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Silicon Valley Bank collapse stirs up fears of 2008 bailouts

By Alexander Bolton,

2023-03-14
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The collapse of Silicon Valley Bank brings back memories on Capitol Hill of rescuing the financial markets during the 2008 collapse, raising concerns among lawmakers that taxpayers may have to pay to bail out risky financial bets.

President Biden assured the nation Monday that no taxpayer money will be used after lawmakers warned over the weekend they will not support bailouts, which are unpopular with voters.

The president said the money to cover depositors would come from the fees banks pay into the Federal Deposit Insurance Corporation (FDIC) and promised that managers at failed banks would be fired and stock-holding investors would not be protected — sidestepping a fight with Congress.

Still, there is already disagreement over what constitutes a “bailout” and the fund being used to pay depositors — including over the $250,000 for standard insurance from the FDIC — is backed by “the full faith and credit of the United States government.”

And some conservative Republicans are already making the argument that covering depositors above the FDIC’s regular $250,000 deposit insurance limit is creating a future moral hazard and could embolden risky behavior heading forward.

A GOP aide predicted that more conservatives would push that argument once they return to Washington and have more time to examine the details of Biden’s intervention.

“I’m sure there will be people who take the view that there shouldn’t be government intervention on any of this,” the aide said.

Lawmakers on both sides of the aisle spent Sunday assuring voters they were against a bailout.

Sen. Bob Menendez (D-N.J.) said he was “not ready to offer them a bailout by any stretch of the imagination,” while Rep. Nancy Mace (R-S.C.) said, “It’s still very early. I don’t even think it’s been 48 hours. But at this time, I would not support a bailout.”

Biden’s decision to intervene and pledge on Monday that no depositors will lose their money was viewed as an effort to avoid repeat of the panic that gripped the financial markets in 2008 after the Bush administration decided not to rescue Lehman Brothers Inc., a major investment bank.

Former Sen. Ben Nelson (D-Neb.), who was in the Senate when Lehman Brothers collapsed, said then-Treasury Secretary Hank Paulson and other senior administration officials were uncertain at first about how to respond to the crisis.

“It isn’t quite déjà vu because it’s different. First of all, Biden stepped forward and said this is what it’s going to be. It isn’t a bailout, it’s going to be making sure depositors are covered,” Nelson said.

Nelson said Biden appears to have learned a key lesson from the fall of 2008: The federal government must act quickly and decisively to prevent fear from quickly spreading through the financial markets.

“I don’t know how many days it was, the secretary of the Treasury was getting together with us trying what to do. There wasn’t any plan that I can recall that came together right away as quickly as this did,” he said, comparing the federal response in 2008 to today.

Liberals, meanwhile, are going on offense by blaming Silicon Valley Bank’s collapse on a banking deregulation bill signed in 2018 under President Trump.

“In 2018, Donald Trump signed a law to deregulate large banks like SVB and Signature Bank. In opposing Trump’s decision to roll back the toughest regulatory requirements in Dodd-Frank, I warned at the time that this could create serious vulnerabilities and ‘may make it more difficult for regulators to spot a threat to financial stability from a larger bank while increasing competitive pressures on community banks and credit unions,’” Sen. Jack Reed (D-R.I.), a senior member of the Senate Banking Committee, said in a statement Monday afternoon.

The Economic Growth, Regulatory Relief, and Consumer Protection Act, which passed the Senate with bipartisan support in 2018, scaled back some requirements of the 2010 Dodd-Frank Act, which Congress passed after the 2008 financial collapse.

Critics say it contributed to the downfall of Signature Bank, which the FDIC took control of Sunday.

Together they mark the second- and third-biggest bank collapses, respectively, in U.S. history and kindled fears of runs on regional banks across the country.

Shares of San Francisco-based First Republic bank fell 62 percent on Monday while Western Alliance Bancorp shares fell 47 percent and PacWest Bancorp shares dropped 21 percent.

“Let’s be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed,” Sen. Bernie Sanders (I-Vt.) said.

“Five years ago, the Republican Director of the Congressional Budget Office released a report finding that this legislation would ‘increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail,” he said.

Sen. Elizabeth Warren (D-Mass.) wrote in a New York Times op-ed Monday that “had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks.”

Some Republicans, on the other hand, blamed Silicon Valley Bank’s downfall on a lack of proper oversight from the Federal Reserve Bank of San Francisco. They argue that federal regulators have become too preoccupied with climate and other “woke” issues to watch out for fundamental problems.

“There’s no mystery what transpired. They had 10 percent insured deposits, they had massive unrealized losses because their portfolio was weighted in long-duration debt so they had a liquidity mismatch. It didn’t matter what artificial regulatory you put into place, you could not overcome the underlying fundamentals of the mismatch and the high rate of uninsured deposits,” said a second GOP aide.

“How the hell did the regulator miss this? That’s the whole point of supervisory examination, to spot this type of thing,” the aide added.

The Republican aide argued that Silicon Valley Bank’s collapse doesn’t call for a new wave of regulation because its circumstances of its liquidity shortfall don’t affect the vast majority of other banks.

“There was no bank in the country with a larger liquidity mismatch than SVB. Nobody else even comes close to the problem that this bank had. That’s what makes it so astonishing that the regulators missed it,” the GOP aide added.

Silicon Valley Bank reported in a December regulatory filing that 95 percent of its bank deposits were uninsured.

Biden administration officials hastily convened a call with Republicans and Democrats in the House and Senate Sunday evening to brief them on the plans to insure the deposits at Silicon Valley Bank and Signature Bank.

The briefing was convened so quickly that only a few Senate Republicans participated, including Sen. Mitt Romney (Utah) and Senate Republican Whip John Thune’s (S.D.) staff.

The administration held a second briefing midday Monday to bring Republican senators who missed the Sunday call up to speed.

The quick outreach appeared to pay off when Romney voiced support for the administration’s actions during the Sunday call and then tweeted his support.

Romney retweeted a statement from the Federal Reserve announcing the plan to ensure depositors’ savings and praised it as the “right decision.”

Democratic leaders on Monday applauded the Biden administration for taking quick action and urged colleagues to “look closely” at the failure of Silicon Valley Bank to weigh whether more regulation is needed.

“We are grateful that the Biden administration, Federal Reserve and FDIC took swift action to safeguard depositors and maintain confidence in the banking system,” Senate Majority Leader Charles Schumer (D-N.Y.) and House Democratic Leader Hakeem Jeffries (N.Y.) said in a joint statement.

“Americans should have faith that bank regulators are doing everything they can to protect consumers. In the coming days and weeks, Congress will be looking closely at the causes behind the run on Silicon Valley Bank and other banks and how we can prevent a similar crisis in the future,” they said.

The vast majority of congressional Republicans stayed quiet on Monday, with neither Speaker Kevin McCarthy (Calif.) nor Senate Republican Leader Mitch McConnell (Ky.) commenting on the decision to cover the potential losses of bank depositors.

McCarthy told “Fox News Sunday” that the administration had “the tools to handle the current situation” but voiced hope that regulators would find a larger bank to buy Silicon Valley Bank to cover the depositors.

“This bank is a unique bank, where they do have assets, they have an amazing clientele, it’s something that could be very possible [for] someone to purchase this bank,” he said, describing that as “the best outcome.”

–Updated at 7:37 a.m.

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