Melissa Harris-Perry: Welcome back to The Takeaway.
I'm Melissa Harris-Perry. This week a multi-billion dollar banking institution collapsed. Wealthy investors have been withdrawing deposits from First Republic Bank over the past few weeks in what has been described as a 21st-century digital run on a bank. The federal government regulators seized the bank's assets on Monday and sold it to JP Morgan Chase. This is now the second-largest bank failure in American history. If you feel like you've heard this story before, it's because you have.
News correspondent: "Another American Bank has failed. Just this morning, financial regulators in California seized First Republic Bank after it lost $100 billion in deposits just in March."
Melissa Harris-Perry: Yes, folks, this is the third major bank failure in the past two months. With me now to help us unravel this unraveling is Aaron Klein, the Miriam K. Carliner Chair and Senior Fellow in Economic Studies at the Brookings Institution. Welcome back to The Takeaway, Aaron.
Aaron Klein: It's a pleasure to be back.
Melissa Harris-Perry: What is happening?
Aaron Klein: Well, it's the same thing that's happening. America has over 9,000 banks in credit unions. A couple of them made some mistakes. Both First Republic and Silicon Valley Bank, the two larger ones made the same mistake, which was they bet interest rates would stay low for a long time, and so they got caught having low-interest rate assets whose value declined when interest rates rose.
Signature Bank in New York, and a smaller one, Silvergate Bank in California, also both failed. Those two institutions were a little different. They leaned in on crypto, and when crypto winter and crypto exploded, that took a different hit on those two banks.
America has a lot of banks. They don't all work out. Some of them fail. That's a normal thing. We've been lulled into complacency by the lack of failure for a couple years, which I actually think is a bigger problem than when some banks are failing.
Melissa Harris-Perry: Is this something that I, as a ordinary citizen and someone with regular level deposits, wants to happen? The federal government to step in and sell one bank to another, and get some federal financing of about $50 billion?
Aaron Klein: Ordinary Americans with regular deposits can just go to sleep and wake up every night. That's why we have deposit insurance. Deposit insurance set up by Franklin Delano Roosevelt has $250,000 as today's limit or less in the bank account. That covers about 98% of Americans. The only people that have more than that in a bank account are really wealthy people. I actually think that it's important for wealthy people to have money at risk. Ordinary Americans, your bank account totally safe. Don't worry about it.
From a broader systemic point of view to try and make sense of it, here's a weird little fact. Banks don't go through bankruptcy. Even though bankruptcy starts with the word bank, banks don't do it. Banks go into something called receivership or resolution. This is because banks are different. They're special. They're chartered by the government. They create money. They serve a very different role from any old company that can go into bankruptcy. All banks have government charters. All banks are regulated. When banks fail, the government winds them down.
The standard way the government winds down a failing bank is to sell what's good from the bank, which are the relationships, its customers, its deposit bank to another bank. This is a little trickier when they're very large banks. There's a concern that as large banks, as we go through this failure, large banks merge, and now we only have very few large banks. Then what can you do when a very large bank fails?
It's important to note two things. One is First Republican Silicon Valley Bank weren't that large five years ago. They grew very rapidly. That was another reason that led to their downfall. Rapid growth is often a sign that you're doing something very different from your peer group. Sometimes that goes south.
When you have new banks come into the market and they get big, that shows a little more of healthy competition. Now, what I'm a little happier about with First Republic was the system. It took losses to the deposit insurance fund--taxpayers, bank customers. We're going to pay for these failures. You're going to pay in higher fees, but the government didn't go and take the extra step of ensuring the uninsured deposits, that is, JP Morgan Chase bought those. Unlike, say, in Silicon Valley Bank, where the government bailed out big tech firms like Roku, and crypto companies like Circle, here, it was a pretty straight transaction. Yes, JP Morgan Chase got some good terms from the government because the government decided this was the least cost way to handle it. They took bids from all the banks. JP just came in with the best bid. That's how this is supposed to work.
Melissa Harris-Perry: Help me to understand the why a bank would have taken on some of the risk that you're talking about. Whether they're the uninsured deposits, the low rates, what was the calculation of these banks that have failed?
Aaron Klein: For First Republic, what they did was they gave really sweetheart mortgages, very low-interest rates, very cheap deals to very rich people, and they said, "Come bank with us. Give us your deposits. We'll give you these really nice mortgages for parking money with us, and then we'll go and invest that money just like banks do, make loans, make investments, and we'll get a good deal." Intrinsic in their business model was that rates would stay low. If I had given you a mortgage where you only have to pay me 2% for seven years, I'm betting that rates are going to stay low for a while. When the Fed raise rates faster than it ever had before, they were on the wrong side of that bet.
Silicon Valley Bank made a similar bet. They bet, "Hey, interest rates are going to stay low. We're going to buy other people's really low mortgages." Remember, Silicon Valley Bank didn't really bank people, it just banked big tech firms. That works well when rates stayed low. In 2019, 2020, 2021, starting, rates stayed low longer than people thought, and these banks made a ton of money. Their stock prices soared, they attracted more customers, they were growing, their executives were paying themselves handsomely, and they weren't hedging their risk. This is where regulators let us down, one of multiple places. They weren't hedging their risk.
Melissa Harris-Perry: Pause right there because I want to dig in on that point in just one moment. We're going to take a quick break, and we're going to be back with more on this bank meltdown and whether we should panic or just relax. Next on The Takeaway.
Melissa Harris-Perry: It's The Takeaway. I'm Melissa Harris-Perry, and we're back with Aaron Klein of the Brookings Institution, taking a look at the collapse earlier this week of First Republic Bank, now the second-largest bank failure in American history. All right, Aaron, pick up on this idea that federal regulators in part have led us down in terms of this moment.
Aaron Klein: Melissa, unfortunately, we're always talking under these bad circumstances. It takes a bank failure to get people interested in banking. There's a group of people that are always supposed to be interested in banking. Federal and state regulators. These are the folks that are supposed to look after the bank, and they're the ones that tell the bank to act in a safe and sound manner.
Here with First Republic and with Silicon Valley Bank, the regulators didn't do their job. They watched as the bank amassed more and more risk. They didn't require the bank to hedge that risk. The bank didn't want to hedge that risk because they were making bets, and when the bets were working, they were making a lot of money. Their stock price was soaring, their bonuses were being handed out. Everyone was happy, and the regulators were being weak and not doing their job and enforcing them to act more prudently, so eventually the bet goes south, the bank starts losing money. At one point, investors wake up.
The thing about these two banks was they had lots of uninsured deposits, that is, most of their money was being kept well over the $250,000 limit. These folks thought, "If this bank is not as healthy as I think, if it could run into trouble, my money could be at risk, so I'm going to leave because the first person to leave the bank gets all their money back." As that run happens, the bank then has to come up with the cash. To do this, they have to sell their assets or they have to borrow from another place to try and make it. First Republic tried both. The problem was their assets had gone down in value. Remember, these were mortgages at low interest rates. Nobody wants to buy a 3% yielding asset when the market rate is up to 7%.
They tried for a while. In the case of First Republic, the government organized 11 big banks to put in $30 billion of deposits as a show of strength, but it didn't stem the flow. Keep in mind, First Republic has been a dead bank walking for a while. It's important not to have zombie banks. The fact that it finally was put out of its misery was a good thing for the system overall. Zombie banks are very unhealthy. You can ask Japan. The economy has struggled for decades in part because they have zombie banks. At a certain point, you got to put them out of their misery. That's what happened on Monday with First Republic.
Melissa Harris-Perry: Okay, and yet, perception is reality, and so your point that we often don't pay a lot of attention to banking until there is a crisis, can our sense of crisis lead to more crisis?
Aaron Klein: Yes. All banking is built on trust. All finance is built on trust. I trust the bank that they'll have my deposit. I trust the insurance company that when I file a claim, they're going to pay me. The bank trusts the borrower that they're going to pay them back. All of finance is built on trust, and panics can erode that sense of trust, and that is part of the job of the government, and one of the reasons government and finance have a more intricate relationship than other aspects of the economy is because during times of crisis, only the government can sometimes restore that fundamental trust in the system.
Melissa Harris-Perry: Aaron, just trying to think through all of this and the way that it comes at us on our nightly news or on our afternoon radio shows, and we're simultaneously hearing about these bank failures, and I hear you saying, all right, one of the ways that trust can be re-instituted and short up is through the federal government, which is meant to be the people in action.
Can I just point out, apparently, federal government can't get its act together fiscally either. We're looking at Janet Yellen telling us that we are within 30 days of a pretty serious fiscal meltdown here. Help me to understand how that either is or is not connected to this bank failures that we've seen.
Aaron Klein: Generally speaking, they're not connected. Something I remember I worked in the Treasury Department for the first term of the Obama administration. We had some issues about that too. The debt limit is actually an anachronistic thing set by Congress going back to World War I when Congress used to have to approve every issuance of debt, and they had to leave for the summer, and they couldn't get back for a long period of time, travel was harder in the 19-teens, and they said to Treasury Department, "Okay, you can borrow to keep the war going up to this amount."
Point of fact, it doesn't make any sense, because every dollar that the government spends and every dollar it raises is also set by Congress, so the amount of debt is just the function of other congressional actions. We have this extra debt limit.
It doesn't really have anything to do with the banking crisis with one caveat, which is the FDIC who ensures all of our banks and the NCUA who does the same for our credit unions, their fund is at the Treasury Department. Their fund creates an interlinking with the Treasury Department. That fund has lost over 25% of its value. About $35 billion has been drained out of that fund, set aside to cover the losses from these bank failures.
In that way, it's a little odd, and no mean me can think of weird corner solutions where the FDIC and the debt limit interplay, but generally speaking these two things have nothing to do with each other.
Melissa Harris-Perry: For, again, ordinary depositors, who have less than $250,000 in the bank, do you have suggestions about how we should think about the effects that this might have. Are we just looking at the Fed increasing interest rates around, trying to keep inflation together, and to think about that when we're determining what's next for us, but just yes, we can go to sleep, that's helpful to know, but are there ways that we ought to be navigating this moment for our own security, but also maybe even for our own benefit?
Aaron Klein: Look, when you talk about your own benefit, according to data, people in the 80th to 89th percentile of income, people that economists, statisticians would call upper middle class ordering almost on the top 10%, almost on wealthy, they have an average about $20,000 in the bank, so it takes a lot to get to $250,000. Not many people are at $250,000, but people haven't been thinking about interest. It's been a long time. When I teach classes, and I start talking about interest and inflation up until last year, I got lots of blank looks from the kids.
They don't remember having been in an environment where banks offered 4% or 5% interest, and so if you are one of the lucky people that have $10,000, $20,000 in a bank account pretty regularly, maybe it's time to shop a little bit for better interest rates in terms of how folks can make the system work for them.
Melissa Harris-Perry: Aaron Klein is the Miriam K. Carliner Chair and Senior Fellow in Economic Studies at the Brookings Institution. Aaron, thanks for breaking it all down for us.
Aaron Klein: Thank you, Melissa.
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