Federal government affirms that moral hazard is A-OK for the rich.

benfell

Silicon Valley Bank

The U.S. government took emergency steps Sunday in an attempt to prevent more instability among banks after the historic failure of Silicon Valley Bank, and assured clients of the failed financial institution that they would be able to recover all of their money quickly.[1]

Federal officials had been hoping for a buyer.[2] Apparently that failed.

This isn’t a systemic event. This [Silicon Valley Bank] is a midsize bank that was badly managed. It may be a little messy. But that’s different than if you have somebody at the core of the financial system stop making payments to somebody else at the core of the system and then the core implodes.[3]

But while they aren’t bailing out the bank, the federal government is assuring depositors at Silicon Valley Bank and at a second bank to be closed, Signature Bank, they’ll have access to their money anyway.[4] The government’s rationalization is a fear of contagion,[5] that the run on deposits that took down Silicon Valley Bank[6] might spread to other banks perceived to be similarly situated.[7]

Officials took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, which gives regulators flexibility to backstop uninsured deposits. The Federal Reserve and the Treasury Department also used emergency lending authorities to establish a new facility to help meet withdrawals.[8]

William Cohan isn’t the first[9] to blame the bank’s failure on its decision to invest in long-term bonds, in pursuit of a higher yield, to cover deposits that might be withdrawn on a moment’s notice.[10] But he does explain it and, indeed, the entire mess better.

[W]e shouldn’t be surprised by these occasional eruptions. First, banking is a confidence game. We’ve decided as a species that it’s safer to keep our money in a bank rather than say, at home, in our mattresses. Maybe it’s the confidence inspired by the marble bank façade, or the huge, 10-foot-thick steel door to the vault over in the corner. But here’s the fallacy in that logic: in our fractional banking system, one in which banks are only required to hold a fraction of their deposits as reserves, the money—our money—that we think is safe and secure is not even at the bank. And whether it is safe and secure is a matter of a myriad of factors that a depositor has nothing to do with, and no control over. In other words, in our fractional banking system, the mirage of safety and security is a clever and extremely persuasive narrative created to get us all to put our money in a bank thinking that a bank is the safest place to put our money. Even the banks that we perceived to be the most august—Lehman Brothers, Merrill Lynch, Bear Stearns—turned out to be elaborate and highly sophisticated houses of cards. . . .

[Silicon Valley Bank] didn’t do itself any favors when, on Wednesday [March 8], it announced that it needed more capital because “we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.” The stampede for the exits, pretty much at the same time, is always a recipe for financial disaster and so it was again with Silicon Valley Bank, just as it was at FTX, and Bear Stearns and Lehman Brothers, et al.[11]

There is, of course, always an excuse for bailing out the ‘donor class.’ As for me, I don’t know what banks Uber and Lyft have—or had—their money in. Unaware that a decision had been made to hold Silicon Valley Bank’s depositors harmless,[12] I took the precaution of pulling out my money at the end of my day today via an instant deposit anyway.

Brian Chappatta, “SVB’s 44-Hour Collapse Was Rooted in Treasury Bets During Pandemic,” Bloomberg, March 10, 2023, https://www.bloomberg.com/news/articles/2023-03-10/svb-spectacularly-fails-after-unthinkable-heresy-becomes-reality

Saleha Mohsin, Lydia Beyoud and Sridhar Natarajan, “FDIC Races to Return Some Uninsured SVB Deposits Monday,” Bloomberg, March 11, 2023, https://www.bloomberg.com/news/articles/2023-03-11/fdic-races-to-start-returning-some-uninsured-svb-deposits-monday

Associated Press, “US government: Silicon Valley Bank clients will get funds,” March 12, 2023, https://apnews.com/article/silicon-valley-bank-bailout-yellen-deposits-failure-94f2185742981daf337c4691bbb9ec1e

William D. Cohan, “SVB’s Valley of Death,” Puck, March 12, 2023, https://puck.news/svbs-valley-of-death/

Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/

Nick Timiraos, “SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98

  1. [1]Associated Press, “US government: Silicon Valley Bank clients will get funds,” March 12, 2023, https://apnews.com/article/silicon-valley-bank-bailout-yellen-deposits-failure-94f2185742981daf337c4691bbb9ec1e↩
  2. [2]Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/↩
  3. [3]Anil Kashyap, quoted in Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/↩
  4. [4]Associated Press, “US government: Silicon Valley Bank clients will get funds,” March 12, 2023, https://apnews.com/article/silicon-valley-bank-bailout-yellen-deposits-failure-94f2185742981daf337c4691bbb9ec1e; Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/; Nick Timiraos, “SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98↩
  5. [5]Associated Press, “US government: Silicon Valley Bank clients will get funds,” March 12, 2023, https://apnews.com/article/silicon-valley-bank-bailout-yellen-deposits-failure-94f2185742981daf337c4691bbb9ec1e; Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/; Nick Timiraos, “SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98↩
  6. [6]Brian Chappatta, “SVB’s 44-Hour Collapse Was Rooted in Treasury Bets During Pandemic,” Bloomberg, March 10, 2023, https://www.bloomberg.com/news/articles/2023-03-10/svb-spectacularly-fails-after-unthinkable-heresy-becomes-reality↩
  7. [7]Associated Press, “US government: Silicon Valley Bank clients will get funds,” March 12, 2023, https://apnews.com/article/silicon-valley-bank-bailout-yellen-deposits-failure-94f2185742981daf337c4691bbb9ec1e; Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/; Nick Timiraos, “SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98↩
  8. [8]Nick Timiraos, “SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98↩
  9. [9]Brian Chappatta, “SVB’s 44-Hour Collapse Was Rooted in Treasury Bets During Pandemic,” Bloomberg, March 10, 2023, https://www.bloomberg.com/news/articles/2023-03-10/svb-spectacularly-fails-after-unthinkable-heresy-becomes-reality↩
  10. [10]William D. Cohan, “SVB’s Valley of Death,” Puck, March 12, 2023, https://puck.news/svbs-valley-of-death/↩
  11. [11]William D. Cohan, “SVB’s Valley of Death,” Puck, March 12, 2023, https://puck.news/svbs-valley-of-death/↩
  12. [12]Associated Press, “US government: Silicon Valley Bank clients will get funds,” March 12, 2023, https://apnews.com/article/silicon-valley-bank-bailout-yellen-deposits-failure-94f2185742981daf337c4691bbb9ec1e; Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/; Nick Timiraos, “SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98↩

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