During a 2016 Democratic primary debate, Sen. Bernie Sanders argued that “Congress does not regulate Wall Street, Wall Street regulates Congress.” Sanders was criticizing Hillary Clinton’s relationships with big investment banks and calling for regulations that went beyond the Dodd-Frank Act, which sought to rein in high-risk financial speculation after the 2008 financial crisis and bailouts. The recent bailout of Silicon Valley Bank (SVB), despite its much smaller scale, echoes the crisis of 2008 and has rekindled debates about regulation, lobbying, and soft corruption.
Instead of strengthening Dodd-Frank, Donald Trump, the eventual winner of the 2016 election, promised to “do a number” on it shortly after taking office. In 2018, he signed a bill—supported by seventeen Democratic senators in addition to every Republican—that exempted small and medium-sized banks from liquidity requirements and regular “stress tests” performed by the Federal Reserve. Among those lobbying for the exemption was SVB, which catered to venture capital–funded tech start-ups with “white glove” services like low-interest mortgages and business advice. Its niche business model meant SVB was vulnerable to a bank run. Whereas the average bank has about 50 percent of its deposits under the $250,000 limit for FDIC insurance, less than 3 percent of SVB’s were under that limit at the end of 2022. The bank’s executives heavily invested its largely uninsured deposits in long-term U.S. Treasury bonds—a safe investment in theory but very risky in an environment of fast-rising interest rates. Most banks hedge against such risks, but despite warnings, SVB’s executives actually dropped previously held hedges over the course of 2022 in order to juice the bank’s profits and stock price.
At the same time, rising interest rates slowed investment in the tech sector, meaning start-ups were withdrawing more of their deposits from SVB to cover costs, forcing the bank to sell its bonds and realize the losses on them. On March 8, the bank sought to address its growing liquidity problems by offering new stock to investors. Its customers—including Peter Thiel and his famous Founders Fund—took this as a sign of trouble, panicked very publicly, and began withdrawing funds and encouraging start-ups to follow suit. The next day—Thursday, March 9—depositors tried to pull out $42 billion, approximately a quarter of the SVB’s total deposits. On Friday morning the FDIC shut the bank down.