A Little Commentary on Silicon Valley Bank's Failure from The Pundits

 

They are all libertarians until they are hit by higher interest rates.

— Nassim Nicholas Taleb (@nntaleb) March 11, 2023

Silicon Valley Bank bought bonds when interest rates were low. Now that they're high, the bonds are worth (much) less, and the bank failed...after successfully lobbying to be exempt from some bank regulation. 

For a more detailed explanation, see Steve Keen's essay here. He, and many others, blame the Fed's speedy increase in interest rates, and the subsequent decrease in value of the bonds SVB had bought. This is a case of iatrogenic medicine--where the treatment causes the disease.

From Mike Norman, commenting on the fallout from being unable to meet payroll thanks to SVB's failure: "If youre a big firm you’re going to have to get all your USD to a 100% govt money market fund and establish your own credit union staffed by your own people for the firm to use for payroll and current accounts payable/receivable... US banking system completely unusable with these Art degree monetarist morons trying to operate it…"

Meanwhile:

Jerome Powell testified in front of the banking committee this week.

COMMITTEE: “Do you see any systemic risk in the banking system because of the rapid rise of interest rates?”

POWELL: “No”

🥴

— Genevieve Roch-Decter, CFA (@GRDecter) March 12, 2023

It’s Like Über, but for Deposit Insurance

Posted on March 13, 2023 by mikethemadbiologist

In light of the Silicon Valley Bank bank run and subsequent rescue, David Dayen points out there’s a solution for businesses, known as Insured Cash Sweep, which chops up your money into FDIC-insurable units of $250,000. That would mean these businesses worried about losing their excess cash wouldn’t. Why SVB didn’t use this for its clients is… unclear, though given the bank officers’ recent behavior, such as paying out a bunch of bonuses right before the FDIC closed them, I’m guessing they didn’t want to spend the money to set this up.

Of course, the larger context is that Trump, Republicans, and some ‘moderate’ Democrats voted to decrease regulations which, had they still been in place, would have prevented the bank run (boldface mine):


Back up: How is it that Silicon Valley Bank [SVB], Thursday the 16th-largest bank in America by assets, is shutdown, in receivership, with every chance of a wild financial ride to come over the next week as every organization with more than $250K in any one bank frantically moves money around to try to get all of its deposits under the $250K FDIC insurance maximum?

…And the answer is:

“As a banking organization, our liquidity is subject to supervision by our banking regulators. Because we are a Category IV firm with less than $250 billion in average total consolidated assets, less than $50 billion in average weighted short-term wholesale funding and less than $75 billion in cross-jurisdictional activity, we currently are not subject to the Federal Reserve’s LCR or NSFR requirements, either on a full or reduced basis…”

What Dan does not mention is §401 of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act:

§165 of the Financial Stabiity Act of 2010… is amended… in the matter preceding paragragph (A), by striking “$50,000,000,000” and inserting “$250,000,000,000”…

supported by 50 Republican and 17 Democratic Senators (and by 225 Republican and 33 Democratic House members), and signed into law by President Trump.

If not for this action of “regulatory relief”, SVB would have been subject to the original Dodd-Frank NSFR, and would have been unable to have taken on the asset portfolio it took on, and so it would not have crashed—at least, not the way it did, and not now…

If we lived in a good world—one in which Dodd-Frank had, as it should have, established the principle that all commercial banking deposits are insured (and that banks pay insurance premiums on all of their deposits) and if the 2018 EGRR&CPA had not been passed exempting SVB from NSFR, et cetera, then Peter Thiel’s chaos-monkey appearance would not have made a difference. No one would have an incentive to pull their money out of SVB. If anyone had felt the urge, SVB would have had a very different portfolio—one without this mark-to-market loss and the expected-future-capital-gain offset—because it would have had to maintain its NSFR ratio above 100% throughout.

It’s fucking stupid all the way down. One other point: if this had been a bank in Michigan that lent mostly to small manufacturers (let’s less than fifty employees), would the titans in Silicon Valley call for helping the depositors?

You already know the answer to that question.

Added: It’s weird how the Fed argues it needs to raise rates to cause unemployment so they can lower inflation, but also needs to make SVB depositors whole to prevent job losses. I suppose some jobs are less inflationary than others.

 Update: From The Intercept:

“There is definitely a class element,” economist Dean Baker of the Center for Economic and Policy Research said of the federal intervention in an email to The Intercept. “Look at how easily we can toss tens of millions of dollars at people who couldn’t figure out how limits on FDIC deposit insurance work, but the idea of giving $10k in debt relief to a student who might have used bad judgment in taking out a loan when they were 18, gets so many people upset about moral hazard and individual responsibility.”

Perhaps no one embodied this contradiction more than Larry Summers, former Treasury secretary and a vocal critic of student debt relief. “This is not the time for moral hazard lectures or for lesson administering or for alarm about the political consequences of ‘bailouts,’” he said in a tweet on Sunday.

Update #2: From Naked Capitalism

This post makes a point that is glossed over in nearly all mainstream coverage of the collapse of SVB and resulting bailout: the discount window liberalization and the creation of the Bank Term Funding Program together achieve what is just a hair’s breadth away from a full backstop of uninsured deposits, while letting the officialdom pretend it hasn’t made that huge extension of subsidies to banks. Biden officials claim that banks will be made to pay for all these new goodies, when even now, they don’t pay the full value of FDIC deposit insurance.

However, the post gets a key element of the SVB-depositor power dynamics wrong. It was not the venture-capital backed companies that chose or agreed to keep all their deposits at SVB. It was their venture capital investors that forced this arrangement on them, confirmed by a reader: “Speaking as a former customer as dictated by my VCs.” This distinction matters because it puts the locus of influence and favor-trading much higher up the food chain.

 Update #3: From Modern Money Theorists Stephanie Kelton and Randall Wray.

This is an extensive history of the Fed's actions as they appear in bank failures. SVB is nothing new.