Another Bank Crisis, Another Bailout

SVB was ‘too well-connected to fail.’
A man puts a sign on the door of the Silicon Valley Bank at the bank’s headquarters in California, March 10, 2023 (OSV News photo/Nathan Frandino, Reuters).

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.

SVB turned out to be not too big to fail, but, as economic historian Adam Tooze put it, “too well-connected to fail.”

What followed was a concentrated lobbying effort from the tech industry, bankers and investors, and allied politicians asking the Fed, Treasury, and FDIC to invoke emergency measures and fully guarantee SVB’s uninsured deposits and “make depositors whole.” Otherwise, advocates warned, the contagion could spread to other small and medium-sized banks and the tech industry could grind to a halt, with firms unable to make payroll. Late the next day, hundreds of tech-industry executives and investors attended a two-and-a-half-hour webinar with Rep. Ro Khanna (D-Calif.), who became a leading advocate for emergency action. Well-known Silicon Valley investor Ron Conway had dinner with Nancy Pelosi and Barack Obama, spoke with Deputy Secretary of the Treasury Wally Adeyemo, and brokered calls with Vice President Kamala Harris. California Gov. Gavin Newsom pleaded for the bailout with White House and Treasury officials, without mentioning that he and the wineries he owns have done business with the bank. SVB turned out to be not too big to fail, but, as economic historian Adam Tooze put it, “too well-connected to fail.”

President Biden emphasized that the bailout—a term he unconvincingly rejected—would be funded by FDIC fees collected from banks rather than taxpayers. But, as University of Chicago economics professor Anil Kashyap commented, “Saying that the taxpayer won’t pay anything ignores the fact that providing insurance to somebody who didn’t pay for insurance is a gift.” The costs associated with covering SVB’s losses may eventually be passed on to consumers in the form of increased fees for banking services and yet more inflation. In the wake of the bailout, the Biden administration also called for tougher banking regulations and tougher penalties for banking executives, like SVB’s ex-CEO Gregory Becker, who sold millions in SVB stock in recent weeks and absconded to his $3.1 million house in Hawaii after running his bank into the ground.

These would all be welcome measures, but conspicuously missing from Biden’s remarks was any mention of the corrupt cycle of regulation, deregulation, and emergency intervention that rewards rich donors and favored industries. While the bailout may have been justified—especially in view of the banking sector’s continued shakiness—the dynamics that made it necessary and brought it to fruition are inexcusable and undemocratic. These dynamics are by no means confined to just the banking sector: lobbying and deregulation in the railroad industry have enabled carriers to boost profits, while the negative externalities—including derailments, laid-off and under-compensated workers, and vulnerable supply chains—are borne by ordinary Americans.

Elizabeth Warren has already introduced legislation to repeal the 2018 rollback of Dodd-Frank. But, without accompanying support for anti-corruption legislation of the kind Warren has twice introduced in the Senate, the Biden administration’s actions will likely be viewed warily by an understandably skeptical electorate. As long as liberal leaders remain unwilling to address a corrupt model of economic regulation that privatizes profits while socializing risks, they invite authoritarian fantasies of strong leaders who will come in and “drain the swamp.”  

— March 23, 2023

Published in the April 2023 issue: 
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