 percent and the cost of financial contracts that insure against a default by the bank spiked, according to Markit, a data provider.
The bank’s largest shareholder, Saudi National Bank, earlier ruled out providing more money for Credit Suisse as it struggles with its latest turnaround plan.The turmoil in Europe came as investors were already anxious over the collapse of Silicon Valley Bank and Signature Bank in the United States last week. Though those banks are relatively small, their sudden shutdown has sent a shudder through financial markets as investors worry about spiraling risk in the system.
Credit Suisse’s troubles, however, are largely separate, and of its own making. The firm has suffered blow after blow in recent years, from big trading losses to spying scandals that led to ouster of a chief executive. …
Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems
NY Times – March 19
The bank was using an incorrect model as it assessed its own risks amid rising interest rates, and spent much of 2022 under a supervisory review.
Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year — an awareness that proved insufficient to stop the bank’s demise.
The Fed repeatedly warned the bank that it had problems, according to a person familiar with the matter.
In 2021, a Fed review of the growing bank found serious weaknesses in how it was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as “matters requiring attention” and “matters requiring immediate attention,” flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.
But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose.
It became clear to the Fed that the firm was using bad models to determine how its business would fare as the central bank raised rates: Its leaders were assuming that higher interest revenue would substantially help their financial situation as rates went up, but that was out of step with reality.
By early 2023, Silicon Valley Bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies — but at that point, the bank’s days were numbered. In early March, it faced a run and failed, sending shock-waves across the broader American banking system that ultimately led to a sweeping government intervention meant to prevent panic from spreading. On Sunday, Credit Suisse, which was caught up in the panic that followed Silicon Valley Bank’s demise, was taken over by UBS in a hastily arranged deal put together by the Swiss government. …
Swiss banking giant UBS will buy its smaller rival Credit Suisse