Wednesday, March 15, 2023

The SVB Bank Collapse - Reasons For It - And Why It's Not A Good Idea To Panic


By now all those not living under a rock - or with brains captured by Tik Tok- know about the collapse of the Silicon Bank SVB. What people may not know is why it happened, and whether it affects their own financial situation - their own bank -and whether they need to race to withdraw funds.

Let's also note that shares of another bank: First Republic, plunged Monday by 62 %, and major U.S. regional bank stocks suffered their largest decline in three years, despite efforts by regulators to calm investors.  It didn't work as the two-year U.S. Treasury yield, sensitive to market interest-rate expectations, posted its largest one-day decline since 1987.  

First things first: No ordinary saver with money in a major bank ought to hit the chicken switch and race to withdraw. Wifey and I certainly aren't - with our savings in Wells Fargo and Capital One - in the form of regular deposit accounts (former), and money market accounts.  As Karen Petroumanaging partner of Federal Financial Analytics, a Washington consultancy, noted yesterday (Washington Post):  

"So long as depositor withdrawals remain at customary levels, healthy banks can continue to operate even as their share prices gyrate."

This is given that a bank's health is determined not by stock gyrations but by the amount of capital they hold in reserve, to cushion and absorb losses. It is the latter which determine the adequacy of a bank's available assets to meet depositor withdrawals - and exactly what the SVB bank (and others - mainly in the tech startup or crypto sphere) did not have.  So this is the kernel of basic understanding to explain why this fiasco occurred. And why also it never should have.  

Basically, these banks (like SVB, Signature), made a terrible bet taking on more risk - in tech startups and venture capital - without factoring in the impact of rising interest rates.  Accustomed to a low interest, stock 'free money' environment, they basically "bet the farm" it'd continue. Most of these gamblers, as Gillian Tett (of The Financial Times) noted, were under 50 years old. So they were too ballsy and brash to know what holding capital in an unstable - especially high interest rate - realm was like. In Ms. Tett's own words:  

"The SVB mess shows that investors and regulators urgently need to get a better sense of imagination and history.  After all SVB isn't the only bank making a dumb one way bet that interest rates would remain indefinitely low. We cannot assume any respite in rates will last, no matter what the youthful herd believes now."

She was correct but to get it into perspective we need a bit of history. In 2010 President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Reserve in the aftermath of the 2008-09 credit crisis raised safety standards for banks, especially ones that are deemed “systemically important.” Indeed, there’s a Financial Stability Oversight Council that’s supposed to take a broad view of risks in the system.  But it clearly wasn’t enough. It didn’t help matters that bank lobbyists got Congress and regulators to roll back some measures that they regarded as onerous. For example, a 2018 law signed by President Trump — which was passed by Congress with bipartisan support — spared banks with $100 billion to $250 billion in assets from the highest level of scrutiny. 

Case in point, as reported March 13 (NATION) by Jeet Heer:

"In 2015, Greg Becker, then president of Silicon Valley Bank (SVB), lobbied Congress to exempt his institution from what he saw as onerous and unnecessary regulations imposed on the banking industry after the 2008 financial meltdown.... It turned out that SVB's 'strong risk management practices' were nonexistent. In fact, the bank was carrying out an extremely risky strategy that ended with its collapse on Friday, "

Basically, Becker and his ilk (including at Signature Bank) e.g. (from WSJ lead piece yesterday): 

"New York-based Signature more than doubled in size to $110 billion in assets, and $88.6 billion in deposits as of the end of 2022. The stricter requirements, had they been in place, might have prompted bank executives and their overseers to move more quickly to place the lender on sounder financial footing,"

But pure greed drove these morons so they instead demanded to have less capital reserves, despite the fact the Fed wasn't going to keep its free money, low interest rate program going forever. Congress and then president Donald Trump caved in to the pressure - and the dreck he signed into law in 2018 raised the asset threshold to $250 billionSo SVB, Signature and other regional banks (like First Republic) no longer needed to comply with the extra regulation for higher reserves set out in the Dodd-Frank law.  Which meant lower capital -liquidity requirements, and less cushion available in case interest rates spiked.  Which they did when the Federal Reserve began its campaign to control inflation last year. Result? Low interest bonds held by SVB etc. cratered in value and the banks grew desperate.   

What especially galled me was to learn that none other than Barney Frank, the original co-author of the Dodd-Frank bill, also played a role in rolling back the liquidity regs for the regional tech-startup banks. After leaving office and joining Signature’s board, Mr. Frank, then a Massachusetts Democrat, publicly advocated for easing those new standards for smaller banks. 

Incredibly, Frank - in defending himself- has claimed he "sees no evidence" that the reduced compliance regs to roll back reserve capital had any role to play in the bank collapses since.  Well, all I can say is I don't know what part of the multiverse he's inhabiting but it isn't this one.  

Ditto for the clueless Trump former econ advisor Gary Cohn, who yesterday morning on CBS declared the ratio of reserve capital to outflows (even after the lowering of thresholds) was "more than sufficient" to cover withdrawals - which is total bollocks. The twit blamed the collapses on "too many depositors withdrawing their money at the same time."   Well, doh! That means there wasn't enough backup capital, fool!  

Especially when risks are managed by reckless idiots such as headed SVB. As pointed out in a WSJ piece yesterday (p. A6, Top Leaders Reveled in Breakneck Growth):

Greg Becker and his two top lieutenants, Chief Financial Officer Daniel Beck and President Michael Descheneaux, were at the helm of Silicon Valley Bank as it rode a wave of low rates and easy-money policies. 

Last year, when the world changed and the Federal Reserve started raising rates at its fastest pace in decades, they all but ignored it, betting that interest rates would fall and homing in on the boom-and bust tech industry."

In other words, the arrogant fools made a bad bet they could continue living high on the hog with depositors' money, assuming continued low interest rates. It blew up in their faces when the Fed began its anti-inflation, aggressive rate campaign.

And certainly the FT's Gillian Tett agrees, writing:

"So what made people so blind? One factor was America’s fragmented regulatory structure, which often causes problems to fall between the cracks. Another was politics. Republicans have pushed to loosen bank regulations in recent years and banks such as SVB have previously lobbied to be excluded from the category of “systemically important banks” — meaning they faced lower capital and liquidity standards. This is mad. .... Meanwhile the Fed, for its part, did little to raise public alarm regarding potential interest rate risks sitting inside banks. "

So there's more than enough blame to go around, and for both parties. At issue here too is the role of moral hazard in providing FDIC backup to too many depositors, especially the wealthier ones. For example, Dean Baker (on Stephanie Ruhle last night) pointed out the risk of moral hazard when all depositors are made whole, even the wealthy venture fund investors, shareholders.  His point - and that of others  - is that technically no one with funds exceeding the $250k threshold for insurance ought to be collecting $$$.  You made a bet in the capitalist system, i.e. that low interest rates wouldn't impact you or your bank shares, now you gotta live with the outcome.

Ken Griffin - founder of Citadel hedge fund- opined that U.S. capitalism "is breaking down before our eyes"  (FT Monday) because the FDIC should not have intervened to make whole all depositors in SVB bank.  Noting: "The U.S. is supposed to be a capitalist economy...what we have is a loss of financial discipline with the U.S. govt bailing out depositors in full".

What is Griffin yapping about?  Only that if you play the capitalist-libertarian game of minimal government intervention - and squawk about government "regulating too much" - you have to live with the financial bets you make (even when interest rates rise unexpectedly wiping out your bond worth).  That means not come crying to "Mama Fed" or FDIC to make up YOUR losses.  As Griffin put it:  "The regulator was the definition of being asleep at the wheel." 

In the Citadel founder's immortal words, given the U.S. govt did not have to take forceful action :

"It would have been a great lesson in moral hazard. Losses to depositors would have been immaterial and it would have driven home the point that risk management is essential."

Going on to point out that the U.S. is a full employment and bank balance sheets are the strongest ever.   We can debate Griffin's points about moral hazard in our financial institutions endlessly but one thing we ought to all agree on is that if you really are pro-capitalism you ought to own your own bad bets.   Suck up the losses if you made a bad bet in bank stocks, i.r. that they wouldn't crater with interest rate hikes, and move on.  Ditto with banks like SVB and Signature. If they bellyached for lower cash reserves on hand don't comer caterwauling to the government to make you whole when ditched common sense (and proper stress tests) for greed.

 Bottom line, SVB was brought down because its managers and Fed supervisors did not pay attention to the risks from the higher interest rates. They basically felt the tech startups alone would make up for the drag on assets, and refused to believe inflation would remain stubbornly high. Compounding the errors, after the startups got a flood of funding during the pandemic, and deposits rose by over $100 million, SVB leadership purchased U.S. government-backed bonds.  

Alas, the risk was not to their future credit rating but to inflation. Thus, as the Federal Reserve raised interest rates over the last nine months the market value of the SVB portfolio declined.  Eventually the value of its assets fell so much that it triggered concerns about solvency and SVB was unable to find enough cash to match the attempted $42 b in withdrawals last Thursday. Of course, it didn't help that the SVB leadership withdrew its own pots of lucre before the bank's circumstances were widely known - also that social media spread the news of a 'crash' and 'bank run'.

Let's finally note that SVB, Signature, First Republic were all part of a "shadow banking" system that has been a source of instability to the entire financial structure since the inception  The reason is that depositors in shadow banks are mainly shareholders who bolt at the first sign of depreciation of assets - and hence this leads to bank runs. The shadow banks were on the Fed's radar since a July, 2019 grilling of Jay Powell by congress, but aside from some oblique remarks about possible "leverage lending"  there were few indications of any will to clamp down.  See e.g.

FRONTLINE | "Age of Easy Money" - Preview | Season 2023 | Episode 4 | RMPBS

For example, these Fed geniuses "flooded the zone" with over $2 trillion in bond purchases via quantitative easing when the pandemic erupted in 2020. A move that only invited inflation and higher interest rates down the line.

What to do now?  First, higher I.Q. citizens need to tune out all the babble emanating from FOX and its allies about "Woke" managers at SVB, i.e. who "mandated DEI" (diversity, equity, inclusion) being the cause.   As Chris Hayes (All In) observed last night, "This isn't even an argument, it's utter nonsense to keep the MAGA base all riled up."   See e.g.

On an actual serious note, more rigorous regulation is needed to restore stricter oversight requirements on medium-sized banks.  Especially addressing liquidity rules that were unraveled in 2018 over some lawmakers’ objections (including 17 Democrats).   The Fed, for sure, needs to stop providing 'cushions' and bailouts to bad actors including shadow banks and its Wall Street investors. If they make the bet and lose they need to own it, take the hit. Otherwise, moral hazard is interjected and there is no punishment for risky behavior. As one finance expert (Christopher Leonard) noted on the PBS program ('Easy Money'), even when the pandemic issues had abated the Fed was pumping $120b a month into the economy via quantitative easing on an indefinite basis.  It was equivalent to "a fire hose turned on and left on the curb".  Of course, the Wall Street speculators were elated as it kept stocks pumped up.  After all, "the stock market didn't just regain all of its previous losses, it broke new records", in the words of Leonard.

We also need to institute new fees on banks to cover a wider array of deposits in the event of a future financial crisis.  What we do not need or want is the "solution" of goobers like Charles W. Calomiris (WSJ yesterday, p. A19, Deposit Insurance Encourages Bank Failures) who wants to abolish FDIC insurance for all depositors in the interest of  "essential market discipline", if you can believe it.  Well, I can believe this Bozo needs his head examined.

See Also:

by Meaghan Ellis | March 15, 2023 - 7:28am | permalink

— from Alternet

Sen. Elizabeth Warren (D-Mass.) has penned a blistering open letter to Silicon Valley Bank CEO Greg Becker demanding answers regarding his role in the appeal to Congress for a rollback of banking regulations.

On Tuesday, March 14, the Democratic lawmaker focused on a statement submitted to the Senate Banking Committee by Becker "calling on Congress to reduce safety standards for 'mid-sized' banks like your own."


Was the SVB Collapse a Twitter Panic?


by Thom Hartmann | March 14, 2023 - 7:52am | permalink

— from The Hartmann Report


The failure of the Silicon Valley Bank (SVB) shows us, once again, that unrestrained greed isn’t good. For even modest greed to have a positive effect in society, it must be regulated.

The CEO of SVB didn’t like the regulations imposed after the 2008 financial meltdown by Congress’ Dodd-Frank legislation, and spent over a half-million dollars bribing…er, influencing…legislators (legalized by 5 Republicans on the Supreme Court) to change the law and exempt his and other smaller, regional banks from what he argued was the heavy hand of government.


by David Badash | March 14, 2023 - 6:48am | permalink

— from The New Civil Rights Movement


Florida’s Republican Governor Ron DeSantis is leading the charge against "wokeness" and diversity, this time falsely blaming "DEI" – diversity, equity, and inclusion – as the reason Silicon Valley Bank collapsed on Friday.

"I mean, this bank, they're so concerned with DEI and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission," DeSantis told Fox Corp.'s Maria Bartiromo on Sunday, as Florida Politics reports....

DeSantis was far from the only right-winger blaming Silicon Valley Bank's collapse on DEI.

U.S. Senator Mike Lee (R-UT), posting screenshots from SVB’s website, mocking the bank's diversity policies along with its environmental, social, and corporate governance polices.

"Well, ESG and DEI certainly didn't save SVP," he declared.

Real America's Voice extremist host Grant Stinchfield, on TikTok, in a Donald Trump tee-shirt, falsely claimed SVB was "at the forefront of this 'equity, diversity, and inclusion' nonsense, where they were literally putting 'woke' policies ahead of profit."

That's false.

As Florida Politics noted, "a more proximate reason for the bank run that led to FDIC receivership could be its heavy investment in 10-year bonds with low-interest rates combined with the need for liquidity from its high-dollar account venture capital clients.


by Dean Baker | March 14, 2023 - 6:02am | permalink

— from Beat the Press

There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):

  • It was a bailout
  • Donald Trump was the person responsible.

The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.

We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.


by Alex Henderson | March 14, 2023 - 7:25am | permalink

— from Alternet


On Sunday, March 12, Biden Administration officials announced that Silicon Valley Bank (SVB) depositors would have full access to their funds the next morning. The announcement came two days after SVB's collapse.

SVB lobbyists has been highly critical of federal banking regulations. But The Nation's Jeet Heer, in a biting article published on March 13, emphasizes that bankers who rail against regulations are the first to ask for help from the federal government when they run into problems.

Heer explains, "In 2015, Greg Becker, then president of Silicon Valley Bank (SVB), lobbied Congress to exempt his institution from what he saw as onerous and unnecessary regulations imposed on the banking industry after the 2008 financial meltdown…. Over the last few days, the many critics of SVB have been vindicated. It turned out that SVB's 'strong risk management practices' were nonexistent. In fact, the bank was carrying out an extremely risky strategy that ended with its collapse on Friday, (March 10), making it the second-biggest banking failure in American history."

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